The IRS is looking for back-taxes for nonemployee compensation for 2005. What do I REALLY owe?

Question

I am an employee of the company that filed the 1099MISC. Without my knowledge my employer filed a 1099MISC recently for 2005. This prompted the IRS to send me a letter looking for almost $3,000 in back taxes, interest, and penalties. The situation is I get an additional $300 expense reimbursment in my paycheck in exchange for lowering my annual sallary by that amount. Is there anything I can do about this? I can't beleive they filed this form 2 years later and the first I hear of it is through the IRS. Any help would be appreciated. Thanks.

Answer 1

the answer depends on the box on the 1099 which has the (keyword) non employee compensation. not all 1099 income is self employment income and there are 1099misc non employee income that is REQUIRED to be filed on line 21 (other income )and which is not allowed to be offset with qualified expenses. refer to your publication 17 or www.irs.gov for information regarding how it should be reported(dictated by the box number of the income)

Answer 2

You are an employee and got $300 a month reimbursement for expenses that I assume you did not account for. Otherwise, if you had submitted receipts for the expenses, there would be no 1099.

You do not use Schedule C to handle this, as it is not compensation as an independent contractor. You need to amend your return and use Form 2106 to compute your employee business expenses, and reduce those expenses by the $3600 you received. Unfortunately, these employee business expenses are miscellaneous expenses subject to a 2% of AGI floor and you must itemize using Schedule A to get any deduction.

If I understand what happened, your employer should have included the money paid you in Box 1 of the W-2 and paid the employer share of SS and Medicare. So, you have an underpayment of SS and Medicare. Use Form 4137 to figure the SS and Medicare, and include those payments to the IRS. Cross out the word "tips" on Form 4137 and put "wages." Omit the lines which deal only with tips.

See Pub 463 for examples of how to report expenses paid under a nonaccountable plan.

http://www.irs.gov/publications/p463/ch06.html#d0e7641

Answer 3

Whether or not you received a Form 1099 for the monies paid to you, you were required to list that income on your tax return and pay the taxes on it. You already knew about the income so you have ONLY yourself to blame for failure to pay the taxes on it!

You are not an employee, you are an independent contractor. There is no characterization of any money paid to you as "wages", "salary", or "expense reimbursements." As far as the IRS is concerned it's all one in the same -- non-employee compensation. (That would not necessarily be the case if you were an employee, but if you were an employee you would have received a Form W-2, not a Form 1099.)

Your only option now is to file an amended return for the year in question and list the income and any business expenses on Schedule C or C-EZ. You'll also need to file Schedule SE to compute the self-employment tax. The IRS might accept your amended return and adjust what you owe but you're going to have to pay the tax along with any penalties and interest.

Answer 4

Here's how I understand it: You got expense reimbursements in lieu of salary, and now the payer has back filed a 1099 and the IRS wants their cut. I presume the $300 expense reimbursement is in exchange for real expenses. I would file an amended return (1040X) for the year in question. Include the income that you have been 1099'd for, and then deduct all expenses that you can. If the amount of your ACTUAL expenses exceeds the amount of the reimbursement, you would actually get a refund. The inverse is true if the actuals are less.

Here's why you got 1099'd: I assume that you were not "accountable" to your employer for the reimbursement, in other words you got the money without having to provide receipts, etc.. For the employer to deduct the payments to you, they need to 1099 you.

My personal opinion is that it is BS they are 1099'ing you this late in the game. What probably happened is that they either got audited by the IRS or the CPA firm doing the tax return brought it to their attention. And it is complete BS that they filed it without telling you, you should receive a copy of all 1099s.

Answer 5

If you are an employee and received a expense allowance or mileage allowance, and you are not required to give a detail accounting of your actual expenses and return any excess money, then you have a non-accoutable plan for your expenses.

The proper way to report this is to include the income on your W-2 and have all withholding taken out of it. To not pay tax on your actual expenses, you need to file a form 2106 for Employee Business Expenses.

I have seen many clients come in with W-2 income for their wages and a 1099 for their expense allowance.

Answer 6

Talk to a CPA about your options. You can even go to H&R Block or Jackson Hewitt to ask them some questions. If they can help you not have to pay the money it is worth the cost. They have tricky little ways to figure out tax situations.