Question/advice relating to Individual taxes?

Question

A couple will report approximately $40,000 in income for 2006 (per W-2s). The husband also gets paid in cash from his employer totalling $60,000 for the year. He wants to report this income so as not to raise a red flag with the IRS. He feels that his expenses (ie mortgage interest, taxes) reflect that of a person with alot more than $40,000 of income. Would he report this extra income on Sch C.? Would it be subject to self-employment tax even though he is not self-employed? Could it be reported as income not subject to S/E tax? He does not want to report his employer.
Any advice would be appreciated, from knowledgable tax preparers only, please. Thank you.

Answer 1

The employer is going to take an expense for these payments. The husband, although employed, is being treated as self employed. He would have to report the income on schedule C and pay SE tax using schedule SE.
Even if the employer does not file a 1099 he will file a tax return and take the payments as an expense. If the IRS audits that return and sees the expense they could then check the husbands return and if the income is not reported he could be charged with fraud.
In addition it sounds like not reporting would leave them in a position of not having reported 25% or more of the gross income which means that there would be a six year statute of limitations for IRS audit not the standard three year statute.
If he is self employed then any expenses incurred to earn the money are deductible on schedule C and he would be eligible to set up and deduct his own pension plan. He would also be able to deduct one-half of the self=employment tax on the front of the return along with 100% of the health insurance premiums he pays.

Answer 2

I am sure that his employer will file a 1099 with the IRS, whether you're husband gets a 1099 or not. Sometimes a company files electronically without sending one in the mail. Your husband was paid in cash. The company/employer does not want to pay taxes for your husbands income. Unless the company works under the table,in which IRS does not recognize what is going on. IRS sees income as profitable which does not get excluded from the S/E tax, unless it is a nonprofit organization, like example, certain churches. The only things allowed deductible for business expense, is exactly that, what was used for business. A home mortgage cannot be deductible, unless it is a second mortgage for the business. But a part of the house, used as an office is deductible. But that gets technical there. You can go to the IRS web site, and look up their forms section and pull up the schedule C and see if he is able to use it. And also their intstructions, to go with the forms. Not sure what type of work your husband does, to further help him decide, what avenue to go.

Answer 3

You need a good tax-experienced CPA. If your husband is getting a wage and "self-employed" earnings, that is a very red flag indeed. It would be rare to see someone getting split earnings like that from the same company. So you must be wary of filing a Schedule C and claiming expenses that would not otherwise be deductible as employment expenses. That is open to challenge

The SE tax must be paid. If your husband does not want to report his employer, he is going to have to eat the extra 7.65%.

Answer 4

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Answer 5

if the employer does not file a form 1099, don't pay the taxes.

Answer 6

Waggy_33 knows what he is talking about!