All Income on 10099-MISC Thru Schedule C?

[Chowdahead]

I have several clients who were paid around $10K on a 1099-MISC for office/clerical type work. They don't consider themselves to have their own business. Another was paid about $1,800 by a real estate company for cleaning apartments.

I notice that the software allows the earnings to be sent directly to the 1040. However, I don't believe the ''self-employment" tax will calculate this way. Whereas running through the Schedule C (or Sch C-EZ), even without expenses, calculates the Self-Employment tax.

How do you guys handles these types of situations? When is it appropriate to send 1099-MISC earnings directly to the 1040?

[JohnH]

They're self-employed (if they want to keep working).

I guess they didn't notice that no tax was being withheld on their earnings and didn't know there must be SOME sort of tax that needed to be paid on their income.

If they don't care if they get fired and/or never work there again, they can always try an end run with Form 8919 & SS-8, which might save them about 7% (Half the SocSec/SE tax).

[OldJack]

When is it appropriate to send 1099-MISC earnings directly to the 1040?

Normally you would not go from the 1099Misc to page 1 of the 1040. There are exceptions such as when the taxpayer did not receive the proceeds as a self-employed person because what they did was not considered a trade or business. Examples such as hobby activity can be found under the heading of "Other Income" on page 4-15 of the 2008 1040 Quickfinder Handbook.

[Chowdahead]

They're self-employed (if they want to keep working).

I guess they didn't notice that no tax was being withheld on their earnings and didn't know there must be SOME sort of tax that needed to be paid on their income.

If they don't care if they get fired and/or never work there again, they can always try an end run with Form 8919 & SS-8, which might save them about 7% (Half the SocSec/SE tax).

So essentially it's definitely has to go through the Schedule C, correct?

[imjulier]

Yes, sounds like Sch C to me

[jainen]

>>it's definitely has to go through the Schedule C<<

If there are no expenses (typical for office work) many tax preparers would show the income on Line 21--it still has to be added to Schedule SE, though. My software has this option, but the IRS says they would rather see it on the C-EZ.

I used to answer the way JohnH did, that filing Form 8919 (previously a modified Form 4137 had the same purpose) would risk getting fired. Now the taxing agencies (especially the states) are so efficiently ruthless at reclassifying workers that I must advise clients to warn their employers of the mistake, and correct it for the new year.

They probably run through a lot of clerical workers with such an informal and low-pay arrangement. All it takes is one happy scammer to file for unemployment benefits or claim sexual harassment or an ADA violation or any of a dozen other retaliations. Believe me, there's a whole industry devoted to that very thing. And as for sending someone to use power equipment and chemicals without Workers Comp and disability coverage... are they NUTS?

[OldJack]

>> are they NUTS?<<

@jainen

No such employer type is probably paying illegal aliens that are not going to file any claims.

[jainen]

>>probably paying illegal aliens that are not going to file any claims<<

Well, at least one has already engaged a tax professional who is asking around. And even if all the workers want to keep a low profile, the apartment OWNER might be interested in one or two ancillary issues.

[David1980]

If the IRS would rename Schedule C from "business" to "self employment" this wouldn't even be an issue.

Anyway, despite the fact that many of the tax preparation software have in the past or current allowed you to put the amount on line 21 and calculate SE tax that is not the proper treatment. I've never heard of anyone getting in trouble over reporting it that way, but if you follow the instructions it will end up on schedule C, and there's no provisions in the IRS instructions for applying SE tax to line 21 income.

Start with the Form 1099-MISC instructions for recipients (IE, page 2 of that 1099-MISC or printed on the back side. Or just get it off the 1099-MISC on the IRS website.)

Box 7. Shows nonemployee compensation. If you are in the trade or business

of catching fish, box 7 may show cash you received for the sale of fish. If

payments in this box are SE income, report this amount on Schedule C, C-EZ,

or F (Form 1040), and complete Schedule SE (Form 1040). You received this

form instead of Form W-2 because the payer did not consider you an

employee and did not withhold income tax or social security and Medicare tax.

Contact the payer if you believe this form is incorrect or has been issued in

error. If you believe you are an employee and cannot get this form corrected,

report the amount from box 7 on Form 1040, line 7 (or Form 1040NR, line 8).

You must also complete and attach to your return Form 8919, Uncollected

Social Security and Medicare Tax on Wages.

And then the Schedule C instructions. 2nd paragraph at the very start.

Also, use Schedule C to report (a) wages and expenses you had as a statutory employee,

and ( certain income shown on Form 1099-MISC, Miscellaneous Income. See the Instructions

for Recipients (back of Copy B of Form 1099-MISC) for the types of income to report

on Schedule C.

So whether the taxpayer considers it a business or not is a moot point. If it's SE taxable income from 1099-MISC it goes on a C.

[OldJack]

>>So whether the taxpayer considers it a business or not is a moot point. If it's SE taxable income from 1099-MISC it goes on a C. <<

Well... not all SE business goes on 1040 Sch-C, if its a farm business it goes on form 1040 Sch-F.

[TAXBILLY]

The danger in putting 1099-MISC income subject to SE tax on line 21 is that the software does not know it is earned income for EIC.

taxbilly

[kcjenkins]

Good point Bill. Even if the EIC pulls off the SE, the IRS wants to know at a minimum what sort of business you earned the money in. It looks like you are trying to hide it, if you put it on Line 21, IMHO. And I expect, any substantial amount without any expenses would raise questions about whether you were in fact self-employed.