Housing Allowance- Non Military & Non Pastor

[Taxadvisor VA]

Client lives in SC. He works for the city in law enforcement. They paid him a housing allowance of $4,300 in 2013 and issued a 1099. The amount is listed in box 7 for non-employee compensation. Well, he is an Employee and I think this city is trying to avoid paying payroll taxes.
Here's my issue. I don't see this as earned compensation subject to SE tax. I think it should go in the "Öther Income" section on the 1040 and be taxed as ordinary income. The fact that the amount is in box 7 on the 1099 leads me to believe that they are treating this as a taxable fringe benefit subject to SE tax.

What's your read? Schedule C subject to SE or 1040- otherincome subject to ordinary income rates.
Thanks,
Taxadvisor VA

[spanel]

Client lives in SC. He works for the city in law enforcement. They paid him a housing allowance of $4,300 in 2013 and issued a 1099. The amount is listed in box 7 for non-employee compensation. Well, he is an Employee and I think this city is trying to avoid paying payroll taxes.
Here's my issue. I don't see this as earned compensation subject to SE tax. I think it should go in the "Öther Income" section on the 1040 and be taxed as ordinary income. The fact that the amount is in box 7 on the 1099 leads me to believe that they are treating this as a taxable fringe benefit subject to SE tax.

What's your read? Schedule C subject to SE or 1040- otherincome subject to ordinary income rates.
Thanks,
Taxadvisor VA

Sch c... but should have been on w2..

[DaveinTexas]

W2

Away From Tax Home
In order for a reimbursement of an expense for business travel to be excludable from income, including meals and lodging, a taxpayer must travel "away from home" in the pursuit of business on a temporary basis.
The statutory phrase "away from home" has been interpreted by the U.S. Supreme Court to require a taxpayer to travel overnight, or long enough to require substantial "sleep or rest". This means that unless the LEO is traveling away from home, the housing allowance must be reported in his income (W2 income if he is an employee).

Also, Lodging is excludable from wages of the employee if it is provided:
 On the employer's business premises, and  For the employer's convenience, and
 As a condition of employment.

Here's an idea that I have done with a client that received a 1099 MISC (Box 7) for an auto allowance, from the same company that issued her a W2; not smart. I reported the 1099 income on a Schedule C, backed it out as an other expense with the explanation, "Reported on Form 4137". Then I reported the income on the form 4137.

I realize this may not be the proper approach but it nets the same results, this way the client pays their share of FICA/Med and if the IRS gripes, the results would be the same. Her employer on the other hand wouldn't be so happy. Also, I informed my client to expect an IRS letter (it never came) and that I would be prepared to defend this position. I told her to inform her Controller that these monies should be added to her W2. He agreed and made the appropriate changes going forward. It was a rather large company too, I wonder how much they saved (cheated) in payroll taxes.

[Burke]

I have seen this several times. I don't think it is a conscious effort to cheat or avoid taxes, but rather a situation where the bookkeeper/accountant sees it as an item separate from payroll. It may in fact be paid separately and not as frequently as a regular paycheck -- say once per month instead of bi-weekly, so it does not get entered into the regular payroll system. It relatively easy to do this correctly in any computer-based payroll system.

[mastertaxguy]

Housing Allowance? Or something else....

Was this amount, perhaps, an incentive to move into the City of employment? Could it have been moving expense reimbursement?

Several institutions, public and private, encourage employees to move into certain areas. Those payments are NOT wages, but more like a prize or an award. For example, in my part of the universe (Detroit, MI), a private university provides up to $10,000.00 to faculty to move into neighborhoods near its main campus. Those payments are NOT wages (nor are they 'combat pay').

See TTB 23-7 (part of the Deluxe or Small Business edition). In theory, such payments are reported in Box 3 of a 1099.

Your scenario says the amount was reported in Box 7. Perhaps this is to "reimburse" the employee/taxpayer for something like home office expenses (on duty 24 hours a day, needs to keep a weapon with him at all times (or at least on top of the refrigerator), or to reimburse uniform cleaning, weapon servicing, private gun range time & ammunition, etc.

If it is a wage type compensation, rather than do a schedule C (unless you charge separetly for a schedule C) you may report it on line 21 of the 1040, and do an SE separately if applicable.

Of course, you could also ask the taxpayer to get clarification from the employer.