1099-NEC for Severance Pay?

[horselover]

I received a 1099-NEC (?) for severance pay from a previous employer. How is this taxed? 

[Opus 17]

Severance pay should be reported on a W-2 along with regular wages. By reporting it on a 1099-NEC, the employer is trying to make you pay both halves of Social Security instead of only the employee half, whether this is intentional or out of ignorance.

I believe in TurboTax when you enter the 1099-NEC, there is a series of checkboxes for special circumstances, and one of the checkboxes says something like “this should have been on a W-2“ or something like that.  If you check that box, TurboTax will fill out a substitute W form for you, and you will pay regular income tax as well as the employee half of Social Security and Medicare, but you will not have to pay the employer half of Social Security and Medicare.  Depending on the size of the severance pay, the fact that there was no federal or state tax withholding will almost certainly decrease the refund you would normally expect or increase the amount of tax you owe.  If TurboTax indicates that you owe a penalty for underwithholding, decline the offer to calculate the penalty and add it to your payment. If you owe a penalty, the IRS will mail you an assessment later, and when that happens, you can appeal based on the circumstances.

If you can’t figure out how to report this 1099 as wages that should have been on a W-2, post back here and I will double check my own copy of the program to see exactly where it is.

[DanielV01]

The actual Form @Opus17 is referring to is Form 8919.  The following link will give you instructions on how to find this form:  Solved: Where do I enter Form 8919 - TurboTax

The answer above refers to Form SS-8, which will not be required for you.  You will see an option that you received both a W-2 and a 1099 from the same employer.  Select this option.

[Opus 17]

I was thinking form 4852, not form SS-8.

[mc013]

Good Morning - I received a 1099-NEC from my former employer as a severance payment. It was not included on my final W2 and I don't have a business to report or enter so how should I enter on my taxes. Thank you

[Opus 17]

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@mc013 wrote:

Good Morning - I received a 1099-NEC from my former employer as a severance payment. It was not included on my final W2 and I don't have a business to report or enter so how should I enter on my taxes. Thank you

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All employee compensation should be reported on a W-2, and the employer is supposed to pay their half of social security and medicare tax.  You are responsible for your share of social security (6.2%) and medicare (1.45%) as well as income tax, of course.  Follow the procedure below to report the income as wages that should have been included on your W-2. 

This information is entered in a different area of the program then regular W2s.  It is found under Federal (or Personal) Taxes -> Wages and Income -> Less Common Income -> Misc Income -> Other Income Not Already Reported on A Form W2 or Form 1099

The quickest way to get there is to use the search feature in the top right hand corner (magnifying glass icon).  

• Search for "8919" and then click the jump to "8919" link (if you are just logging into your account, make sure you click the Take Me to My Return button before performing the search).
• You will get sent to the Other Wages Received Page
• You will click Yes and proceed until you get to Any Other Earned Income
• Click Yes to this question because you have other income that should be on a W2
• Leave check next to employee compensation that was not reported on a W2
• Next screen will be Employee Compensation that was not reported on a W2
• This screen will explain Form 8919 and SS-8.  You will select reason code H for form 8919, and you do not need a form SS-8 in your situation.
• When the program asks for "total compensation" from this employer, only enter the compensation not already included on a W-2.  (Turbotax is a bit confusing on this point.)

[DMarkM1]

This should have been wages reported on a W2.  Social Security and Medi-care taxes have not been paid on this income.  Your employer should pay 1/2 and the other 1/2 should have been withheld from the pay.  However by reporting the income on a 1099-NEC the employer is making you responsible for the entire amount of these taxes.  You will file a form 8919 making a claim that the pay should have been wages with the employer paying their half.  Your half will be added to your taxes on your return.   

1. Under the "Income" tab,
2. Scroll down to "Other common income"
3. "Show More"
4. "Start/revisit" the 1099-NEC topic
5. After entering the form information you will arrive at a page titled "Do any of these uncommon situations apply?" 
6. Select the option that reads, your employer reported this income on a 1099-NEC, but it should have been on a W2
7. Next select the option that reads you received a W2 and 1099-Nec from this employer
8. The form 8919 will generate and your share of social security and medi-care taxes will be added to your return.  

[mc013]

Thank you for your response - I assume the employer wanted it to be done this way. Is there any issues if I enter the information as it should have been a part of my W2 ? Just dont want to have any tax implications especially since that would go against my previous employer. With this said - if I enter 1099 NEC and don't have a business is there any other work around to enter my information into turbo tax. I am not a contractor and it was simply payment as severance after leaving my job. Much appreciated and thank you so very much !

[Opus 17]

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@mc013 wrote:

Thank you for your response - I assume the employer wanted it to be done this way. Is there any issues if I enter the information as it should have been a part of my W2 ? Just dont want to have any tax implications especially since that would go against my previous employer. With this said - if I enter 1099 NEC and don't have a business is there any other work around to enter my information into turbo tax. I am not a contractor and it was simply payment as severance after leaving my job. Much appreciated and thank you so very much !

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If you report on form 8919, the IRS may investigate the employer, or at least send them a letter asking them to explain and to pay the half of social security and medicare tax that they owe.  That's not on you, though.  They have a responsibility to follow the law.

If you report as self-employment, you will need to upgrade to turbotax self-employed (more expensive version of the program) and pay 15% self-employment tax instead of 7.65% social security and medicare tax.  You would create a business (use any code you like) and report the gross income with no deductions for expenses since you can't have deductible expenses when you are an employee.

Seriously, why pay double the SS and medicare tax when they aren't following the law?

[mc013]

Thank you for your response.  In the event that I claim this as income that should have been reported on W2 would I have any tax penalty if old employer opted not to pay their portion since they sent a 1099-NEC after my final check was received ? Just want to do the right thing and avoid any issues - Thank you

[Opus 17]

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@mc013 wrote:

Thank you for your response.  In the event that I claim this as income that should have been reported on W2 would I have any tax penalty if old employer opted not to pay their portion since they sent a 1099-NEC after my final check was received ? Just want to do the right thing and avoid any issues - Thank you

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You have no further obligations, unless your employer tries to tell the IRS that you were never an employee and were an independent contractor.  In that case, you would submit a form SS-8 with documentation of your employment status.  Assuming you can prove you were an employee, the employer gets in worse trouble than before and has to pay both halves of the social security and medicare tax as a minimum penalty.  This is unlikely to happen.

Also, the employer will not have the choice of "opting" to pay or not pay their half of the employment taxes.  You think the IRS will ask politely and then shrug their shoulders and walk away if the employer says no?

[KrisD15]

May I suggest you contact the former employer and explain the situation. 

It is possible that payroll made the error and they can send you a corrected W2. 

If you enter the 1099-NEC as wage income, there would be no penalty to you, but the IRS would investigate as to whether 

• You are a 1099-NEC (Non-Employee Compensation) Taxpayer, in which case you would be liable for your share of Self-Employment tax 
• Your former employer reported the compensation incorrectly in which case they would be liable for the tax, and perhaps penalty. This tax is part of the payments to your Social Security Account. 

It would be MUCH better if you and the former employer could sort this out before the IRS gets a chance to step in. 

According to the IRS:

"Is severance pay taxable? Yes, severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes. See Publication 525, Taxable and Nontaxable Income, for additional information. "

IRS Link

[mc013]

Thank you very much - appreciate your feedback - make it a great day !

[mc013]

Thank you very much - appreciate your feedback - make it a great day !

[pkenn1]

I worked as a W2 employee for 18 years. I was offered a severance package. After long  negotiations I received a severance payment 15 month after being terminated. The employer sent me a 1099-NEC instead of a W2. What do I do