2019 EIC Issue with Settlement Value and form 3514

[MrFumo]

This year I received a settlement for back wages. This entered from form 1099 MISC. It is a lawsuit type income which the software asked and I entered correctly. During California 2019 return, I qualified to the EIC being under 30,000 even with the settlement. The software inaccurately inputs the value as self-employed money. THIS ISN'T CORRECT. Regardless I delete Form 3514, forgo my ~$40, go to print to mail, and the form regenerates on its own half filled out. This puts me at risk for audit due to the bug. Please advise on how to proceed.

[KrisD15]

Here is a copy of the steps so you can be sure it was entered correctly:

1. Sign in to TurboTax and open or continue your return.
2. Search for 1099-misc and select the Jump to link.
3. If you're asked Did you get a 1099-MISC?, answer Yes.
   1. If you've already entered a 1099-MISC, select Add Another 1099-MISC.
4. Input the information from your 1099-MISC and select Continue.
5. On the Describe the reason for this 1099-MISC screen,type in lawsuit settlement and select Continue.
6. On the Does one of these uncommon situations apply? screen, select This was money from a lawsuit settlement and then answer the back wages question before selecting Continue.

[MrFumo]

I appreciate your response. I think it may have helped to read a tad more closely. I already did the federal part just fine following the steps you posted for me. Software worked beautifully for Federal 1040. The 540 section however is the issue. Nowhere in the CA 540 does it ask about 1099-MISC. It automatically reads from Federal 1040 and imports my LAWSUIT earnings as SELF EMPLOYED BUSINESS earnings which is why I can't complete the EIC 2019 despite myself qualifying. I try to remove the auto-generated 3514 to ignore my credit given the bug in the software. I switched to forms>then 3514>then delete form. The software automatically regenerates the form when I go to the mail in return section. I literally watch the green refund numbers change as I go to print return for records and filing.

There is no where for me to report bugs in the software so I'm on here trying to get my return done in such a way I won't be audited. It's not worth the 40$ to me to run that risk, and I'd prefer to use the software I paid (ironically) $40 for at Costco.

[MrFumo]

UPDATE: 4/24/2020

I have again verified it is entered as LAWSUIT.  I switched to forms to verify it shows boxes other income checked  (1099-MISC >Box 3>other income and back wages from lawsuit ) It would be fantastic to see an update patch this bug, so I can reduce my risk of audit.

[RT18]

I've been looking for the same solution.  Received a settlement for backwages on a 1099 misc and now California thinks I run a business.  I was thinking I'd need to upgrade to get a live accountant, but I think they'll have the same problem we are having.  A patch is needed.  

[MrFumo]

UPDATE: As of about 6 days ago, the software updated so you can delete the form without it auto populating. I've been curious as to why that has to be like that though. My research has yielded the following.

1) 1099-MISC is somehow being accepted on Federal form as a proper 1099-MISC, but when it transfers to California 540, it magically becomes a personal business income instead.

2)Following the guide on https://www.ftb.ca.gov/forms/2019/2019-3514-instructions.html , Work through to find out if I am under 30k, single, no child, etc, they qualify, BUT the calculations for EITC 3514 NEGLECTED to add input for 1099-MISC. Not exactly TurboTax fault, but more FTB oversight.

I've debated manually re-doing the entire packet using the FTB online PDF forms, using the TurboTax as a template, but punching the 1099-MISC as other income somehow. The difference is about $40 bucks for me to just forgo the credit, so I might just let CA keep that money to save my gray hairs.

Please let me know anybody if they figure out how to get the Credit if they are plagued by the 1099 MISC!

[MrFumo]

Further Update:

Given the software grabs information from Federal to import to California, I combed through that. 

1) Federal Taxes 1040 Schedule 1 Part 1 populates fine, but in Part 2, it has a random deduction listed ("Deductible part of Self- Employment Tax"). I looked to find where that number came from. 

From IRS, its supposed to generate that deduction from equations on a chart Schedule C, which TurboTax didn't populate in my return. This is intended to figure out your taxes if your working for yourself as a business like a contractor or something, probably not for class action lawsuit settlements for back wage OT calculation errors, especially if its claimed as other income directly above in Part 1 and labeled as such. 

This webpage seems to think it should just be treated as wages. But it blatantly states that it's not the law on page one.
https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf    

My proposal to TurboTax: To avoid errors later in the case a 1099-MISC is a lawsuit for back wages, maybe skip the self employment deductions section if the wages were from a W-2 corporate employer. That way it would populate correctly in the State return, and I wouldn't have to forgo my EITC. Maybe make a question if the 1099-MISC pertains to self employment, or something else?

2) There was a form 8919 that was supposed to populate to pay fair share of social security and medicare for 1099-MISC if you were not an independent contractor. It forgoes schedule C in the instructions, so I assume this is a potential route to pay tax on non-contractor 1099-MISC. Maybe someone in TurboTax could look into that as well, so others (albeit a small percentage) of people who received a tax settlement as a W-2 employee can keep other qualifying deductions.

I already submitted my Fed, so I'm stuck this year, but maybe this can help others.

[EMASS]

After spending 2 hours on the phone with TurboTax we finally figured out the solution for this problem.

1) go to Tax Tools on the left-hand side

2)Selected Tools

3)Selected Delete Forms

4)Scroll to the CA forms and select Form 3514 and delete.