How do I add ESPP ordinary income that was not included in my W-2?

[lazyh32]

The 2020 version of Turbotax online does not ask me if the ordinary income I earned as part of an ESPP stock sale was included in my W-2.  I went through the step-by-step enter it yourself.  I even worked with a Turbotax support person on the phone, and they could not get the question to come up.  I then used the suggestions from 2019 questions that said to use the "Miscellaneous Income, 1099-A, 11099-C" option and then the "Other income not already reported on a Form W-2 or Form 1099" option but I am not able to put in a description of "ESPP ordinary income" and none of the pre-set choices for description are applicable.  How do I handle this?

[DawnC]

After you go through the step by step and click through the summary screens, you should come to a screen that says Let's review your employee stock plan results.  There will be a checkmark in the box that says 'Reported on W-2'.  Uncheck that box and TurboTax will add the amount to your Wages reported on Line 1 of your Form 1040.  

[lazyh32 · Accepted solution]

I finally figured it out.  For 2020, in order to get the program to ask you if your ordinary income was included in your W-2, you must do the following.
1) You must select "I need help figuring out my cost basis"
2) You must select "I'll enter this on my own" when asked about the sales info
3) Specify "It's for an employer that has an existing W-2 on this return" (if appropriate, either way works)
4) You must enter the amount of compensation income on the "Let's enter your ESPP sale details" page
5) Then after completing it, it will summarize your sales on the "Here are all your investment sales" screen
6) When you click on continue, it will bring up the "Let's review your employee stock plan results" screen and ask you about your W-2's

Without going though the "I need help figuring out my cost basis" section, it never asks about your W-2, nor gives you the option to specify your ordinary income.

[nicholerallen]

I was having the same problem and just figured this out as well.  However, I thought that missing ordinary income from qualified sales (not on a W-2) is supposed appear on line 7a of the 1040?  I tried the methods suggested by SuperUser TomYoung on this issue and he instructed to make adjustments for it to appear inline 7a, but I always end up with the income included on line 1.  Which is correct?  Sorry to hijack the question but I've spent days on this!

[lazyh32]

For me the ordinary income also ended up included in line 1, not line 7a.  I don't think TurboTax will do it any other way.  I went ahead and submitted my taxes with it this way.

[DawnC]

The compensation (ordinary income) should show up on Line 1 on your 2019 tax return.    The answer you were reading from Tom Young was from a prior year (2017 or before) when wages were reported on Line 7.  Form 1040 was revamped for 2018 and later tax returns as part of the Tax Acts and Job Cuts legislation.  

And there is no such thing as hijacking a question here in the TurboTax Community..;)  Feel free to ask, answer or comment on any post that has helped you or may help others.  We encourage community members to participate, so thank you for contributing!  

@nicholerallen

[maja_MN]

Thank you for asking this question! I'm hoping the answer from lazyh32 will work for me. I tried adding an extra 1099 or adding an extra line to my W-2 that isn't really on the actual W-2. fingers crossed.

[czhang4]

sorry to ask a dumb question: isn't still ok to do the ""Other income not already reported on a Form W-2 or Form 1099" option" trick? I know there is no way to enter "espp ordinary income" there. But isn't TurboTax simply added that ordinary income to the wage in 1040 line 1? I don't see any other form being attached in the final reporting forms. 

The net result of the final forms looks no different from just add the amount to section "Other income not already reported on a Form W-2 or Form 1099". 

[MarilynG1]

@czhang4 You are correct, the income still gets taxed the same way adding it through 'Income not reported on W-2..'.

Another option is to choose 'Other Reportable Income', where you will be able to enter a description on the next screen (screenshots). 

[czhang4]

Thank you MarilynG1!

The only concern that I have is, will IRS understand that this is the "compensation income" part of the ESPP sale if I report them as'Income not reported on W-2..'.?

My point is the final form does not look contains any explanation or whatsoever about this adjustment even if I go through the ESPP questionnaire to adjust the cost basis. 

[AmyC]

Your tax return will show ESPP on sch 1 line 8 with the dollar amount. It is clear.

[czhang4]

@AmyC @MarilynG1 

Very interesting! I did a few experiments today. Apparently there are a few ways to get this adjusted:

1), using TT espp questionnaire, by doing so, your 8849 form for that particular sale will be adjusted with code B, and cost basis -$x. Then this $x is added to 1040 line 1 with NO explanation in the official forms for filing. But in the ESPP worksheet, it does show how this is calculated. Also, the amount shows up in the "wages, salaries &tips" worksheet.

2), If I add the compensation income into the "Miscellaneous Income" -> "Other income not already reported on a Form W-2 or Form 1099", the amount $x is added to 1040 line 1 just as above. But there is no calculation and the amount shows up in the "wages, salaries &tips" worksheet, with the explanation you typed in.

3), If I add it to "Miscellaneous Income" -> "Other reportable Income", then this $x amount does NOT show up 1040 line 1, instead it shows up in line 8, together with other income received, for example, on 1099-MISC. It is also treated the same as MISC income on schedule 1 line 8, again with the explanation you typed in.

You have to manually adjust the cost basis for the particular sale with both method 2 and 3.

From the form perspective, both #1 and #2 gives exactly the same official forms for filing, though worksheets are different. #3 generates slightly more informative official form, but the amount is added to line 8 instead of 1.

I am not sure which one is more acceptable to IRS, maybe all of them? I will just go with #1, but it would be interesting to know. I guess I am just curious to understand how can IRS match the extra amount reported in either line 1 or 8 on 1040 to the 3922 form that the company has filed years ago 🙂

[MarilynG1]

@czhang4 The IRS is not going to match the income you report with a Form 3922 filed years ago, as you pointed out. 

If anything, they may want to know why (and how) you adjusted your Cost Basis reported on your 1099-B.

These are all acceptable to report (and be taxed on) income not reported on other forms.

[khuynh03]

I'm in the process of entering my ESPP sale details and similar to the original author of this post, my W-2 doesn't include the compensation income for this sale.

I'm entering the compensation income manually and see the following in the help message:

"Compensation income is reported on line 1 of Form 1040 along with wages. Usually, employers include this compensation in box 1 of Form W-2. If they did not, we'll add it to your regular wages."

How will TurboTax know whether or not my employer included this compensation income in my W-2? I don't see any options to let TurboTax know that this isn't included.

[GeorgeM777]

It won't, unless the compensation income is separately stated on your W-2.  Thus, if you know the compensation income was not included on your W-2, you can add it as "other income" on your Form 1040.  To enter this compensation income as other income, follow these steps:

1. go to Income & Expenses,
2. scroll down the page to the last item Less Common Income, select Miscellaneous income,
3. then from the list select Other reportable income. 
4. you will have to enter the amount you earned plus a short description. 

If you are using TurboTax Online, here are the steps to follow to preview your Form 1040 and see the amount on line 8:

       Open or continue your return.

1. Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
2. With the Tax Tools menu open;
3. Select Tools.
4. Next, select View Tax Summary in the pop-up.
5. Then Preview my 1040 in the left menu.
6. Select Back in the left margin to return to the page where you left off.

@khuynh03