My employer issued a 1099NEC instead of adding it to my W2. Now IRS is saying we owe more money like we didn't claim We did claim 1099NEC as that's what was provided, but it should have been included on W2, even though taxes weren't taken out.

[brimelow01]

IRS has come back on us and said we owe more taxes because the employer provided a 1099NEC instead of adding bonus on my W2.  We did provide this information on our taxes, but used the 1099NEC, which was incorrect.  What are our options now?

[SharonD007]

Form 1099-NEC is reported on Schedule C which the IRS considers self-employment income.  Did you combine the income from your 1099-NEC to your W-2 income? Please clarify. I'm asking as you stated, that the IRS sent you a letter.  If you didn't enter the 1099-NEC on Schedule C (where you could have deducted expenses as well), you can file an amendment.   Let us know how you initially reported the 1099-NEC so we can assist you.

[Opus 17]

All money paid by your employer for work performed is considered wages and should be reported on the W-2, and is subject to withholding of income tax, social security and medicare tax.  If the employer pays a bonus on a 1099-NEC, they are (accidentally or intentionally) avoiding paying the employer half of social security and medicare, and they may be avoiding other responsibilities.

Your first step should be to contact the employer and ask for a corrected W-2.  Keep copies of your correspondence and their refusal (assuming they refuse).

To properly report the bonus, enter the 1099-NEC as-is, but then on the list of "special circumstances" check the box for "I received a W-2 and 1099 from the same employer and this 1099 should have been included in my W-2."  Turbotax will prepare a form 8919 with code H, which is correct for this situation.  You will be assessed income tax of course (since this is taxable income) and you will also be assessed the employee half of social security and medicare tax that should have been withheld by the employer.  But you don't pay the full self-employment tax and you won't have a Schedule C for self-employment. 

If this is for a prior year, you may need to prepare an amended tax return.  It's unclear what you originally reported.  Did you report the W-2 and a separate self-employment job for the 1099?  If so, then you overpaid your taxes.  Did the employer issue a corrected W-2 that included the bonus, and cancel the 1099?  In that case, the IRS is seeing your W-2 doesn't match, and they don;t know that your 1099 self-employment didn't really exist.  Start by getting your wage and income transcript from the IRS for that year, to see if there is a corrected W-2 on file and if the W-2 on file with the IRS matches the one you received.

https://www.irs.gov/individuals/get-transcript

If there is a corrected W-2 on file, you should amend your return to update the W-2 and remove the self-employment.  Your taxes should go down, not up.  Or, if the IRS only has the original W-2, you should amend your return to remove the schedule C self-employment and report the bonus on form 8919 instead.   Don't file the amended return normally, instead you will print it, sign it, and mail it to the office that sent the tax notice, along with a detailed letter of explanation, possibly including copies of pay stubs and other correspondence from the employer. 

[Hal_Al]

Q. What are our options now?

A. Option #1 is write a check to the IRS for the amount shown on the IRS notice and get it over with.

As others have explained, your employer did it wrong, either on purpose, to shift his half of the FICA burden to you,  or just not knowing any better. You failed to report the 1099-NEC, in the manner to get TurboTax to calculate the self employment tax (essentially both halves [employer & employee] of FICA). 

Option #2: discuss it with your employer to see if they will get involved to straighten it out. The simple solution: you pay the extra tax and they reimburse you (probably half).  Even on a W-2, you pay half the FICA. 

That said, IRS notices, with a bill, are sometimes wrong. Preparing an amended return, to compare to the bill, before paying it, is recommended. 

[brimelow01]

Thanks so much for everyone that offered us a solution on this issue.  It was not filed under schedule C, and it appears the employer will not reissue a W2 to add the 1099NEC, so we will send something to IRS to let them know the two were issued by the same employer of my husband.  We don't mind paying taxes on what is owed, but obviously if it is reported incorrectly and employer does not pay their portion the amount would change.  We will send a reply to IRS with this information. 

[Opus 17]

---

@brimelow01 wrote:

Thanks so much for everyone that offered us a solution on this issue.  It was not filed under schedule C, and it appears the employer will not reissue a W2 to add the 1099NEC, so we will send something to IRS to let them know the two were issued by the same employer of my husband.  We don't mind paying taxes on what is owed, but obviously if it is reported incorrectly and employer does not pay their portion the amount would change.  We will send a reply to IRS with this information. 

---

If you reported the 1099 as "miscellaneous", other, or hobby income, then you paid the correct income tax but you still owe 7.65% social security and medicare tax.  I would prepare an amended return to remove the 1099 as "other" income, and add it back as a 1099-NEC, check the box for "supposed to be on a W-2" and pay the social security and medicare tax.

(If the IRS is seeing a 1099-NEC, they are probably billing you for 15.3% self-employment tax because you did not include schedule C.  You owe half of that, but you need to include the form 8919 with reason code H to document that.)