1099-Misc & W-2 for same income

[Bill Tubbs]

Client works as a stenographer (court reporter), and is employed by the county. For some of the court cases she works on, one of the parties (plaintiff or defendant, I'm not sure) will pay her; well, if that law firm pays her more than $600 during the year they send her a 1099-Misc -- so far so good. BUT, when the county hired her, she was told that all money that the law firms pay directly to her, she needs to report that income to the county so that they can take out the correct amount of taxes (I'm not sure if she actually signs over the checks to the county, or if they just adjust her taxes on the next payroll check they issue her). Anyhow, now we end up with all the money that's reported to her on 1099-Misc is also included on her W-2. Wait, it gets a bit better... anything that she is paid during 4th Qtr (Oct-Dec) she has to report in January, so there is also a timing difference.

Does anyone have experience with this sort of scenario, and how best to report it? I was thinking something along the lines of including the 1099-Misc on Form 1040 line 21 "Other Income" and then having an adjusting entry also specified on that same line to zero it out with the description saying that the monies was included in W-2. There is some money that she does not receive a 1099-Misc because it's under $600 -- so leave the entries as equal but opposite because the under $600 amounts _may_ account for the timing difference?

Bill

[ChEAr$]

Client works as a stenographer (court reporter), and is employed by the county. For some of the court cases she works on, one of the parties (plaintiff or defendant, I'm not sure) will pay her; well, if that law firm pays her more than $600 during the year they send her a 1099-Misc -- so far so good. BUT, when the county hired her, she was told that all money that the law firms pay directly to her, she needs to report that income to the county so that they can take out the correct amount of taxes (I'm not sure if she actually signs over the checks to the county, or if they just adjust her taxes on the next payroll check they issue her). Anyhow, now we end up with all the money that's reported to her on 1099-Misc is also included on her W-2. Wait, it gets a bit better... anything that she is paid during 4th Qtr (Oct-Dec) she has to report in January, so there is also a timing difference.

Does anyone have experience with this sort of scenario, and how best to report it? I was thinking something along the lines of including the 1099-Misc on Form 1040 line 21 "Other Income" and then having an adjusting entry also specified on that same line to zero it out with the description saying that the monies was included in W-2. There is some money that she does not receive a 1099-Misc because it's under $600 -- so leave the entries as equal but opposite because the under $600 amounts _may_ account for the timing difference?

Bill

Since you're dealing with a 1099misc, report it on schedule c in gross, then "back it out" somewhere as an expense item including a statement with the return explaining the situation. It's important to do it this way for IRS matching purposes and to forestall a cp2000 letter down the line.

[FEDUKE404]

Solution

I would be wary of playing the Form 1040 line 21 game with this income, since it is more than likely the IRS might come looking (rightfully or wrongfully) for some SE tax, especially if Forms 1099-MISC are involved.

If I am reading your scenario correctly, viz the court reporter must report ALL outside earnings to her "employer," then it might be prudent to file a Sch C showing the income and then somewhere in the expense section show something like "income reported as wages to employer - included on W2." I have encountered scenarios comparable to this where an employee receives an insurance commission, and per employer rules does something comparable to what you are describing.

This logic only applies if the court reporter is actually transferring (or at least reporting) the funds to her employer. If her contract stipulates such, you are OK. OTOH, if she does other work as a self-employed person (such as transcribing dispositions and other legal work outside the court system) then she may already have a Schedule C to deal with. Then things could get sticky re allocation of expenses on Sch C and as employee.

One other thing: You cannot just go by any Forms 1099-MISC that might have arrived. If law firm X pays her $450 and does not issue a Form 1099-MISC, you in theory should handle that income exactly the same as law firm Z that pays her $1200 and does issue her a Form 1099-MISC.

As for the receipt of income/W2 timing issues, the inclusion/exclusion on Sch C would also resolve that concern. (Income received in Dec but showing up as Jan 2013 wages could appear/disappear on her 2012 Sch C.)

Again....be sure you have a very clear understanding of the rules the court reporter is working under before you stick your neck out too far!

FE

[Kram BergGold]

Whoa!

I can't give you any advice until you find out where the money went. Quickly, if she kept the pay then it is reportable on Schedule C. If she turned it over to the employer you wash it off C by saying it is included in her W-2. However, maybe there is more to this.

[taxea]

Have you verified with her employer that the 1099 income is, in fact, included in bx 7 of the W-2? It is possible that she actually needs to prepare a Sch C for the 1099 income. If the 1099 income is included on the W-2 and taxes were withheld on that income then you will have to report the 1099 and then back it out with an explanation that explains in detail what is happening. Lastly her employee status for the 1099 income needs to be established. If she is being assigned these jobs through her employer than the 1099 should not be issued to her even if she is being paid directly from the hiring agency.
If she is picking up these jobs on her own then the employer should not be asking for them to be reported and then withholding taxes. Something isn't tracking right here.

[Matt Sova]

Details

I think I would request proof from the county that this is actually happening before I did anything.

[Nashville]

If I understand it correctly

If I understand it correctly, here is what I would do:

Issue a 1099-MISC of her own to the county court system for all the compensation that the county will be putting on the W-2. Show the 1099s from the attorneys as revenue, and deduct the amounts on the subject 1099 that she will issue. If there are timing issues, then so be it -- just let them fall out as they will because of tax basis taxpayer.

Also include as revenue any income she made which was NOT reported to her on a 1099. Filing the Schedule C may also give her some strong deductions that would otherwise be ineffective if she took them on Sch A as misc. deductions.

Be aggressive in this approach as a solution to a problem that she did not create to begin with. And whatever you do, don't screw around with Line 21.

[Roland Slugg]

Hmmm. This is an interesting situation, and all the above posts contain excellent suggestions and advice. The trouble is the OP contains statements that seem inconsistent or contradictory, and Mr. Tubbs even admits ...

I'm not sure if she actually signs over the checks to the county

Thus, everyone is really guessing here. Get your facts straight so your client doesn't report the same income twice ... or fail to report some income even once.

Some of what's stated in the OP does not ring true to me, and getting the facts straight may not be easy. The client herself may not understand how the county treats her outside income, or she may harbor an incorrect understanding. It might be helpful to ask her to show you her earnings statements, and those should make clear what is going on.

All of the income she receives directly from lawyers should be reported on Schedule C, whether or not she receives forms 1099-MISC and whether or not it is also reported by the County on form W-2. If it turns out that all or some of the income reported on forms 1099-MISC is also included on her W-2, then that income should be subtracted out, and I would do that by entering the "duplicated" total on line 2 of Schedule C.

[Bill Tubbs]

Sch C it is then

Sorry I took so long to get back... life can be hectic.

Yes, I don't know whether she actually signs the checks over to the county [or if she just reports the amount of the income earned to the county and they adjust the next paycheck's taxes]. But, according to the documentation that she showed me from the county, I have every reason to believe all her income is reported on the W-2.

I was leary of opening a Sch C to report income and an equal/offsetting expense, but it sounds like this is preferred over the Line 21 option. Thank you all for your input on that. Yes, I will be taking into account all the amounts and timing difference. But, if there is a positive amount because of the timing difference which could result in SE tax, how do you reconcile that against her and her employer paying FICA on that money too?

TAXEA: "If she is being assigned these jobs through her employer than the 1099 should not be issued to her even if she is being paid directly from the hiring agency."
-- is that covered in the 1099Misc instructions?

Bill

[FEDUKE404]

Weird situation all around

This whole thing sounds either shady or shaky.

Fundamental reason: If this woman is (apparently) a county employee, why are outsiders paying her directly for her (county?) work in the first place??????

Point in fact: So if this woman earns some funds for working for a local attorney, and reports/transfers/disposes/whatever those funds to the county, their accounting department is going to happily pay the employer's portion of FICA/Medicare, FUTI/SUTI, workmen's comp, and likely also put something into her "employee" retirement account?? Welcome to Pleasantville!

As for the question about the "timing difference" creating income on Sch C, assuming the scenario exists as it has been described, so far as she with all due haste "turns over" the funds to the county, she can for all intents and purposes show a simultaneous +/- of those funds on her Sch C and those avert any Sch SE tax by creating zero net Sch C income.

I still think she may have some issues for Sch C expenses versus Form 2106 expenses, but that is a different topic.

Keep us posted on this venture!

FE