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Signing Bonus Self-employed tax questions

Home Tax Reduction Signing Bonus Self-employed tax questions

  • Avatar KYDoc 
    Participant
    Status: Physician
    Posts: 4
    Joined: 03/20/2018

    I received a signing bonus in 2018 on a 1099-MISC on line 7 as non-employee compensation.  No taxes of any kind were taken from this.  I think I know how to handle this but wanted to run it by a few people to check.

    1. Do I have to claim this on a schedule C as business income and pay FICA and Medicare tax on it?  Any way to claim it as “other income” that would not be subject to Medicare and Social Security tax?  I haven’t figured out which way would be more beneficial to me yet.  It depends on the answer

    2. My W-2 job has total wages as $128,962 and SS/Medicare wages as $75,752.  As I understand it, there is a cap on how much income is subject to SS tax but I thought it was a lot more than $75,752.  Would my bonus be subject to SS tax?  I’m military if that makes any difference.

    3. Since the bonus is non-employee compensation, I think it shouldn’t be subject to state taxes in the state where the business is located.  I’m currently a resident of a state without state income tax so wouldn’t have to report it there either.

    4.  I wasn’t proactive enough to realize that I probably could have opened a solo 401(k) last year on the bonus but think I can still open a SEP IRA and defer a bit of that bonus (20% of the net bonus after paying self-employment taxes).  I’m planning on doing this after figuring out what my self-employment taxes will be.  Would probably roll it over to a solo 401(k) afterward so that I can do the backdoor Roth later on.

    Thanks!

    #188942 Reply
    Avatar EMPAC623 
    Participant
    Status: Advanced Practice Provider
    Posts: 28
    Joined: 11/15/2018

    1. You have to claim it as income and its subject to all taxes. State and federal. You can make a business and then do schedule C deductions and such, but will have to pay SE tax as well as SS/Medicare, fed and state.

    3. Box 7 is non employee contributions. Basically that means your being paid and they are saying you are an independent contractor/self employee. So yes if you live in a state with no state tax and you did the work in that state it’s not subject
    To state tax. But still other taxes.

    4. Depends how much the bonus is? 5K maybe not worth setting up sep or solo If you don’t plan on doing more IC work. Your income is low enough you shouldn’t need need to do backdoor Roth? 190k or so married filing jointly.

    Is your goal to lower taxes owed on that as much as possible? Cause if it’s 5K you’re talking maybe $1000 max SEP contribution which saves you 20-24% taxes so $200

    #188947 Reply
    Avatar EMPAC623 
    Participant
    Status: Advanced Practice Provider
    Posts: 28
    Joined: 11/15/2018

    Sep is 25% too max 56,000 in 2019

    #188948 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7797
    Joined: 01/09/2016
    Earnest refinancing bonus
    1. You can claim it as “other income” on p1 of 1040 or on sch C, but you’ll be subject to FICA taxes either way.
    2. SS wage base was $128,400 in 2018, which means you’ll owe full FICA taxes (with a deduction for 1/2) on any bonus between $75,752 and $128,400.
    3. Was this income for a non-military job? If so, you will need to review the regs for military in the state that paid you. The fact that the income is on a 1099 is irrelevant.
    4. Yes, you can open a SEP. Technically, you must own an active business to open a solo-k this year to receive the SEP funds. If you intend to continue earning IC income, that would count. Agree with EMPAC623 that you don’t need to worry about a backdoor Roth at this time.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #188964 Reply
    Avatar KYDoc 
    Participant
    Status: Physician
    Posts: 4
    Joined: 03/20/2018

    I’m not sure I understand the SS base wages. I made more than $128,400 in the military this year but only $75,752 is listed as SS wages. Why would this be? I’m trying to figure out why it seems that I was capped at a lesser amount (not that I’m complaining). I wouldn’t need to do a backdoor Roth until 2020 so no hurry there. The bonus is $15K so a SEP would be worth it for me. There seems to be some controversy about whether I’d have to pay state tax or not. The argument is that since the bonus is non-employee compensation, it’s not subject to the same state tax as if it had been employee compensation. I live in a tax free state. But it looks like I have to pay SE tax no matter where I list the income.

    #188995 Reply
    Avatar KYDoc 
    Participant
    Status: Physician
    Posts: 4
    Joined: 03/20/2018

    I figured out that only military base pay is subject to FICA and Medicare taxes.  Still not sure why that is though.

    #189178 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 1284
    Joined: 03/27/2017

    Back in the olden days, military service included modest pay as well as food and lodging. Your basic allowance for housing and basic allowance for subsistence are in lieu of an on base house and meals provided directly by the government.

    #189693 Reply
    Avatar gretznut33 
    Participant
    Status: Physician
    Posts: 3
    Joined: 03/25/2019

    Is OP correct in #3 of his original post that if the signing bonus is received while you live in a state without a state tax, you do not have to pay state taxes to the state where the payer is located? I am in a similar situation with a signing bonus paid by a hospital in Kansas (state income tax) to me during residency in Texas (no state income tax). Income was given as 1099-MISC. My Texas address is listed on the 1099-MISC.

    To further complicate my situation, I was actually given the last half of the bonus check after I had moved to Kansas. The check is dated on my contract start date. I obviously don’t want to pay Kansas what I don’t owe, but it seems technically I would owe half of the 1099 amount. Any thoughts would be greatly appreciated.

    #202785 Reply
    Avatar nateoh_5398 
    Participant
    Status: Resident
    Posts: 1
    Joined: 05/24/2019

    Hi all,

    Am in similar situation to OP and actively engaged with both a CPA and the hospital system (neither seems to have much experience on this issue). It seems to me that these are loans to be forgiven when certain conditions are met (and the promissory note I’m being asked to sign stipulates as much), so 1099 MISC shouldn’t apply. We’re not “independent contractors” and certainly aren’t providing any services to the hospital (yet). Furthermore, if it truly is “income,” then there should be no obligation to repay it. Otherwise, it’s a loan.

    I’m not an expert in the area, so I did what I think most lawyers do in these situations and looked to case law for an answer. I came across this: https://www.taxlawforchb.com/2017/07/employee-loan-or-compensation/ (full case here: https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11315).

    In this case, it seems a physician was trying to claim a “sign on bonus” was NOT a loan for tax purposes (it became an issue when the hospital tried to collect the amount outstanding of the “bonus” after the physician terminated the contract early), and the US Tax Court ruled that in fact it was.

    Any thoughts from anyone on this thread? I’d be especially interested to hear what Johanna has to say.

    Thanks.

    #216714 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7797
    Joined: 01/09/2016
    Any thoughts from anyone on this thread? I’d be especially interested to hear what Johanna has to say.

    Click to expand…

    lol, you know how to bait a hook.

    First of all, disagree that “…the terms of the loan are often closely scrutinized by the IRS…” (yeah, right).

    However, totally agree with the Court on this one. Physician was trying to have his cake and eat it, too. No income on the front end, then no deduction on the back end. However, it should be noted that the only reason it appears this case stood was that the employer had followed all steps necessary to cement the fact that this was, indeed, a loan – including not taking a deduction for the “Guarantee Amount” paid to physician in the first 6 months. Employer obviously had good legal representation. Had employer not dotted all the i’s and crossed the t’s, physician might have gotten away with it. Meaning he might have gotten the cake, too, as it appears that the SOL may have already tolled on the initial tax return that d/n report the loan as income (which, as was mentioned, was not addressed in the opinion).

    impo, consistency matters. Had the taxpayer originally reported the payment as income, I believe the IRS would have allowed the deduction. These agreements tend to be all over the place and there is little consistency with the law. Many times, they are referred to as loans, but a 1099 is issued and no promissory notes are signed. Lesson is to nail everything down in writing with your future employer to ensure proper tax treatment.

    To the physician in your story, pigs get fat and hogs get slaughtered.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #216721 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7797
    Joined: 01/09/2016

    Is OP correct in #3 of his original post that if the signing bonus is received while you live in a state without a state tax, you do not have to pay state taxes to the state where the payer is located? I am in a similar situation with a signing bonus paid by a hospital in Kansas (state income tax) to me during residency in Texas (no state income tax). Income was given as 1099-MISC. My Texas address is listed on the 1099-MISC.

    To further complicate my situation, I was actually given the last half of the bonus check after I had moved to Kansas. The check is dated on my contract start date. I obviously don’t want to pay Kansas what I don’t owe, but it seems technically I would owe half of the 1099 amount. Any thoughts would be greatly appreciated.

    Click to expand…

    Sorry, I missed this when you originally posted. I agree with you that you would owe tax on 1/2 of the signing bonus. You did not have nexus when you received the 1st half but you did when you received the 2nd half.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #216734 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1793
    Joined: 02/01/2016

    I agree with @jfoxcpacfp.

    The only time the IRS considers payments in lieu of compensation a loan, is if the loan is converted to actual compensation within the tax year. There is a difference between what your contractual obligations are and what the IRS considers compensation. Otherwise, employers would routinely give employees “loans” in lieu of compensation and not have to pay FICA, FUTA, Workman’s Compensation insurance, etc…

    Even if you sign a promissory note requiring repayment of the signing bonus if conditions are not met. It is almost always considered non-employee compensation and reported as such on a 1099-MISC box 7 and the promissory note only reflects your contractual repayment terms.

    If you fail to meet the terms of the signing bonus and the repayment is <= $3K, you used to be able to claim it as a miscellaneous deduction before the TCJA. With the TCJA removal of the Miscellaneous deduction. If the repayment is > $3K, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

    You always want to file Schedules C and SE for the Form 1099-MISC box 7 non-employee compensation received as a signing bonus. Also, you can then take the QBI deduction if eligible,  adopt a one-participant 401k to make contributions and have a destination for IRA rollover contributions.

    #216859 Reply
    Liked by Peds

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