1099-Misc, Box 7

[MomIsWorried]

What is the name of your state? Ohio

I had a client come into the office today. He had already filed his return with me on February 23rd, and then got a 1099-Misc in the mail yesterday. The envelope was post-marked March 3rd. He wanted to file an amended return. When I started to fill out the Schedule C, I asked him what type of self employment income the 1099-Misc was from. He said it wasn't self employment income... he had been "let go" from a job, and his employer had handed him a check for $840 and called it severence pay.

Is there any way for him to get around paying self employment tax on something that is not self employment income?

Edit: I forgot to mention that he does have a W-2 from this same employer, if that makes any difference. I just think the employer should have put the $840 in Box 3 as Other Income instead of Box 7- Non-employee Compensation. I asked the guy if he had tried to contact the former employer about the 1099-Misc, and he had...I guess the employer was not helpful.

So I guess my other question would be...is severence pay always, or even generally, considered 'Non-employee compensation'?

 

[LdiJ]

What is the name of your state? Ohio

I had a client come into the office today. He had already filed his return with me on February 23rd, and then got a 1099-Misc in the mail yesterday. The envelope was post-marked March 3rd. He wanted to file an amended return. When I started to fill out the Schedule C, I asked him what type of self employment income the 1099-Misc was from. He said it wasn't self employment income... he had been "let go" from a job, and his employer had handed him a check for $840 and called it severence pay.

Is there any way for him to get around paying self employment tax on something that is not self employment income?

If he received a W2 from that same employer, then the 840 should not have been included on a 1099, it should have been included in his W2. However the employer obviously didn't withhold Social Security and medicare taxes from the 840 when he/she gave it to him, therefore they "punted" and issued a 1099 instead of paying the Social Security and Medicare taxes out of pocket.....or, they forgot to have the payroll service include it in the W2 and instead of correcting the W2 (and subsequently their employment tax returns) they did things the lazy way and issued the 1099.

What the taxpayer should first do is go back to the employer and demand that the employer void the 1099 and issue a corrected W2. That is the appropriate solution.

If that doesn't work (and it may not for the same reasons that the employer issued the 1099 in the first place) then the taxpayer needs to decide if the amount of SE tax involved is worth the hassle (and cost, depending on what you are going to charge him) to file the necessary paperwork to dispute this.

The SE taxes are going to be around 115-120. If the employer had done things properly about 65 of that would have been deducted from the 840 when he received it.

Therefore the actual "dispute" is over 50-55 dollars. I suspect your firm would charge him close to that amount to handle the paperwork to dispute things.

 

[Snipes5]

Since his employer isn't willing to cooperate, here is a workaround:

Fill out a substitute W-2 and a form 4137, which is Social Security and Medicare tax on tips. In place of the word tips, write "wages". Also include all the info about the employer, and on the sub-W-2 include a list of all the efforts the taxpayer has made to resolve the issue with the employer.

This will calculate the employee's portion of SS and Medicare, and will also alert the IRS that the Employer is breaking the law.

Snipes