Received w2 as a part of lawsuit settlement and same amount as 1099-misc

[LdiJ]

Why are you assuming that the employer treated it as self-employment income? The fact that it was reported on a 1099-MISC does not automatically compel the conclusion that the employer treated it as self-employment income. That form is used for all kinds of non-employee comp income. All the that the OP telling us it was reported on a Form 1099-MISC tells us that it was not part of the wage income. The details of the award or settlement are needed to determine the correct tax treatment of what was received; the forms issued by the employer are not controlling, as your answer correctly implies.

Taxing Matter, the OP said that it was reported on line 7 of the 1099-MISC. I said it should have been reported on line 3. I never said that using a 1099-Misc automatically made it self employment income. I said that reporting it on line 7 made it look like self employment income. I do not know how you could have missed the fact that I was talking about what line it was reported on, rather than the fact that it was reported on the 1099-Misc at all. You quoted exactly where I said that.

 

[curiousv]

So, here is the wording of settlement agreement.


Defendant shall pay gross amount of $21500 as below.
1. Defendant shall issue gross amount of $10750 less required tax deductions. Defendant will pay IRS W2 to plaintiff for this amount.
2. In addition, defendant will issue a check payable to plaintiff in the amount of $10750 for payment of penalties and liquidated damages. Defendant will issue IRS form 1099 for this amount.

So on W2 - employer has withheld $156 for medicare tax and $667 for social security tax. Somehow fed. income was not withheld but IL state tax was withheld in the amount of $240 (not sure why only $240) so net check issued was $9687. I think it was deliberate on employer's part to do it that way...not sure.

and for 1099-misc check issued was total $10750 of course no withholding.

 

[Zigner]

Realistically, in the end this is a no-harm/no-foul situation. You might have a little bit of paperwork to do in the future, but it's going to be minimal.

 

[LdiJ]

So, here is the wording of settlement agreement.


Defendant shall pay gross amount of $21500 as below.
1. Defendant shall issue gross amount of $10750 less required tax deductions. Defendant will pay IRS W2 to plaintiff for this amount.
2. In addition, defendant will issue a check payable to plaintiff in the amount of $10750 for payment of penalties and liquidated damages. Defendant will issue IRS form 1099 for this amount.

So on W2 - employer has withheld $156 for medicare tax and $667 for social security tax. Somehow fed. income was not withheld but IL state tax was withheld in the amount of $240 (not sure why only $240) so net check issued was $9687. I think it was deliberate on employer's part to do it that way...not sure.

and for 1099-misc check issued was total $10750 of course no withholding.

As far as the W2 is concerned the person would owe exactly the same tax whether any withholding was done or not. Its just being paid later rather than having it withheld. If you follow my suggesting to report the 1099-Misc income on line 21 of the 1040 rather than using a Schedule C, the same thing will happen there. They will be paying the same tax that they would have paid anyway, they are just paying it later rather than having withholding.

All in all, its the same amount of money.

 

[curiousv]

Thanks your time all of you guys...

I still wish someone can pull a 'legal' idea to save on taxes...she does not have much money...she has to get a loan to pay this taxes...

particularly that 300$ penalty from obamacare was totally unexpected.

 

[LdiJ]

Thanks your time all of you guys...

I still wish someone can pull a 'legal' idea to save on taxes...she does not have much money...she has to get a loan to pay this taxes...

particularly that 300$ penalty from obamacare was totally unexpected.

She does not need to get a loan. The IRS will cheerfully set up a very reasonable payment plan for her. If she is very low income she could pay as little as 35.00 a month. The interest rates are very reasonable, around 4% annually.

Most states will also set up a payment plan as well. Their interest rates tend to be a little higher, but still very reasonable. She can either send the installment plan request with her federal tax return (form 9465) or she can wait and get a bill from the IRS, and then send the form 9465 with that.

Go to your state taxing authority website to see what to do to set up an installment plan.

 

[Taxing Matters]

Taxing Matter, the OP said that it was reported on line 7 of the 1099-MISC. I said it should have been reported on line 3. I never said that using a 1099-Misc automatically made it self employment income. I said that reporting it on line 7 made it look like self employment income. I do not know how you could have missed the fact that I was talking about what line it was reported on, rather than the fact that it was reported on the 1099-Misc at all. You quoted exactly where I said that.

Right, you did say it was line 7 of the Form 1099-MISC. But that box is not used exclusively for self-employment income; that just happens to be the most common thing reported there. Most payments reflected in that box are subject to self-employment tax, but not all, as the IRS instructions on the Form 1099-MISC (the recipient copy, not the separate instructions for the person issuing the form) clearly indicate:

Box 7. Shows nonemployee compensation. If you are in the trade or business of catching fish, box 7 may show cash you received for the sale of fish. If the amount in this box is SE income, report it on Schedule C or F (Form 1040), and complete Schedule SE (Form 1040). You received this form instead of Form W-2because the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax. If you believe you are an employee and cannot get the payer to correct this form, report the amount from box 7 on Form 1040, line 7 (or Form 1040NR, line 8). You must also complete Form 8919 and attach it to your return. If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21).​

(Bolding added.) Note from the bolded last sentence that even the IRS recognizes that sometimes income not subject to SE tax, i.e. income that is not from self-employment, is properly reported in box 7. Thus my asking why you reacted with the statement “Well, I have a serious problem with it being reported on Line 7 (non employee compensation) because it is NOT self employment income.” As you phrased it, it suggests you think that box 7 of the Form 1099-MISC is used only for self-employment income. That is the only part of your answer that I am questioning.

I am not disagreeing with you that line 21 for the form 1040 is the right place for the taxpayer to report that income; the IRS instructions above say as much.

I am also not disagreeing with you that box 3 for the Form 1099-MISC was the proper place for the employer to report it; the Form 1099 instructions for the issuer make that pretty clear. In the section on what goes in box 3 it includes: “Generally, all punitive damages, any damages for nonphysical injuries or sickness, and any other taxable damages. Report punitive damages even if they relate to physical injury or physical sickness. Generally, report all compensatory damages for nonphysical injuries or sickness, such as employment discrimination or defamation.”

So I am inclined to agree the employer made a mistake. But I doubt it was done “deliberately, out of spite” since proper reporting on the return gets the tax right anyway and may avoid even a CP-2000, and at worst would simply cause the taxpayer to have to spend a little time responding to the CP-2000 with a copy of the judgment. That’s not something that’s going to seriously trouble the taxpayer in any way. So if it was out of spite, the spite must not have been much.

 

[HRZ]

there is one point to QUICKLY check out..and a bit beyond my skills...sometimes with a low income worker an additional $10,000 of counted wages in some of counted quarters can make a big difference in SS ...but one must file for a correction within 3 years, 3 mos and 15 days and you are tight on that. I simply do not know if improper wages for 2014 finally paid in 2014 count in 2014 ( probably better math ) or in 2017 ....but I'd jump on the question ...and if in doubt file ASAP and sort it out later.

 

[curiousv]

there is one point to QUICKLY check out..and a bit beyond my skills...sometimes with a low income worker an additional $10,000 of counted wages in some of counted quarters can make a big difference in SS ...but one must file for a correction within 3 years, 3 mos and 15 days and you are tight on that. I simply do not know if improper wages for 2014 finally paid in 2014 count in 2014 ( probably better math ) or in 2017 ....but I'd jump on the question ...and if in doubt file ASAP and sort it out later.

I am not sure what you are suggesting...are you giving hope that this income can be reported as 2014 income? or you are saying 2014 social security records should be corrected ?

And u 3 years 3 months and 15 days... but we should count those days from January 1 2015?

and I think we should also amend her 2014 return in which she paid as self employed because she was paid cash under the table... ...can we do that or its too late?

Also we have to do the same for 2015? ..Her actual employment was last 3 months in 2014 and first 3 months in 2015.

 

[LdiJ]

Right, you did say it was line 7 of the Form 1099-MISC. But that box is not used exclusively for self-employment income; that just happens to be the most common thing reported there. Most payments reflected in that box are subject to self-employment tax, but not all, as the IRS instructions on the Form 1099-MISC (the recipient copy, not the separate instructions for the person issuing the form) clearly indicate:

Box 7. Shows nonemployee compensation. If you are in the trade or business of catching fish, box 7 may show cash you received for the sale of fish. If the amount in this box is SE income, report it on Schedule C or F (Form 1040), and complete Schedule SE (Form 1040). You received this form instead of Form W-2because the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax. If you believe you are an employee and cannot get the payer to correct this form, report the amount from box 7 on Form 1040, line 7 (or Form 1040NR, line 8). You must also complete Form 8919 and attach it to your return. If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21).​

(Bolding added.) Note from the bolded last sentence that even the IRS recognizes that sometimes income not subject to SE tax, i.e. income that is not from self-employment, is properly reported in box 7. Thus my asking why you reacted with the statement “Well, I have a serious problem with it being reported on Line 7 (non employee compensation) because it is NOT self employment income.” As you phrased it, it suggests you think that box 7 of the Form 1099-MISC is used only for self-employment income. That is the only part of your answer that I am questioning.

I am not disagreeing with you that line 21 for the form 1040 is the right place for the taxpayer to report that income; the IRS instructions above say as much.

I am also not disagreeing with you that box 3 for the Form 1099-MISC was the proper place for the employer to report it; the Form 1099 instructions for the issuer make that pretty clear. In the section on what goes in box 3 it includes: “Generally, all punitive damages, any damages for nonphysical injuries or sickness, and any other taxable damages. Report punitive damages even if they relate to physical injury or physical sickness. Generally, report all compensatory damages for nonphysical injuries or sickness, such as employment discrimination or defamation.”

So I am inclined to agree the employer made a mistake. But I doubt it was done “deliberately, out of spite” since proper reporting on the return gets the tax right anyway and may avoid even a CP-2000, and at worst would simply cause the taxpayer to have to spend a little time responding to the CP-2000 with a copy of the judgment. That’s not something that’s going to seriously trouble the taxpayer in any way. So if it was out of spite, the spite must not have been much.

Its not going to avoid the CP-2000. That is going to happen. I have been dealing with this kind of stuff for the last 30 years and this is the one area where a CP-2000 almost always happens if you do not treat box 7 income as self employment income...particularly in the last 10 years. On top of that, sometimes its a real fight with the IRS to challenge that its not self employment income. This one won't be, but many times it is. For most of these people there is enough money involved to really hurt them, but not enough to be able to justify the costs of taking it to tax court.

And yes, employers who lose lawsuits, do often deliberately do it wrong, out of spite. They are ticked off that they lost the lawsuit and they want to cost the winner as much as possible in tax and/or hassle, and/or angst. Some of them simply do not understand what is or isn't appropriate to be included in box 7, but many of them do it on purpose. Heck, I have had to put my foot down with employers and refuse to allow them to do it when I know they want to do it out of spite. Seven to nine out of ten of those taxpayers will just treat it as self employment income and just pay the tax. TurboTax and most other online tax software will also treat it as self employment income.

And while you and I both know that the income belongs on line 21 and while you and I both know that its relatively easy to deal with a CP-2000 letter, the taxpayers do not know that. Particularly lower income taxpayers. To them there is an incredible amount of stress and angst dealing with these situations, no matter how much reassurance we give them. WE know that people who are in the right have no reason to fear the IRS. THEY do not understand that.

 

[HRZ]

TWO separate issues :

IRS requires honest returns for the relevant years . and there is no statute of limitations for a fraudulent return .

I simply don't know if a 2017 payment for a 2014 /2015 wage error is attributed to 2014/2015 by proper filing PROMPTLY with SSA ..but I do know that modest improvements / corrections to low income work histories can sometimes make a hefty difference in ones SS And sometimes a quick scan of the wage history in the SS printout is a big help ..each better quarter drops off a bad quarter or hole . Or if a 2017 correction is attributed to 2017 SS base computations . That earnings history might provide big clue as to which way to hope works. GEt started quickly....

 

[Taxing Matters]

I simply don't know if a 2017 payment for a 2014 /2015 wage error is attributed to 2014/2015 by proper filing PROMPTLY with SSA

Please read the thread before adding things that are not relevant to it. The questions asked were about the federal income tax treatment. The facts given tell you this was no mere “wage error” and even if it was, income tax is not ever affected by filing anything (promptly or otherwise) with SSA. Moreover, I already explained in this thread that the amounts received from the judgment are included in income in the year the payment is RECEIVED. For cash basis taxpayers (which includes pretty much all individuals) that is the rule for nearly all income — the year that it is included in income for tax purposes is the year it is received.

 

[HRZ]

Correct as to nccome tax reporting ...but the reporting as to SS is adjusted back to the year(s) in which the wage was earned for back pay awards by statute ..but must requested...otherwise the SSA assumes it is for current year....see Pub 957 for a better discussion of back pay awards. $667 could/should be back to 2014/2015 ?

 

[curiousv]

I did call social security and found that there is nothing we can directly do with them.
We have to update income records with IRS and SS will automatically get updated records and will adjust quarterly credits accordingly.

Also note that in 2014 she showed net self employment income of $3184
(in 2014 she worked only for last 3 months) and she paid $450 as self employment tax.

But this was because employer refused to pay her officially and was underpaid. Now that employer paid her officially in my opinion she
should amend 2014 return because she paid taxes as if she was self employed which in fact she was not.

Same thing in 2015 ...her net self employment income was $2650 and she paid $374 as self employed tax ...but now employer paid and gave W2 so in my opinion
she should amend 2015 return to remove self employment tax and correct it with w2 she received.

Since W2 is received in 2017 for her entire work..I am thinking she should split this income equally in 2014 and 2015. And I think that income of 10750 in 1099-misc she should pay taxes in 2017..because that was for penalties and liquidated damages which was earned as lawsuit winning.what do u think?

Correct me in my logic/thought process.

Even if you think that is not the right thinking and if we still amend those returns, what worse can happen?
What can and will IRS do ?

 

[HRZ]

THat seems INCORRECT , the IRS and SSA sites are pretty clear that a request to correct the SS earnings record must be received by SSA within 3 years, 3 months and 15 days of the year in question ...it's not automatic.

THe person in question might be wise to get a clear written request with the best available data into SSA well ahead of April 15, 2018 with return receipt requested ...look it up and get it done ...if it is unnecessary so be it...but It's not fun to miss a deadline with Feds if you want something done.

And your post suggests some overpayments based on incorrect status as self employed ...I'd lay out the math as best and as clear as I could ..just get it there . Keep good copies

I doubt she wants " earnings" for 2017 updated with SS.

ON some other SS questions I found the quality of on line answers varied a lot...some of the SSA staff know thier stuff well ...others vary .... the