Income that is NOT income?

[Black Bart]

Strangest letter I've ever seen - customer brought it in today.

Acme Services Corp. - Refund of Over-Collected FICA

According to the Social Security Domestic Employment Reform Act of 1994 and IRS Publicatiion 926, you are considered a household or domestic employee. The IRS mandates that if you did not earn $1,800 or more during 2012 from a single employer, you will not receive a W-2. As such you are entitled to a refund of all FICA, federal income tax, and state income tax withheld from your check.

You are receiving this notice because you did not earn more than $1,800 from your employer, John Smith. Your total wages earned in 2012 from this employer is $1353.94. The amount of $116.78 was direct deposited into your bank account and represents the total amount of FICA, federal income tax, and state income tax withheld from your paycheck during 2012.

Acme Services Corp. CANNOT provide you with advice on how to report this information on your income tax return. It is important that you bring this notice to your tax preparer.

That's not such good advice because I cannot provide advice either. I have never heard of earned income that "doesn't count." Does every other tax preparer know about this and I simply have never stumbled across it? Any idea what to do with it?

[taxea]

First thing the client should do is check the bank account for the deposit. Sounds like some kind of a come-on to me. Company trying to get the TP interested enough so they will be contacted.
If the information on the letter is correct it can be determined by reviewing the W-2. Does the client have more than one job? Does total client income from working exceed the withholding limit?
How did this company get the information. I would think it would be confidential, not something a private business would have access to.
Is it possible that the company is the payroll services provider for the employer?

[Gene V]

Strangest letter I've ever seen - customer brought it in today.

Acme Services Corp. - Refund of Over-Collected FICA

According to the Social Security Domestic Employment Reform Act of 1994 and IRS Publicatiion 926, you are considered a household or domestic employee. The IRS mandates that if you did not earn $1,800 or more during 2012 from a single employer, you will not receive a W-2. As such you are entitled to a refund of all FICA, federal income tax, and state income tax withheld from your check.

You are receiving this notice because you did not earn more than $1,800 from your employer, John Smith. Your total wages earned in 2012 from this employer is $1353.94. The amount of $116.78 was direct deposited into your bank account and represents the total amount of FICA, federal income tax, and state income tax withheld from your paycheck during 2012.

Acme Services Corp. CANNOT provide you with advice on how to report this information on your income tax return. It is important that you bring this notice to your tax preparer.

That's not such good advice because I cannot provide advice either. I have never heard of earned income that "doesn't count." Does every other tax preparer know about this and I simply have never stumbled across it? Any idea what to do with it?

Never received a letter like that either--However, after glacing threw Pub. 926, I would say that mostly the letter is correct. Household employee's that make less then $1800 is not subject to FICA,etc.

The income without a W-2 goes on line 7 with the letter HSH beside it.

Hope this helps

[Traveling EA]

Is Acme Services an agency for household employees similar to a temp agency? Do they handle the payroll for the customers who then report the household employee on their tax return? The $1,800 is correct, that withholding is not needed for household employees.

[taxea]

Is Acme Services an agency for household employees similar to a temp agency? Do they handle the payroll for the customers who then report the household employee on their tax return? The $1,800 is correct, that withholding is not needed for household employees.

Problem is how does one know how much the employee will be paid until the end of the tax year unless there is a set salary in the beginning.
I googled the company and nothing in the tax field was found. I am really curious...did the letter have an address?

[FEDUKE404]

Only dodge FICA/Medicare, NOT tax on income itself

Problem is how does one know how much the employee will be paid until the end of the tax year unless there is a set salary in the beginning.
I googled the company and nothing in the tax field was found. I am really curious...did the letter have an address?

Don't quite see your point.

It is STILL "income" whether or not it is required to be reported via a Form W2. Gene V has already addressed that issue.

The relevant instructions also state the procedures for both when an employer (frequently of the household type) withheld FICA/Medicare in error as well as how to handle the reverse scenario. Obviously, employment/income circumstances can change during the period of January 1 through December 31.

As for the company sending out the letters....also I've never seen such. The fact that "Acme Services" apparently had access to the recipient's specific tax information would indicate some tie-in with the employer/bank/whatever. My guess is they will charge some fee to write the employer and tell him to refund your money. Not unlike "Pay us only $25 to get a copy of your Social Security earnings!!"

FE

[Black Bart]

Clarification

Taxpayer dropped package including this letter off at the office -- no interview yet, but maybe I've figured out a few things.

The client's always had a disabled relative in the home and I'm guessing here's what's going on: He cares (or maybe hires somebody else to) for the disabled person and receives money from "Acme Services" (not a real name) who is probably acting as a commissioned payroll agent between my client and some government program of in-home care for the disabled. The "John Smith" listed as his employer is the disabled person himself.

I didn't know about the "no W-2 under $1,800" rule and, at first, it seemed to me the letter was saying to treat the payments as if they had never happened. Now I see that it's simply, as Duke pointed out, varying payments require either a W-2 or a refund after 12-31.

Next question for me though is -- is this $1,353.94 for line 7 (with HSH as Gene said),
for line 21 miscellaneous, or for C-EZ & SE? He has another job, is not really a domestic worker, and isn't in that business. OTOH, it's likely going to be a steady, long-lasting thing, so I'm kinda leanin' toward the C. Too, while I used to paper-file returns with notations like this "HSH" or "No W-2 Furnished" written alongside line 7 and they were processed without a hitch, I don't have a clue how to efile a non-existent W-2 or to even enter it on a tax program.

[FEDUKE404]

Chasing the money

....Next question for me though is -- is this $1,353.94 for line 7 (with HSH as Gene said), for line 21 miscellaneous, or for C-EZ & SE? He has another job, is not really a domestic worker, and isn't in that business. OTOH, it's likely going to be a steady, long-lasting thing, so I'm kinda leanin' toward the C. Too, while I used to paper-file returns with notations like this "HSH" or "No W-2 Furnished" written alongside line 7 and they were processed without a hitch, I don't have a clue how to efile a non-existent W-2 or to even enter it on a tax program.

It sounds, from your description, as if the person was/is a "household employee" that would fall under the W2/Schedule H rules. Some states do "pay" indirectly for in-home care via the method you described. I've never quite figured out that scenario, although I know it could wreak havoc on someone's Schedule A medical deductions.

(Whether potential Schedule C, or even line 21 miscellaneous income, exists is for you to decide separately.)

The ole "processed without a hitch" fallback does not carry much weight as to what you should now do. I already have one 2012 client who went from W2 employee to a "no W2 this year" employee. At the end of 2012, the "employer" just wrote a separate check to refund the FICA/Medicare amounts that were withheld in (retrospective) error during 2012. Wages now safely lurk on line 7 of her tax return, with appropriate "HSH 1234" printed on the line. Your software should easily lead you to how to input that data when there is no W2 for the "wages."

Good luck!

FE