How do I enter 1099-misc penalty late payment of CA wages?

[Vanessa A]

Clarification....Enter late payment where for what?

[pxg62]

Section 203 of the California Labor Code has required employers to pay a penalty for willful failure to provide a departing employee with their final wages on their last day of employment (or within 72 hours for employee who suddenly quit). The amount of this penalty, often referred to as “waiting time penalty,” equals one day of pay for each day the employee is made to wait for the final paycheck, up to a limit of 30 days.

[pxg62]

I found multiple articles saying it's not taxable (including legal from where I worked), here is one: 

There was some ambiguity and disagreement over the years regarding whether these waiting time penalties should be considered wages and subject to applicable tax withholdings. However, on May 29, 2015, the IRS Chief Counsel’s Office issued interpretative guidance (CCA [removed]) to clarify the tax treatment of such late payment penalties, concluding that they are not wages for the purposes of FICA, FUTA, or federal income tax withholding. The IRS guidance compares the late payment penalties under Section 203 to liquidated damage payments, which are awarded when an employer fails to pay its employees minimum wage or overtime compensation. These two payments are similar on two significant grounds: (1) both serve to punish the employer and (2) both are imposed by statute, instead of by the terms and conditions of the employment relationship. Unlike wages, which are awarded for the past or present services of the employee, late penalty and liquidated damage payments are not dependent on any action by the employee. Even though the late payment penalty amount is calculated based on the employee’s average daily wages, whether the penalty is owed is entirely dependent on the employer’s failure to pay the employee’s final wages. Because the late payment penalties under Section 203 have this unique purpose and are not related to the employee’s services, they do not fit within the broad definition of wages under FICA, FUTA, or the Treasury Regulations relating to federal income tax withholding. Hence, the IRS Chief Counsel concludes that employers

are not required to pay federal payroll taxes for such penalties. However, employers are still required to issue 1099 forms to reflect these penalty amounts, and employees must report the amount of these penalties on their federal income tax returns.

Given the IRS Chief Counsel’s ruling on this issue, it is likely that the California taxing authorities will follow suit. Indeed, the California Department of Industrial Relations has long adopted the same view as the IRS on this issue

[Vanessa A]

You would enter this as other income. To do so, select the following:

• Federal
• Income and Expenses
• Scroll down to Less Common Income and click Show More
• Start next to Miscellaneous Income
• Start next to Other Reportable Income

This will put it on line 8z of your schedule 1 as other income. 

[Vanessa A]

The article you mention does not say it is not taxable, it says it is not subject to withholdings.  These two things are different.  It clearly says you must report it on your personal income tax return.  The article is geared towards the employer saying they are not responsible for withholding taxes on the penalty, but it is not exempting the employee from paying regular income tax on it like they would on something like interest received from the IRS. 

It is telling them they must issue a 1099 which means the IRS still wants to know you received the income so they can still tax you on the income.  You just have to make the payment yourself.

[rdblevin1]

My husband got a 1099-Misc from Peloton for 2022 for California Penalty payments (I am assuming it was wait time penalties) because they did not pay anything on time... I know that it is not subject to withholding or employment taxes - and I am finding conflicting information on taxability or federal and state income taxes. I have it entered under the 1099-misc and answered the questions corrrectly, but I dont think it is taxing it based on the calculations. Can anyone help?

[MarilynG1]

If you entered the 1099-Misc with an amount in Box 3 in TurboTax and selected 'None' from 'Uncommon Situations', on the next screen you indicate that 'it didn't involve work like your main job' and then 'didn't involve intent to earn money'.

This amount will show as  Other Income on your return, on Schedule 1, Line 8z and transfers to Form 1040, Line 8.

@rdblevin1 

[MarkPC]

I have the same problem, pay from employer due to late last day paycheck.
Thought I followed the previous instructions, but now I have a double entry (Line 10 shows 2x the 1099-MISC):  Schedule 1, line #3 (business income from Schedule C) and 8z Other income.

Do I just delete Schedule C and ignore TT prompts to review?

[TomK2023]

Yes, delete the Schedule C; this is not self-employment income.

To enter a 1099-MISC for miscellaneous income (Late Payment of CA Wages):

1. Open your return.
2. Click on Federal tab, then Wages & Income.
3. Scroll down to Other Common Income - Tax refunds, 1099-G, 1099-NEC, 1099-MISC, 1099-K, Click on down arrow.
4. Click on 1099-MISC Start/Revisit.
5. Enter info from 1099-MISC form (Payer, Federal ID #, Box 3 amount, etc.), Continue
6. Enter Description for reason for 1099-MISC; perhaps something like "Late Payment of CA Wages", Continue.  
7. On Does one of these common situation apply? page, Click on None of these apply.  Continue.  
8. Click on No that you don't have another 1099-MISC (unless you do, of course), Continue
9. You should land on 1099-MISC Summary page.

This income will show up on Schedule 1, Line 8z, with your description next to it.  It should eventually carry forward to your 1040 form, Line 8.

Here's the general procedure for viewing a list of all the forms in your return and deleting unwanted forms, schedules, and worksheets in TurboTax Online:

1. Sign in to TurboTax and open your return by selecting Continue or Pick up where you left off
2. In the left menu, select Tax Tools and then Tools
3. In the pop-up window Tool Center, choose Delete a form
4.  
5. Select Delete next to the form, schedule, and worksheet in the list and follow the instruction.

TurboTax FAQ: How do I view and delete forms in TurboTax Online?