1099-MISC Received for Bonus Paid by Franchisor

[Stratburst]

I am employed by a hotel owned and operated as a franchise. I received a W-2 from the franchise owner for my wages and a separate 1099-MISC for a sales bonus paid by the national hotel chain that owns the brand, the franchisor. Technically I'm employed by the franchisee, not the franchisor but the bonus was directly related to my employment but paid by the franchisor without tax withholding.  How do I report 1099-MISC received for a bonus? 

[LenaH]

If extra pay is reported on a 1099-MISC in Box 3, then you will still need to pay the uncollected Social Security and Medicare tax, as well as the income tax. Therefore, this income should be on a Schedule C.

The IRS classifies bonuses as supplemental wages, along with severance pay, taxable fringe benefits, vacation pay, back pay, and overtime. Supplemental pay is anything other than your regular pay. Typically, bonuses are added to a W-2. However, there are different withholding methods for supplemental wages that the employer can consider, which are discussed in IRS Publication 15.

Per the IRS, regardless of the method employers use to withhold income tax on supplemental wages, supplemental wages are subject to Social Security and Medicare taxes. 

[Stratburst]

Thank you for your reply. Understood that I will need to pay federal, social security and Medicare tax on the amount.  The income is reported on 1099-MISC in box 7 as non-employee income.  I ask because this income was earned as a direct result of my employment and therefore I don't view this as self employment income. The income however is not paid by my employer. It appears that I need to include the gross amount in line 1 of form 1040, and  report it using 1040 schedule 2 and form 8919. 

[Opus 17]

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@Stratburst wrote:

Thank you for your reply. Understood that I will need to pay federal, social security and Medicare tax on the amount.  The income is reported on 1099-MISC in box 7 as non-employee income.  I ask because this income was earned as a direct result of my employment and therefore I don't view this as self employment income. The income however is not paid by my employer. It appears that I need to include the gross amount in line 1 of form 1040, and  report it using 1040 schedule 2 and form 8919. 

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There's three issues here.

You say it was reported in a 1099-MISC box 7 non-employee compensation.  If so, the payer used the wrong form.  1099-MISC has no box 7 for 2020, the payer should have used a form 1099-NEC and put the money in box 1.  If you choose to enter this as self-employment income, you would have to enter it as if it was a 1099-NEC with income in box 1, since the Turbotax interview will not allow you to enter a box 7 amount for a 1099-MISC in 2020.

Second, because the franchisor reported the income in box 7 of the old-style 1099-MISC, they are indicating that it is "earned income" -- that is, income earned from providing a service or doing work.  You would report this on a schedule C for self-employment.  You do NOT report this as Misc income with a form 8919--that procedure is appropriate when the same employer provides you a W-2 and a 1099, but that procedure does not work if you have two different employers, and one provides a W-2 and the other provides a 1099.

Third, there is a decent question to be had over whether or not this is really "earned" income.  But the problem is that, by using box 7, the payor is taking the position that it is income earned from working, and you have a high hurdle to overcome to report this as unearned income.   

The analog you are looking for is the "spiff" in the automobile sales industry.  A "spiff" is an incentive paid directly by the car manufacturer to the sales person, bypassing the dealership that pays the salesperson's regular salary.  Because the salesperson does not work for the manufacturer, the spiff is taxable income, but it is not earned income.  It is reported as "other" income, and is not subject to a schedule C, self-employment tax, or social security and medicare tax on form 8919.  Interestingly the IRS publication that describes this is not available on the IRS web site, but it is archived elsewhere.

https://www.unclefed.com/IRS-Forms/2005/p3204.pdf

The IRS audit manual discusses this issue.

https://www.irs.gov/businesses/corporations/new-vehicle-dealership-audit-technique-guide-2004-chapte...

Here is a Turbotax discussion, although some of the instructions are outdated since the 2020 program changed how 1099s are entered.

https://ttlc.intuit.com/community/taxes/discussion/i-got-a-1099-misc-for-a-spiff-at-my-job-paid-by-t...

Now, back to your situation.  Because this was reported in an old-format 1099-MISC as box 7 "non-employee compensation", the IRS will assume this was compensation earned by working, and you WILL get audited if you report it as miscellaneous income not subject to self-employment tax.  At the very least, you will get a letter demanding an explanation, and if the examiner doesn't agree with your explanation, you will get assessed the tax, plus a late penalty and interest, and you will have to take your case on appeal to a supervisor or possibly Tax Court.

If you decide to report this as compensation for work performed, enter it as if it was a 1099-NEC with income in box 1 and prepare a schedule C for self-employment, and pay the SE tax.  Don't prepare a form 8919.

If you decide to report this as miscellaneous income, report it as if it was a 1099-MISC with income in box 3, and answer the profit testing questions as "No" (not income earned from working, not intending to make a profit, not planning on doing the same work in the future, etc.)

[Hal_Al]

What you have is a SPIFF.  It does not go on line 1 of form 1040 and is not subject to FICA  (don't prepare a form 8919) or Self employment tax. 

SPIFF (Special Performance Incentives for Field Force)  payments reported on Form 1099MISC; (1) are not treated as wages, (2) are not subject to federal income tax withholding, social security, Medicare, or federal unemployment tax, and (3) are not considered to be self employment income and, therefore, are not subject to self employment tax.   https://www.unclefed.com/IRS-Forms/2005/p3204.pdf

In TurboTax, Enter at:

- Federal Taxes tab

 - Wages & Income

Scroll down to

  -1099-Misc and Other common Income

      - Income From 1099-Misc

 On the  follow up screen :"Describe the reason for this 1099_Misc",  enter SPIFF in the blank box, then on the next screen,  "Does one of these Uncommon situations apply" on the drop down list, check “This was  a Manufacturer's incentive payment”

This will put it on line 8 of Schedule 1.

[Opus 17]

The only time you can use form 8919 without also filing a form SS-8 is if you have a single employer who pays you on a W-2 and pays the bonus on a 1099.  That would be code H on form 8919.  That's not the case here, you have two payors.   To claim that you are an improperly classified employee of the franchisor, you would have to file form SS-8 to make that determination, and based on the facts, you clearly aren't an employee of the franchisor. 

[Stratburst]

Based on the groups input it's clear form 8919 does not apply. I have taken a closer look into my situation and provided additional details and clarifications below. Also note this is for tax year 2019. I apologize for failing to mention this as it appears to be significant in my case.

• Tax year: 2019
• The hotel is a franchise
• The franchise owner contracted with management company to operate the hotel
• The franchise owner and the management company are separate entities
• I am employed by the management company as a sales director, my W-2 is from the management company
• The "incentive" bonus was paid by the franchise owner, not the management company
• The 1099-MISC provided by the franchise owner reports the bonus in box 7 as nonemployee compensation. No other boxes are completed.

Based on this information does it appear that a SPIFF applies to my situation employed as a salesperson for a hotel or will I have to handle this as self employed income? Frustrating because the bonus was only $1k, not worth the time I've spent trying to discover how to properly report it especially if I'm on the hook for self employment taxes on it. I appreciate everyone's input!

[Opus 17]

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@Stratburst wrote:

Based on the groups input it's clear form 8919 does not apply to my situation. I have taken a closer look into my situation and provided additional details and clarifications below. Also note this is for tax year 2019. I apologize for failing to mention this as it appears to be significant in my case.

• Tax year: 2019
• The hotel is a franchise
• The franchise owner contracted with management company to operate the hotel
• The franchise owner and the management company are separate entities
• I am employed by the management company as a sales director, my W-2 is from the management company
• The "incentive" bonus was paid by the franchise owner, not the management company
• The 1099-MISC provided by the franchise owner reports the bonus in box 7 as nonemployee compensation. No other boxes are completed.

Based on this information does it appear that a SPIFF applies to my situation employed as a salesperson for a hotel or will I have to handle this as self employed income? Frustrating because the bonus was only $1k, not worth the time I've spent trying to discover how to properly report it especially if I'm on the hook for self employment taxes on it. I appreciate everyone's input!

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I'm starting to get unclear again, because you are talking about a franchise owner and a management company but not a franchisee.  

Now, you have big name hotel chain (let's say, "SingleTree."). That's the franchisor.

Then you have someone who pays SingleTree a licensing fee to operate a hotel, it might be a person or a company, but that company is the franchisee, we'll call them "LocalHotelOperator LLC".  LHO might hire their own staff who are employees of LHO.

Or, LocalHotelOperator might contract with a hospitality management company to actually staff the hotel, especially if LHO doesn't have much experience.  There's a big national firm I'm thinking of that does hospitality contracting all over the country if you know what to look for, and the house staff of the hotel are employees of the hospitality company, and not LHO.  And in fact, I know of one particular location where there are 4 different hotel brands on the same property, all owned by the same local operator, and operated buy the same contractors, but they are franchises of 4 different national brands. 

Now here's my confusion:

If you are an employee of LHO, and the national chain SingleTree pays you a separate bonus, that's probably a spiff, since you are not an employee of SingleTree and don't have any direct obligations to them.  Likewise if you are an employee of the hospitality contractor, and SingleTree pays you a bonus, that's probably a spiff.

But if you are an employee of the hospitality contractor, and the Local Hotel Operator (the franchisee) pays you, I don't know what that is, since it is not the same kind of hands-off relationship, and you are more or less under contact to LHO, although it is indirect.  Although I may be overthinking it. 

Finally, the fact that it was reported in box 7 means that the IRS will automatically consider it to be self-employment income, and if you report it as a spiff (as "other income" not subject to self-employment tax) you will get a letter from the IRS demanding payment or a good explanation.  You might have a good explanation here, but it does at least mean that the hassle won't end when you file your return. 

[Hal_Al]

I agree with Opus17, the relationship between your employer and their client is not the same as a Hotel chain and their franchisee or a manufacturer and their dealership.  Therefore, I don't think the payment qualifies as a SPIFF.  Since, the work is clearly related to your regular work, it is subject to social security and Medicare tax.  So, it should be reported as self employment. 

[Stratburst]

What I have learned is the entity that paid the bonus owns the franchise, and is not the franchisor as originally reported. They contract with the management company to operate the hotel. I am employed by the management company, they are listed as the employer on my W-2 from.

It sounded like a SPIFF applies to this situation until I read that the the following: "...the fact that it was reported in box 7 means that the IRS will automatically consider it to be self-employment income." It sounds like this is my answer. I will report it as self employment income. Thank you for your assistance!

[Hal_Al · Accepted solution]

Yes,  If you try reporting box 7 income as anything else, you chances of hearing from the IRS are high.  But our experience, here in the forum, has been that SPIFFS were frequently erroneously reported in box 7 of a 1099-Misc.  Box 7 reporting is not automatically a disqualifier.

The fact that the payment was not from your employer does support  the SPIFF classification.  But, my opinion is that  the relationship, between the parties  is not exactly the same, as in the typical SPIFF situation.  The money sounds more like a bonus that a sales incentive.