1099-NEC from employer bankruptcy settlement

[user17751694096]

My son worked for a company that went bankrupt in 2024.  There were unpaid wages in 2024.  As a result of the bankruptcy settlement, the amount owed for the unpaid wages was paid in 2025.   He was sent a 2025 1099-NEC reporting the payment.  None of the 1099-NEC type of income options seem to apply.  How should this be handled?  

[Mike9241 · Accepted solution]

1) Was your son being paid wages with withholding, Social Security, and Medicare deductions? If not, it would seem he was being paid as an independent contractor who would get a 1099-NEC at year-end, which would mean his compensation is also properly reported on a 1099-NEC

2) However, if these taxes were being deducted from his paycheck, your son was being treated as an employee, and a W-2 should have been issued. Even a third-party liquidator should have issued a W-2 if your son was an employee.

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Something might have occurred to make the 1099 proper, even though your son was an employee, but I have no idea what that would be

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If you believe that under the facts and circumstances of this situation, he should have gotten a W-2, you can use FORM 4852 to generate a substitute W-2. However, read the instructions at the top and bottom. The IRS  wanted to be contacted before this is used. TurboTax, depending on your version, may be able to generate this form, allowing e-file - maybe 

4852 

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There is no way to know if the IRS will send your son a notice because of the reporting mismatch.

[user17751694096]

Thanks.  My son was a W-2 employee with this company for over 10 years - withholding, social security, 401K, etc.  He should have been paid on a W-2 in 2024, but the employer let things go on for too long and did not have money to pay his employees or suppliers.  There were 100 or so employees in this situation.  The amount he should have been paid in early 2024 on a W-2 was paid in late 2025 on a 1099-NEC.  By that time he wasn't an employee and it's not clear that the company existed.  

[DianeW777]

It's important to know what name and address is listed for the payer on your son's 1099-NEC. If it is the same company, using the same employer identification number (EIN) then I would advise the filing of Form 4852, as indicated previously.  If the name and EIN are not the same as on previous W-2s your son received, then it's possible they may have a legal standing to issue the 1099-NEC (possibly because they are out of business). 

Use that information to decide how to report, and if you see the name and EIN are the same as in earlier years, I advise to file and the wait for the IRS to respond. It's important to note that there could be interest and penalties for underpayment if they disagree with the use of Form 4852. Review Form SS-8 as well, however I believe you will agree your son was an employee.

• How do I file a substitute W-2, Form 4852?

This will report your wages and you will also see the information for the SS-8 along the way. You will pay only the employee share of social security and medicare taxes. 

If you do decide to use the Form 1099-NEC as though your son was self employed, use the link below.

• What is a 1099-NEC?

@user17751694096