W2 Employee gets a severance package ($4K). Employer issues a 1099 for this. Employer does not want to issue a W-2 for the $4K.
Tax Preparer (CPA) suggests filing a Schedule C for Employee for this. (I thought Schedule C was for Sole Proprietors and not W2 Employees) TurboTax suggests filing Form 4137, and a 1040 Schedule U for this. (Won't this trigger an audit?) CPA's suggestion results in $300 more in taxes.
What's the right thing to do here?
The CPA's recommendation is incorrect. Severance pay is taxable compensation and belongs on a W-2. Taxpayer should prepare a substitute W-2 (Form 4852). Include the employer's name and EIN (found on the W-2 received) and enter the "wages" on Line 7a of the 4852. Answer questions 9 & 10. Include the "wages" with other amounts on Line 7 of the
1040. Taxpayer should prepare the 4137 and its corresponding Schedule U to compute his half of the soc. sec. taxes and medicare taxes and post it on Line 59 of 1040. Enter the employer's name and EIN on the 4137 and everywhere you see the word "tip" or "tips" change it to "severance". Paper file the tax return.
Follow Alan Kalman's instructions and use Form 4137. IRS has new Form 8919, "Uncollected Social Security and Medicare Taxes on Wages," under development which they anticipate releasing in October of this year. "Tax Products Posting Schedule"
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