1099-misc form for bonus pay from employer...but paid out of separate company

[MaxPowers]

getting a bit confused here...hoping for some help.

I received a bonus payment from my employer. Great.

The issue now at tax time though is that it was paid out of a separate investment entity owned by the owner of our company. So basically, my company is X and I was paid out of Y for bonus payment earned through X.

When inputting the bonus payment into my tax forms, the IRS doesn't want to recognize it as "additional wages" but instead as self employed income since the federal tax id numbers are different for my employer and the investment company i was paid out of.

So i'm being subject to the self employment tax in addition to the regular unpaid taxes on the wages ( which i understand ). I discussed with my employer and that certainly wasn't the intent. The reason for doing so is a long explanation which I understand, but it is clear that the impact on my taxes was overlooked ( it was also admitted ).

Absent working something out with my employer on the back end, am i kind of screwed on the front end with taxes? I've racked my brain and can't come up with any solutions where i can funnel bonus payment from a separate entity back into my standard w-2 forms.

Should i just focus on trying to get creative with "expenses" from 2017 instead?

[SeattleCPA]

getting a bit confused here...hoping for some help.

I received a bonus payment from my employer. Great.

The issue now at tax time though is that it was paid out of a separate investment entity owned by the owner of our company. So basically, my company is X and I was paid out of Y for bonus payment earned through X.

When inputting the bonus payment into my tax forms, the IRS doesn't want to recognize it as "additional wages" but instead as self employed income since the federal tax id numbers are different for my employer and the investment company i was paid out of.

So i'm being subject to the self employment tax in addition to the regular unpaid taxes on the wages ( which i understand ). I discussed with my employer and that certainly wasn't the intent. The reason for doing so is a long explanation which I understand, but it is clear that the impact on my taxes was overlooked ( it was also admitted ).

Absent working something out with my employer on the back end, am i kind of screwed on the front end with taxes? I've racked my brain and can't come up with any solutions where i can funnel bonus payment from a separate entity back into my standard w-2 forms.

Should i just focus on trying to get creative with "expenses" from 2017 instead?

Probably you want to find some expenses if possible. E.g., maybe a SEP?

[MaxPowers]

Was just discussing a SEP with someone else a moment ago. I will look into it over the weekend.

Basically, it seems highly likely that i'm going to have to deal with this as a independent contractor, right?

[MaxPowers]

or perhaps a Solo 401k might be a better option? Looks like you can defer the first $17.5k in earnings to the Solo 401k without paying the self employment tax first?

With SEP, it seems like you have a pay the self employment tax first.

Is that correct?

Edit:  after some additional reading, it looks like you can't set up solo 401k plans in the following year to the year you earned the income, so that might not be helpful. SEPs on the other hand would allow me to set one up now ( 2018 ) and make contributions for 2017, which is what i need.

[SeattleCPA]

I think you're too late to do a 401(k) because you're supposed to set those up by end of fiscal year... but you could call people like Vanguard etc and confirm this. (That might let you contribute more to a retirement account if you haven't already maxed your elective deferral.)

I do think you need to treat this as 1099 contractor income (so you add a Schedule C to your return).

Had you known about this tax treatment before, you could have really optimized the situation. But it's too late now to do much of anything.

[MDM]

I received a bonus payment from my employer. Great.

If it had been 90% of that amount, but paid from X, would that have also been great?

If so, you are still ahead of the game after paying the extra 7.65%.

[Undecided]

I think you're too late to do a 401(k) because you're supposed to set those up by end of fiscal year... but you could call people like Vanguard etc and confirm this. (That might let you contribute more to a retirement account if you haven't already maxed your elective deferral.)

I do think you need to treat this as 1099 contractor income (so you add a Schedule C to your return).

Had you known about this tax treatment before, you could have really optimized the situation. But it's too late now to do much of anything.

You're a CPA, and I'm not, so I'm just asking questions, but if the compensation was earned from employment by X, then regardless of whether the owner of X used the other entity Y to make the payment, how does that make this self-employment income? How can X, Y and their mutual control person just treat this as something it's not and stick the OP with the consequences?

[SeattleCPA]

It probably should have been W-2 wages. That would be my guess. too. (I.e., if OP is an employee of X, how can work he or she does for X make him or her an independent contractor of Y.)

But we don't know all the facts. And I can think of situations where payer's accounting works.

[MaxPowers]

I suppose it would be helpful to clarify my why my employer elected to pay this way.

Our company was sold to another last year although we still function mostly autonomously. So the original owner of our company is actual now just an employee. His compensation is tied heavily to the overall growth and performance of our firm now. So - right or wrong - the intent to pay bonuses out from a separate company is to keep the balance sheets looking even better for our company since his earnings are now based on performance.

The consequence for me is that this seems to force me to be unexpectedly self employed for the bonus pay.

I don't mind a little extra leg work if I can get things to work in my favor such as some minor deductions and SEP contributions, but I pretty much have to commit fully to the self employed approach if I'm going that way since I would have to set up and contribute to the SEP.

The company's intent is to do the same thing for 2018 ( and on I'm sure ), so if I am "self employed" for part of my compensation, then I want to make sure I'm prepared and make the most of it going forward.

Does that help clarify things a bit?

[Undecided]

Explains how you got there, but seems doubtful, to me. E.g., how does the second payer justify not making any applicable FICA withholdings? And if it’s not self-employment income, how would it support a SEP IRA or a current-year 401(k)?