By issuing a Form 1099-MISC rather than reporting your earnings as an employee on Form W-2, it appears that your employer is attempting to circumvent the requirement that he pay his share of FICA taxes on your earnings.
Politely inform your employer that you need to report the missing
tips on your return to avoid problems with the IRS. Let them know you'll
send an explanatory letter to the IRS so you don't get stuck paying
your employer's payroll taxes. Hopefully your employer will quickly
figure out that it's in their best interest to void the 1099-MISC and issue a correct W-2.
If your employer won't budge:
- Enter the unreported tips as explained below. TurboTax will automatically create Form 4137, Tax on Unreported Tip Income.
- Finish your return as usual, but do not e-file it. It must be paper-filed by mail.
- Create an explanatory letter for the IRS. Your letter should mention that:
- You reported the correct tips to your employer;
- Your employer didn't include the full amount of tips on a W-2, issuing a Form 1099-MISC instead;
- Your employer refused to issue a correct W-2;
- You have entered your earnings on your tax return as if a W-2 had been issued;
- You kept records of your tips.
- Include the letter with your return when you mail it to the IRS. (Be
sure to keep a copy of the letter with your tip records and a copy of
your tax return.)
The IRS will then contact your employer about collecting payroll
taxes and perhaps discuss penalties for failure to report employee tips.
You want to do this because if the IRS finds out you have income not reported on the tax return you signed, they'll come to you for additional taxes and penalties.
Note on entering income if employer will not issue Form W-2:
This is highly unusual advice, but since you will be mailing your return to the IRS with an explanatory letter, I am comfortable giving this advice.
- Do not enter the Form 1099-MISC on your tax return.
- Using the employer's information from the 1099-MISC and the earnings amount from Box 7, enter the information into TurboTax as if it were from a W-2. The Box 7 amount from the 1099-MISC becomes the amount entered in BOXES 1, 3, AND 5 for the W-2.
- If federal income tax was withheld by your employer, and reported on the 1099-MISC, enter that in Box 2 for the W-2. Leave Boxes 4 and 6 blank. Select Continue at the bottom.
- Continue until you reach the Do any of these uncommon situations apply to this W-2? screen. Check the box for Unreported tips and select Continue.
- On the Tips Not Reported to (employer name) screen, answer the question about your tips.
- On the Enter Any Tips You Didn't Report to (employer name) screen, enter the amount of your tips.
- Complete your tax return, review it, print, sign, and mail, with the letter described above.
