Received a 1099-MISC form from my employer with the $2,000 Christmas Bonus placed in Block 7. "Nonemployee compensation" Do I claim this as self-employment income?? If not, how do I file the $2,000?

asked 02 Feb '11, 05:05

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Bsa1
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Hi Bsa1,

Congratulations on the Christmas Bonus.

Unfortunately, this happens more often than it should. You are correct. There is no doubt that this amount should have been reported properly on Form W-2, as you are an employee. A Christmas Bonus in no way meets the criteria of “other services provided.” It should be noted that an employer is subject to penalties when they report income incorrectly, or fail to pay their share of employment taxes.

With that being said, your options are as follows:

  1. Request that a correction be made to your W-2. If the employer complies, you will be issued a From W-2C (Corrected), and you will then file your tax return as you normally would.

  2. If the employer refuses to make this correction, you can always contest this and file a Form SS-8 (Determination of Worker Status for Federal Employment Taxes and Income Tax Withholding) with the IRS. Many employees don’t know that this is available to them. This filing has no bearing on your responsibility to timely file your tax return.

  3. If you don’t want to be bothered with the hassle of contesting this with your employer, the explanation for this last option is quite detailed.

When taking the route of not haggling with the employer, you may be advised to simply report these amounts on line 21 as other income. This is a simple fix, but it is incorrect.

Because everything has its place on the tax return, and even though you understand that you are not self-employed, amounts reported to you as non-employee compensation are reported on Schedule C (Profit or Loss from Business).

Keep in mind that the issue at hand is that the income has not been taxed. There are two sides to the coin of employee payroll taxes. Regardless of whether an employer reports the income properly, you were always going to be responsible for your share of Social Security tax (6.2% for 2010), and Medicare tax (1.45%). When income is reported on Schedule C it is characterized as self-employment. Because your net “self-employment” exceeds $400, the income will be subjected to self-employment tax. You will in essence end up paying both sides of the equation (your share as listed above and the employer's share of Social Security tax 6.2% + Medicare tax of 1.45%). It doesn’t seem fair, AND it’s not, but that will be the reality if you choose to file your return using this third option.

Also, shy away from any professional that encourages you to deduct expenses on a Schedule C with respect to this incorrectly reported income. There aren’t any expenses incurred for receiving a Christmas Bonus. As an employee, had your income been properly reported, you would be reporting any unreimbursed business expenses on Form 2106 & Schedule A, IF you were itemizing your deductions.

By filing your return correctly, based on the information documents you have received, you will be in compliance, should an audit ever occur.

If you do choose option three, hope that your employer doesn’t do this in the future, as bonuses tend to get larger with length of employment.

Best of Luck!

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answered 02 Feb '11, 11:02

Kristy%20M.%20W.'s gravatar image

Kristy M. W.
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Great answer, Kristy!

To Bsa1, this could get ugly.

I would certainly follow Kristy's advice to get your W-2 corrected if at all possible. Many business owners/employers are misinformed about payment of bonuses and other non-wage compensation (and unfortunately others report this way to avoid paying their share of the social security and medicare tax for employee compensation and other taxes as well). I'm not going to determine your employer's reasons for issuing 1099s, but you can use this information to inform them of why you need a corrected W-2, and let them know that if they are unable to provide one, you will be required to request a determination of your employment status from the IRS. I would also advise you to write down who you talked to and when, and their response--you'll see why later.

I would NOT go to the employer and state, "You did my W-2 wrong and you have to fix it or I'll report it to the IRS," but instead, DO tell them, "I think there might be an error on my W-2 because my bonus was reported on another form and I am requesting a correction." Don't let them talk you out of a corrected W-2, but DON'T argue with them, either. Say simply, "I checked with a CPA, and if the W-2 can't be fixed, I have to request a status determination from the IRS to be able to report it on my tax return--and they may ask you about my employment and how I get paid." If they can't/won't correct it, make sure you write everything down (or have it in emails) and report on your tax return as I have suggested in the next paragraph.

In the absence of a corrected W-2, I would not advise you to use Sch C to report this income, as it is not from self-employment, regardless of the description on line 7 of the 1099-MISC. Do not include it with your wages, either, as it was not reported on a W-2, and your return could get kicked back for mismatched amounts. It should be reported on line 21 of form 1040. I would also advise you to report and pay your portion of the social security and medicare tax on the $2000. This is properly reported on form 8919 and the total tax is carried to line 57 of form 1040.

Because you are already an employee, you would follow the instructions on form 8919 and use reason codes D and, as required, G. This requires filing Form SS-8 (Determination of Worker Status for Federal Employment Taxes and Income Tax Withholding) as Kristy stated and your employer will likely be questioned by the IRS. The ugly part--I have seen employees get fired over this, when the employer was intentionally reporting improperly and avoiding social security and medicare payments. Again, not to say this describes your employer, only what I have seen in other companies. This is why you want to document, as I described in the above paragraph, your request for a corrected W-2. It was useful in determining wrongful termination in the case I described where the employee was fired, and I would hate to see you in a situation where you were treated imploperly with no recourse.

If you have already filed your return, you can amend it on form 1040X. Proceed with requesting a corrected W-2, and if you can't get one, file the amended return as I have suggested.

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answered 16 Feb '11, 00:07

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cpaboise
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Hi Cpaboise, you make an excellent point here! Many tax preparers simply slap the figure on Line 21 without taking into account that the employee was always going to be responsible for their share of Social Security and Medicare taxes. The absolute proper thing to do, when an employer is unresponsive, would be to file the 8919 in conjunction with the SS-8, and then report on Line 21. Unfortunately, the fear of job loss is the deciding factor and many end up using the lesser of two evils: Schedule C (which at least takes into account their share of FICA), or Line 21 alone (which is risky).

(23 Feb '11, 05:52) Kristy M. W.

Great answer by Kristy. An employee is not also a 1099 misc person, but since it happened, it can be in box 21 as other income. Is definitely NOT self employment.

I would also talk to human resources for your employer and ask that next year, please add this to your W-2 wages and save them the hassle and trouble of filing 1099's as well.

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answered 02 Feb '11, 19:54

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SandySea
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What do I do if the bonus did not come from my employer but was related to my employement. To be clear, in 2008 I worked for Company A which was contracted to provide services to Company B. In 2010 I recieved a bonus directly from Company B related to work I had done for them while employed by Company A (I am no longer employed by Company A). Company B also provided me a 1099-misc form reporting the income.

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answered 15 Apr '12, 13:30

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daxinarian
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Asked: 02 Feb '11, 05:05

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Last updated: 15 Apr '12, 13:30