W-2 for wages & 1099 from same employer for car allowance

[slf517]

My spouse's employer insists on issuing a 1099 for a car allowance when they also issue a W-2. I have spoken with their CFO, who insists that this is proper. However, all of my research confirms that it is not appropriate for them to issue a 1099 to a full-time employee.

Since they will not amend the W-2 or void the 1099, we must report it as income and pay all its taxes. I feel the employer is doing this to reduce their tax burden intentionally.

Am I wrong? What can I do to correct or report the situation?

My spouse is near retirement, so any impact of reporting to IRS or whomever would be negligible, even if they discovered who reported them. We wouldn't normally nitpick something like this, but it has a large effect on our taxes and I am frustrated and disappointed that this company would skirt taxes this way. 

[rjs · Accepted solution]

You are right.

You didn't say what kind of 1099 form the employer is issuing. I assume it's a 1099-NEC. Here's how to report the 1099-NEC correctly on your tax return, in spite of the employer's error.

After you enter the 1099-NEC in TurboTax you will come to a screen that asks "Does one of these uncommon situations apply?" Select "My employer reported this extra money on a 1099-NEC but it should have been reported on a W-2." Then click Continue. On the next screen select "I received Form W-2 and this Form 1099-NEC, but all the income reported on this Form 1099-NEC should have been included on my Form W-2." Then just read the next couple of screens and click Continue.

TurboTax will include Form 8919 in your tax return. The car allowance will be reported as wages on Form 1040 line 1g. Form 8919 calculates the Social Security and Medicare taxes that your spouse's employer should have withheld on the car allowance. The total of these taxes will appear on Schedule 2 line 6 and will be included in your total tax liability.

[slf517]

Thank you! I must have missed that question on last year's tax return. I'll have to consider amending it.

One follow-up: You said that form 8919 will calculate SS & medicare taxes that the employer should have withheld. Will I still have to pay both the employer and employee sides of those taxes?

[rjs]

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@slf517 wrote:

Will I still have to pay both the employer and employee sides of those taxes?

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No, you will pay only the employee's share of the Social Security and Medicare taxes. The income will not be treated as business or self-employment income, and you will not have to pay self-employment tax.

[slf517]

All good to hear. Thank you for your help!

Have a great day!

[Opus 17]

If this is from a non-accountable plan (she is not required to report or prove mileage) then it is correctly reported as taxable income, but I agree that everything an employer pays an employee as compensation for their services must be included on their W-2 and subject to withholding.  Using form 8919 with reason code H is the correct answer.

If this is reimbursement on an accountable plan (she has to report mileage and is only reimbursed for her work-related mileage) then this should not be taxable at all, and I have a couple of thoughts about how to deal with that.

Also, if you agree that it is taxable, but you included a schedule C in 2021, 2022 or 2023, it is not too late to file an amended return to remove the schedule C and report the 1099 on form 8919 instead.  You would get a partial refund of the self-employment tax she paid.