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Confused about how to pay taxes on signing bonus

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  • Avatar bretticus2002 
    Participant
    Status: Resident, Physician
    Posts: 2
    Joined: 04/09/2019

    Hello everyone. I would appreciate any help on this matter.

    Last year I signed a contract for my first job out of fellowship that I will start in 2020. I received a significant signing bonus in late 2018. I was given a check for the full amount, no taxes withheld. I was then given a 1099-Misc this year, where the income was reported in box 7.

    Now I’m trying to do my taxes, and it’s very confusing. I’ve tried entering my forms (regular W-2 at my current university, couple of minor 1099-INTs) on several of the tax prep websites and am getting wildly different amounts that I owe. For instance, H&R block software gives me the option for sporadic activity such that I don’t pay self-employment, resulting in a much lower tax bill.

    I have Googled and Googled trying to find the answer, including looking on this forum, but answers also seem to vary. Some people say this should be reported on Schedule C, whereas others say not. It doesn’t “seem” like it should be, as this is not a business I’m running. I’ve also seen advice to file 8919 or SS-8 but that this could upset my future employer (which I obviously don’t want to do).

    At this point, I think I may just have to get help from an accountant, but I thought I would ask here to see if anyone has advice.

    Thanks again.

    #205323 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 2076
    Joined: 09/18/2018
    #205344 Reply
    Liked by Peds
    Avatar White Coat Husband 
    Participant
    Status: Spouse
    Posts: 3
    Joined: 03/22/2019

    I just went through the exact same situation. The advice that I got from my tax preparer was that there is enough gray area in the IRS guidance on this matter that reporting the sign on bonus as business income should not cause any issues. Forget about the ss-8, find all of your deductions (unreimbursed job search travel, percent of cell phone, home office, etc.), and do schedule c. You will have to pay self-employment taxes on that, though, a portion of which is deductible.
    FYI I am not a tax preparer, financial advisor, or even an amateur expert.

    #205366 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 2076
    Joined: 09/18/2018
    Disability Insurance

    “If you’re not an employee of the payer, and you’re not in a self-employed trade or business, you should report the income on line 21 of Schedule 1 (Form 1040), Additional Income and Adjustments to Income and any allowable expenses on Schedule A (Form 1040), Itemized Deductions. Refer to Not for Profit Activities in Chapter 1 of Publication 535, Business Expenses for allowable nonbusiness expenses.”

    The advantage would be no employment taxes would be due. IRS wording.

    #205503 Reply
    White.Beard.Doc White.Beard.Doc 
    Participant
    Status: Physician
    Posts: 748
    Joined: 02/06/2016

    Interesting, different opinions from different accountants.

    You can choose the more aggressive approach and risk an audit, or the less aggressive approach and pay more taxes, depending on the amount of your business deductions on schedule C.

    If it was me, I might figure the tax both ways and take the less aggressive approach if the savings are minimal, or the more aggressive approach if the savings are more substantial.  Of course, you have to take into account the possibility of an audit, which may or may not lead to extra tax due, depending on how good your accountant is at defending her/his position.

    #205539 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 2076
    Joined: 09/18/2018

    @White.Beard.Doc,
    The IRS guidelines describe two ways to report it and the conditions appropriate in each.
    One is independent contracting and one is other income.
    My suggestion was to follow the rules. Income tax will be due on both. I would be interested in your opinion.
    Sincerely, the IRS guidelines are about all anyone has.
    Unless you have case law, which is doubtful other than one without precedent.
    If you use adjustment risk, worst case is SS and Medicare. I’d like to point out, I never heard of anyone making a living collecting signing bonuses! Meant in jest, that sounds lucrative. Which line do you think it really belongs? First time I read it, passed it along for him.

    #205556 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7307
    Joined: 01/09/2016

    I hate to burst everybody’s bubble (kind of), but this payment is definitely SE income.

    1. It is paid by the OP’s future employer (how much more obvious can it be?) and
    2. It is for services in the course of the OP’s profession

    Line 21 can be coded as either SE taxable or non SE taxable when it is time to report. For example, we use line 21 for SE when a client has no related expenses that would require a schedule C.

    Examples of when this line is not SE are:

    • jury duty
    • being paid as an executor of an estate
    • yard sale proceeds (if you happen to make money and are very, very black-and-white – even I am not that black and white : -) )
    • Other random income outside the normal course of what you do for a living

    However, when the future employer is paying a future employee via 1099 simply to avoid starting the benefits clock from tolling (and to avoid paying FICA taxes of maybe another $7k – $10k), that doesn’t change the characteristic of the income.

    The fact that you may or may not be audited in the future should have no bearing on your decision.

    I don’t understand that when someone wants to contribute to a solo-k, this is absolutely, no question income that is qualified for a solo-k because it’s a “side hustle”. Until it comes to the taxes. Then it gets squishy. That’s not how the tax code operates, at least on this particular issue.

     

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #205579 Reply
    Liked by Tim
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 2076
    Joined: 09/18/2018

    @Johanna,
    (how much more obvious can it be?)
    It’s obvious that’s what is good for the goose, is not good for the gander. The gander is always gonna get shafted.
    It’s perfectly legal for the goose to say, your not an employee this year. IRS says, that’s correct. 1099.
    Then IRS says, that’s employment earnings. Pay double.

    Signing Bonuses

    This is not the first time for you. The ability to set up a solo-401k is valuable. OP really needs to consider that. The flexible in the future is valuable in having a plan for rolling over in the future.

    #205605 Reply
    Liked by jfoxcpacfp
    Avatar bretticus2002 
    Participant
    Status: Resident, Physician
    Posts: 2
    Joined: 04/09/2019

    Thank you everyone for your responses. It seems like the Schedule C with SE tax is the correct way to go (unfortunately).

     

    Now that I’m filing this way, what exactly is eligible to be deducted? If the IRS is saying a signing bonus is part of my trade, can any expenses I have related to being a physician be deducted, even if they weren’t directly related to getting the bonus? I’m thinking board prep materials, travel for a conference that wasn’t fully reimbursed, maybe even percentages of cell phone, internet, etc. since I take frequent required home call. I would really like to decrease my tax burden if these are allowable.

     

    Also, what is the value of the Solo-k, other than time value of money and the tax benefit for 2018? My group next year will have a traditional 401-k as well as some other potential retirement savings options. I assume with the Solo-k, the benefit is that I have more freedom in choosing what to invest in? How is that different from an IRA if I don’t have that much to invest? Honestly, expenses up until I start employment, emergency fund, etc. seem like a better place for my money for a just a few more months.

     

    Thank you all again.

     

     

    #205675 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3594
    Joined: 01/08/2016
    cell phone, internet, etc. since I take frequent required home call.

    Click to expand…

    um no since thats for your primary job and not your 1099 job that you havent even started yet…..

    #205685 Reply
    Liked by Tim
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 2076
    Joined: 09/18/2018

    “How is that different from an IRA if I don’t have that much to invest?”

    Read about backdoor Roth accounts. You don’t want to open an IRA. Read about solo 401k. It requires business income or 1099. It can also be use as a tax deferred account when you change employers at sometime.
    Contributions to the solo 401k will be before tax. Run the numbers. Value now and in the future.

    #205689 Reply

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