Back Wages from an Estate

[Lion]

Client calls; wife received two checks from her father's estate for $22,500 and $8,000. The $8,000 she will in turn split with her two siblings. Father was a clergyman with a private church and his estate goes into a foundation. The estate, the husband thinks, (or the foundation) sent the checks with a note that they are for back wages. I asked client to call the lawyer who said wife will be issued two Forms 1099 with the above amounts in Box 7. So, do I report on a Schedule C with SE tax? And, what about the $8,000 she will split with her sisters? I'm not sure wife ever worked for her father and she certainly did not work for the foundation; this is some type of legal settlement in order to close his estate and allow the newly formed foundation to receive his assets. The sisters are all friendly and just glad to have the estate settled after years. Can I just calculate wife's income and SE tax hit on the $8,000 to subtract the taxes paid on her sisters' share before she cuts checks to them as if gifts? Or, does she have to go through some nominee process? Will a Schedule C for one year only attract unwanted attention from the IRS? Is there another way to report this?

[Bees Knees]

From TTB page SB10-7

Wages

Income tax. Wages paid after death are reported as income to the
recipient on Form 1099-MISC, box 3. If wages are paid to the estate,
the estate receives the 1099. If wages are paid to the surviving
spouse or other successor, that person receives the 1099. Wages
paid after death are not included in box 1 of the deceased employee’s
Form W-2 and are not subject to income tax withholding.

FICA and Medicare. Wages paid after death are subject to FICA,
FUTA, and Medicare tax if paid in the calendar year of death. The
employer withholds FICA and Medicare tax from the payment
made to the estate or successor. On the deceased employee’s
Form W-2, the employer includes the tax withheld in boxes 4 and
6 and includes the after-death wages in boxes 3 and 5.

What that tells me is if a beneficiary receives wages from a deceased employee, the employer is responsible for the FICA tax withholding. The beneficiary only worries about paying income tax on the 1099 received.

TTB doesn't say anything about a minister who gets a W-2 but pays SE tax, but I think the principle would still be the same. The beneficiary is not the one earning the income. Thus, the beneficiary should not be liable for any FICA or SE taxes on the earnings; only income tax.

I wouldn't bother with a Schedule C. I would put it on line 21 as other income and put in the explanation that it is income in respect of a decedent.

[Lion]

Wages to Daughter

Sorry I wasn't clear. I'm not especially clear on the facts, myself. But, the daughter is receiving a legal settlement for back wages for some reason. Maybe she really did work for her father a long time ago; her husband did not recall. However, if the $8,000 were really wages to the father that the sisters are inheriting, then that would explain why she's splitting that part with her sisters. It raises a new question of why the estate doesn't issue three checks and three Forms 1099, though. The best I can tell is that the wages were due to my client or arose out of some legal settlement with the estate and ended up taking that form.

[Lion]

More details

All three daughters worked for five years to close their father's estate and move assets to a foundation. All received differing amounts directly and will receive their own Forms 1099. In addition, my client received $8,000 that she is splitting with her sisters; but she'll get one 1099 for the $8,000 in her name. So, schedule C with SE tax for the $22,500 and the $8,000? And, the sisters seem to be willing to receive their share of the $8,000 as a gift from my client after we account for the taxes she'll pay on the $8,000. Neither my client nor her sisters were executors of this estate. Nor are they beneficiaries, not inheriting anything from the estate. All assets went into a foundation. Think they worked because nobody else knew the workings of their father's church.

[JON]

Not a professional trustee

if that is the case I believe it is not subject to SE. If one time trustee duties and do not hold yourself out as being hired for it. This seems a little long, but I do not know if that really changes things.

[Lion]

Not court appointed

Thanks, Jon. Does it matter that none of the sisters were the executors or were court-appointed? They just wanted to wrap this up, and apparently so did the lawyer or those involved with the foundation that was being created with father's assets so money was disbursed to the daughters as "back wages" and not as executor fees.

[JON]

??

If they were not executors or trustees how do they have the power to do anything?? Who was the trustee and did he/she just want a writeoff against trust income, so called it wages(?)- If not a executor/trustee I doubt that anything paid and deducted on the 1041 is not wages and/or self employment income.

[Lion]

No power, just worker bees

Client and her sisters had no power, no decision-making, etc. They just provided clerical services to keep their father's church running or to wind it down or whatever was needed by the lawyer who was moving assets to a foundation. They sorted the church's paperwork that had been boxed in storage, had some ideas about where Dad stored things or which banks he might've used, etc. Telephone and leg work and filing, mostly. Guess they could've said NO and let the lawyer charge the estate $380/hour and not have any assets left to fund the foundation.

[JON]

The point

is the exemption from SE tax for executor/trustee fees are for those services only. The executor/trustee can hire help from anyone they want and sounds like the kids were hired and paid for those duties.

[Lion]

Yes.

Yes, and as happy as they were to receive checks this year for work they did five years ago, they were surprised that they were not paid as employees. It just feels awkward to prepare a Schedule C for work that was not performed this year! And, the $8,000 check is most problematic since my client must split it with her sisters, but it will appear on her Schedule C for income tax and SE tax purposes. I've just never had anyone receive back wages from a prior year and have them reported on a Form 1099-MISC Box 7. I'm worried that a Schedule C appearing for 2009 will be a red flag when it no longer exists in 2010.

[JON]

Split the

the $8000 up and take as an expense on the Schedule C. Trouble if sisters do not pick up-if so send the 1099s lake and get out of the penalty or pay the $100.

[Lion]

Thanks for the advice

Thanks for the advice.

[Burke]

I'm worried that a Schedule C appearing for 2009 will be a red flag when it no longer exists in 2010.

I would not worry about that. It happens all the time. Unless he calculated the "back wages" on an hourly rate, it appears the payment was for a specific job, the executor did not control how long they worked, or how they did the work, etc. It does not appear to be an employee situation. I am sure the executor deducted it as an administration expense (or should have.) Report on Sche C, deduct payment to other parties as expense, and send them a 1099MISC for their part. If the funds were just received in 2009, the form is not late. Also, if they all agree as you said above, she could gift the amt to the other parties after taxes. Run the numbers and see if it affects other items on her return.

[Lion]

Thank you

Thank you for all your help.