Received a W2 and 1099-Misc for a settlement?

[itsmy99]

Hi @RobertB4444, I read that the IRS recognizes that not all 1099-MISC are earning income subjected to SE tax. The survey questions that TurboTax provides after a 1099-MISC entry should direct the tax software to prepare or not prepare a SE schedule. Which it was doing yesterday for me. But now the SE schedule seems to have stuck as an automatic response to my 1099-MISC. If the IRS allows zero self-employment tax on the Non-Wages portion of a settlement, help me with the steps to tell TurboTax software to delete the SE schedule. Thank you so much.

[RobertB4444]

@itsmy99  Delete the schedule C that you created and then you can just enter this as 'Other income.'

 To Delete a form:

1. Select Tax Tools from the menu on the left
2. Then select Tools
3. When the new menu pops up select Delete a Form
4. You will see a list of all the forms in your return
5. Find the form that you want to delete
6. Select the Form
7. Click Delete on the right  

Tax forms are interconnected.  While you are on this screen don’t start deleting forms you don’t recognize.

[itsmy99]

No schedule C was created for me. However, a schedule SE was created and stuck there. Should I delete it?

[itsmy99]

My Tools drop down menu doesn't have a Delete a Form option. Where would I go to do that?

[itsmy99]

The software is a TurboTax Premier 2021 that I am using this year.

[DawnC]

From the Tools drop down, choose Tax Tools, then Delete a Form.     I tested this in TurboTax and realized that if you change your answer to NO after you already entered yes, TurboTax doesn't update the change on your tax return.   There is no self-employment tax when you answer NO.   Since changing your answer to NO is not working correctly, leave your answer YES, but enter 0 for the amount of back wages.   This will put all of the 1099-MISC income on Line 8 of Form 1040.    Or you may want to delete it completely and reenter it from scratch.   For me, entering zero as the amount of back wages worked as I expected it to.  

I believe what you may be seeing with your tax bill when entering this, is when you answer YES, TurboTax is correctly moving the back-wage portion to Line 1 - Wages and this is increasing your Earned Income Credit by more than the ordinary tax generated by answering NO.   But none of the 1099-inc should be reported as wages - you got a W-2 for that.   If misreporting the income as wages increases your Earned Income Credit and therefore your refund, the IRS might deny your credit and disqualify you from claiming the credit in the future.   So, if you qualify for EIC, make sure you are not overstating your wages.  Your EIC credit is on Line 27a.  See Over or Underreporting Your Income or Expenses.

The W-2 amount should be on Line 1 of your tax return, and the 1099-MISC amount should be on Line 8 - Other income.   You can verify there is no self-employment tax on your return by checking Line 23 of Form 1040.   Any SE tax is included there - and you can see the breakdown of those taxes on Schedule 2.   SE tax is Line 4.    You may have something else on your return generating the SE tax, but it does not appear to be coming from the 1099-Misc entry.    @itsmy99

[itsmy99]

Thanks so much @DawnC and @RobertB4444. My 1040 had been completed, looked correct, and accepted by the IRS! Even though my settlement was not large, your time and help were invaluable.

[Iamkookie]

I have a question. Will the income be considered as earned income? I didn't work in 2022 at all and I have 3 qualifying children. Will this settlement income allow me to qualify for the tax credits?

[InibeheA]

It depends. If the settlement was paid by your former employer for wrongful discharge, lost wages, business income and benefits, it is considered earned income. Generally, any other type of settlement will not be considered as earned income. See Tax Implications of Settlements and Judgments for more information.

If the settlement is earned income, you may qualify for the earned income tax credit if you fall within the income threshold. See Earned Income and Earned Income Tax Credit (EITC) Tables for more information. 

@Iamkookie

[CarlosR2]

Hi @ToddL99 , 

what do I put in the "description box" before you add a negative number that cancels the 1099-misc entry? 

[Hal_Al]

Q. what do I put in the "description box" before you add a negative number that cancels the 1099-misc entry? 

A. "Duplicate tax form reporting of income" or some other such wording.

[hyang]

It seems like the offset should only happen when W2 and 1099 MISC overlap with each other, but why is that even allowed? What's a clear way to tell whether they overlap or not?

For my case, I received both W2 and 1099 MISC from a lawsuit settlement. Although the amounts are the same, one represents wages, and the other non-wages, according to the summary on top-right of the letter (which contains both W2 and 1099 MISC).

Doesn't seem like I should manually enter the negative amount of 1099 MISC under "other reportable income"?

Because:

1. It will negate the tax from adding 1099 MISC which didn't have tax withheld on its own. As said, my W2 and 1099 MISC don't seem to overlap, therefore I prob should pay tax on both of them. (When I tried offsetting it though, my tax was reduced by about $3000.)

2. If I check "back wages" and fill in that (full) amount on 1099 MISC, it will reflect as negative value under other reportable income (which is the same category the offset would be entered). But it seems to be hidden until a manual offset is entered (unsure why). As a result, the negative amount generated through back wages incurred a self employment tax of ~$300. (As answered by previous posts, seems like this is a clear sign I shouldn't check "back wages".)

At first I was very confused by the same negative value under "tax payer/spouse amount" causing very different results: through "back wages", it increased tax by ~$300, while through manually offsetting, it decreased tax by $3000. But I guess it's because the two numbers have different contexts.

Still unsure whether the 1099 MISC (attorney fee) can be deducted or not. And if it can be, how much should I put? (It must be the 3. other income on 1099 MISC right? Since that's the only number on that form).

[DaveF1006]

The general rule regarding taxability of amounts received from settlement of lawsuits and other legal remedies is Internal Revenue Code (IRC) Section 61. This section states all income is taxable from whatever source derived, unless exempted by another section of the code. 

IRS Section 104 states that a taxpayer may exclude amounts arising from personal physical injuries and physical injuries. Unless your lawsuit involved personal physical injuries or physical injuries, then you would not negate the 1099 MISC. We would have to assume that the W2 and and 1099 MISC are coincidentally the same amount even though these are for two distinct things, wages and non wages. Otherwise, there really is no way to tell if these two amounts overlap without confirmation from the issuer of the W2 and 1099 MISC.

Let me know if this helps.

@hyang 

[ysette9]

Thanks so much for the clarification. I would have never figured out this ridiculous system alone.