1099-MISC incorrectly issued?

[mblatour]

I prepare my son's preschool teacher's taxes as one of my clients. She asked me to prepare their sons return this year. The son turned 18 in 2008 and attended highschool up until the summer. He worked for 2 different landscaping companies over the summer. One issued a W-2 for $2,600 with about $160 total withheld in Fed & State taxes. The other issued him a 1099-MISC with $2,400 in the Nonemployee compensation box.

He moved out of state (neighboring state of WI) in the fall into an apartment and is now attending college full time. He is still being claimed as a dependent on parent's return. Mom and dad pay for tuition, books, rent, groceries, you name it.

Obviously he is not an independent contractor, and so what do I do with the return? If I file a Sch C-EZ, he ends up owing self employment tax. The owners of the landscaping business who issued the 1099 are good friends of the parents and the son plans to come home and work for them again this summer. I spoke to the mom and she doesn't want to cause any "issues" between them and their friends, but also said that her son doesn't have the money to pay; so they'll have to pay the tax for him. They don't have the money either and are going to struggle to come up with the money to pay what they owe from their own return this year.

Any thoughts? Thanks so much in advance!

Becky

[JohnH]

I don't see where you have any choice but to file a Schedule C and SE. Naturally they don't want to pay the SE tax, but they also don't want to have any issues with the landscaping company. An understandable dilemma, but they can't have it both ways.

If he had been treated as an employee, then $184 would have been withheld from his paycheck for SocSec/Med. As a self-employed person, he will pay $339, which is a net difference of $155. Sounds like the $155 is what they are going to have to invest in maintaining the friendship and maybe helping insure that the son has a part-time job next summer. Not so much when you look at it that way, although I do understand there's still the difficulty of coming up with the $339 all at once when it wasn't expected.

They could also file with a partial payment and stretch the balance out over a few months, or just extend and plan to have the $$ when they file between now and Oct. If things are really tight for them, then the $3 - $4 per month they will pay would seem to be worth it while they adjust to the financial realities here. Not to mention that if things ar ethat tight the son could always move into the dorm to save some of that rent & utilities - that never harmed a college student as far as I'm aware.

[BP.]

what do I do with the return? If I file a Sch C-EZ, he ends up owing self employment tax.

Think that's your only option on this.

[mblatour]

JohnH,

Thanks for much for the "understanding" tone of your response. I hate these sorts of situations, but I am in agreement with you. I'm going to pick up my son from preschool right now and will have a heart to heart with the mom.

Becky

[Lion]

They didn't complain then...

Didn't the kid or parents notice that one check had withholding but his other did not? Why didn't the son address this with the person who hired him when he saw his first check. It was OK with all of them then. Now, they want you to fix it?!

[RitaB]

Sorry, this is one of my pet peeves

Yeah, he should've been classified as an employee (I guess), but why don't people notice when taxes are NOT withheld? Especially if he DID have withholdings somewhere else? It probably took a while to make $2400. Not like it's a one time uh-oh. Who did they think was going to pay the taxes?

Edit: Yeah, what she said! I was typing at the same time as Lion.

[AJsTax]

1099-misc

I said the same thing, only was held in cyber space somewhere. No need to repeat. we agree it is sad for the kid, but someone should have known.

[mblatour]

I agree with all of your thoughts on knowing about the situation....

but sometimes people just do not fully comprehend how taxes work. I think others think that since the dependent isn't making THAT much money, they'll be fine when it comes to paying tax. Meaning that there won't be any Federal and State tax assessed. Which in this case is true, BUT, they forget about the Social Security and Medicare end of it.

Perfect example: My stepmom believed that her dependent son was supposed to get all of the "taxes" back that he paid in for the year on his part time janitor job. I explained to her that he did not have to file a return because he made less than the required amount to file. She then said to me "but what about his refund?" And I replied "refund for what?" She replied "for the taxes he paid". I showed her on the W-2 that he did not pay any Federal or State taxes. She then said "but what about those ones". (Those ones being the Medicare & SS taxes). I thought to myself 'are you kidding me?" She wasn't.

So you can see that sometimes people just DON'T understand how the tax system works......unfortunately.

Becky

[Nashville]

Question/Options

Ms. Latour p.s. I'm hoping to make it to the MN north shore (i.e. Duluth to Grand Portage) this summer. From what I've read, I'm in for a real treat!!

If this "employer" is in MN, I've been told that the recipient must be registered with the State of MN as an independent contractor before the payer can issue him a 1099-MISC. Don't know about enforcement, but it appears that the issuer is out-of-compliance on MN regulations.

Secondly, I believe the boy has the option of including his 1099-MISC proceeds as wages on Line 7. There is another form (can't remember #) which essentially identifies the payer as an "employer" and quantifies the amount of proceeds claimed as wages. The recipient is thus able to avoid self-employment tax. At one time, I was told the IRS would track down the employer, fine him, penalize him, and make him buy his way out of purgatory. But having known a couple situations like this, the IRS did absolutely nothing.

Yet another option is to see if there are any expenses which can be written off against the 1099-MISC legitimately. Sometimes there are job expenses which can be directly deducted on a Sch C, but get washed into the lake as an employee expense because of the 2% and Sch A threshholds.

[mblatour]

Nashville,

Thanks for your reply. The North Shore is such a beautiful area. I am actually heading up that way this upcoming weekend (not as far as Grand Portage) for a family weekend at a lodge. I've spent quite a bit of time in the Boundary Waters Canoe Area. It's tranquil, peaceful and an absolutely beautiful place to be. No boat motors allowed. Rare to find nowadays a place so full of natural beauty.

You are correct on MN cracking down on the Independent Contractor bit. I'm feeling it too because my husband (and my) geothermal business deals with Independent Contractor's. A lot of people are reluctant to comply with the new rules.

I spoke to the mom of the boy in question and she feels she does not want to bring this up to their son's employer/their friend. She is so upset about having to come up with the money to pay. These are really nice people and I do feel sorry for them. I'll admit, I'm a softy although I know they should have known better. What's done is done now, and I am just trying to make this as painless as possible. Afterall, the mom has spent 7 hours a week for the past 2 years teaching my son (and 2 years before that teaching my other son) and she is worth every penny it costs for her class. My children are better people for having had her in their lives.

She's certain there are no receipts for any sort of expenses her son might have incurred. She said he did have a cell phone that he used while on jobsites. That's it.

Looks like I'll be filing a C-EZ and having them pay what they have to pay. I am so sick of being the bearer of bad news lately. I know its not my fault, but that gives me little comfort.

Thanks again for your reply. It never hurts to have another spin on things.

Becky

[taxea]

1. did he work continuously and consistantly for the landscaper? If not, line 21 no SE.
2. he is a dependent because he is in school more than 1/2 time.
3. A Sch C, if required doesn't negate his dependent status. taxea

[mblatour]

Taxea,

Answers:
1. Yes, while he was off for the summer; in between high school and college. But not at all for the other 9 months of the year.
2. Yep, got that
3. Yep, got that too

Becky

[taxea]

I would say the answer to #1 is no because it was a short seasonal job. Line 21 not subject to SE. enjoy the North Shore! Be sure to visit the turtles at Laniakea Beach. taxea

[mblatour]

Not many turtles on this North Shore......

The North Shore we're speaking of runs along the edge of Lake Superior in Northern Minnesota near the border of Canada. It's a fresh water lake that has some turtles, but they are not easily found and hard to see in the dark water. The smaller lakes that are inland are where a lot of people vacation to "get away from it all". It's very peaceful and you will see wildlife such as deer, moose, ducks and loons (our state bird).

Taxea: So you'd feel comfortable putting that income on Line 21?

Anyone else out there that'd do the same?

Thanks for all of your thoughts!
Becky

[Larmil]

The North Shore we're speaking of runs along the edge of Lake Superior in Northern Minnesota near the border of Canada. It's a fresh water lake that has some turtles, but they are not easily found and hard to see in the dark water. The smaller lakes that are inland are where a lot of people vacation to "get away from it all". It's very peaceful and you will see wildlife such as deer, moose, ducks and loons (our state bird).

Taxea: So you'd feel comfortable putting that income on Line 21?

Anyone else out there that'd do the same?

Thanks for all of your thoughts!
Becky

I believe it is subject to SE tax wherever you put it.