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gsachs
New Member

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

So the question is he allowed to file amended returns as a 1099 contractor? And how do I deal with the returned income?
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Accepted Solutions
Carl
Level 15

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

In order to file an amended return, he would have to be issued a corrected 1099-MISC first, for the year he was overpaid and for which he would be amending for. If you issue a corrected 1099-MISC, then you too will have to file amended returns.

Otherwise, if they just give back the overpaid amount in 2016 with no corrected 1099-MISC, then that's considered a 2016 transaction of which the payer can deduct from their 2016 income, and the receiver has to claim as 2016 taxable income. This could change the tax bracket of one or both parties involved in the transaction, and could also change the qualifications for both or either party, for tax breaks they would otherwise qualify for.

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9 Replies
Carl
Level 15

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

In order to file an amended return, he would have to be issued a corrected 1099-MISC first, for the year he was overpaid and for which he would be amending for. If you issue a corrected 1099-MISC, then you too will have to file amended returns.

Otherwise, if they just give back the overpaid amount in 2016 with no corrected 1099-MISC, then that's considered a 2016 transaction of which the payer can deduct from their 2016 income, and the receiver has to claim as 2016 taxable income. This could change the tax bracket of one or both parties involved in the transaction, and could also change the qualifications for both or either party, for tax breaks they would otherwise qualify for.

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gsachs
New Member

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

According to IRS documents it's pretty clear that if you're overpaid you cannot file an amended return and you must take the overpayment as a deduction. I'm surprised you didn't know that? Also the money paid back to the employer is not taxable. Please advise and clarify your questions
Carl
Level 15

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

What specific document on the IRS website would that be? If a corrected form, such as a W-2 or 1099-MISC is issued, and if the change results in a change of the givers and/or recipient's tax liability, then an amended return is required - especially if the correction means you owe more to the IRS.
Generally, if you are issuing a corrected form for a prior year (2014 or earlier in this case) then the issuer is subject to fines and penalties for not getting it right by the original filing deadline. The fines and penalties isn't always true though, as it just depends on the specific situation.
For the purposes of this specific thread though, it would probably be most cost effective to treat the payback of the overpayment as a 2016 transaction so that no corrected forms have to be generated and submitted at all. But only the original poster can determine what is best for their specific tax situation.
gsachs
New Member

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

Employee reporting of repayment. The wages paid
in error in the prior year remain taxable to the employee
for that year. This is because the employee received and
had use of those funds during that year. The employee
isn't entitled to file an amended return (Form 1040X) to re-
cover the income tax on these wages. Instead, the em-
ployee is entitled to a deduction (or credit in some cases)
for the repaid wages on his or her income tax return for
the year of repayment.
gsachs
New Member

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

Publication 15
Cat. No. 10000W
(Circular E),
Employer's
Tax Guide
For use in 2016
Carl
Level 15

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

What's the URL of that document please? I'd like to bookmark it for the 2016 tax season.
Zbucklyo
Level 9

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

Cited document doesn't apply. OP is referring to an independent contractor, not an employee.
gsachs
New Member

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

Does  anyone know c if v this c applies to contractors asc well?
Hal_Al
Level 15

A 1099 contractor was overpaid for past few years. He's returning this money this year. Can he file amended returns? Does he file overpayment with a deduction this year?

Repayments

This situation is  described in IRS Publication 525. pgs 34-35.  You can take a  misc itemized deduction, on line 28 of schedule A (not subject to the 2% of AGI threshold*) Or you can take a credit. The credit is computed by re-figuring the tax return from the previous year as if the income had not been received. Then the difference in tax is claimed as a credit on the current year's return.  In the forms mode (the forms mode is not available in the on-line versions of TurboTax[TT]), you can use the line 73 smart work sheet to enter the credit amount on line 73; select item D, claim of right under IRC 1341 for repayments. TT will  enter "I.R.C.1341" on the line next to box d on line 73 of form 1040. TT does not do the calculation or compare it to the alternate deduction.

So, the taxpayer  has the option of either claiming the credit or deducting the repayment as a miscellaneous itemized deduction, whichever provides the greater benefit. But, you cannot file an amended prior year return. 

*If the amount is $3,000 or less, only the  miscellaneous itemized deduction is allowed and is subject to the 2% of AGI threshold; it goes on line 23 (instead of line 28) of schedule A. 

You cannot amend the previous year return. It would be incorrect for the payer  to issue a corrected 1099-Misc, for a previous year, if the money was repaid in the current year.

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