Severance Pay

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Severance pay was reported on a 1099 Misc box 7. Prior accountant put it on line 21 Other Income on the 1040. This saved the client a few thousand dollars in SE. I believe it should be reported on Schedule C with SE due. Does anyone know who is correct here?

[Burke]

Severance pay is wages. Goes on W2, box 1,3,5. Also applies to "golden parachute" payments.
See Pub 15, page 10, section 5. Even if it was in exchange for cancelling an employee contract, it is still wages . See Pub 15, page 13, section 7 -- which clearly states severance pay is supplemental wages. He should report accordingly. Not on Sche C. Employer responsible for FICA/MC and withholding as usual.

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client says

Client claims it is severance pay but when asked if it is for consulting service tells me yes. Since it is on a 1099 MISC I see no choice but to put it on the Schedule C. The previous accountant has report attached to 07 return titled "1099 Misc Report-2007". But the total from that report was put in box 21 on the 1040??????? How could the IRS not pick that up. We are talking thousands of dollars in SE not paid. Am I missing something?

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couldn't be clearer

Severance pay is wages. Goes on W2, box 1,3,5. Also applies to "golden parachute" payments.
See Pub 15, page 10, section 5. Even if it was in exchange for cancelling an employee contract, it is still wages . See Pub 15, page 13, section 7 -- which clearly states severance pay is supplemental wages. He should report accordingly. Not on Sche C. Employer responsible for FICA/MC and withholding as usual.

Thanks for your reference to Pub 15, page 10 section 5. That couldn't be stated any clearer. thank you!

[Burke]

Client claims it is severance pay but when asked if it is for consulting service tells me yes. Since it is on a 1099 MISC I see no choice but to put it on the Schedule C. The previous accountant has report attached to 07 return titled "1099 Misc Report-2007". But the total from that report was put in box 21 on the 1040??????? How could the IRS not pick that up. We are talking thousands of dollars in SE not paid. Am I missing something?

I was assuming from your original post that the client was an employee and formerly received a W2 for past work. If he was an independent contractor, then 1099 Box 7 is correct. IRS will catch up with this, but it takes 18 mos, sometimes more. The computer will look for SE if it was actually reported on Form 1099, Box 7, and he will get a letter demanding the SE tax, plus interest and penalties. If payor did not file 1099 with IRS for last year, but the acct simply entered a figure on Line 21, then they may not catch it. But you are correct in that is what should have been done.

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corrected 1099

I was assuming from your original post that the client was an employee and formerly received a W2 for past work. If he was an independent contractor, then 1099 Box 7 is correct. IRS will catch up with this, but it takes 18 mos, sometimes more. The computer will look for SE if it was actually reported on Form 1099, Box 7, and he will get a letter demanding the SE tax, plus interest and penalties. If payor did not file 1099 with IRS for last year, but the acct simply entered a figure on Line 21, then they may not catch it. But you are correct in that is what should have been done.

The client contacted the previous employer and they are correcting the 1099 misc from box 7 to box 3 (Other Income). They are correcting it for both 08 and 07. The client does not perform any services for the money reported on the 1099. It was a buyout of an employment contract 3 years ago. He signed an agreement saying he was responsible for all taxes so I guess that is why the former employer didn't do a W2. I don't think he should be responsible for SE tax since he is not self employed. He's performed no services for a Sched C. With the 1099 corrected, I'm using Line 21 (Other Income). Your thoughts?