Issues With 1099 Signing Bonus

[edwinebert]

I'm just starting a new job.  I received signing bonus of $45,000.  Because it's paid out before I'm actually starting, it was paid out as a 1099 check.

The first thing I did was talk to my accountant.  They seemed very concerned that it was paid out in this form and told me it may not even be legal.  Regardless, I wanted to put as much as I could into a Sep IRA to save and to decrease my tax losses.  My accountant came back and said that I could NOT invest any portion of this into a  retirement account.

This is the response I received from the accountant:

The sign on bonus will not permit you to make an SEP IRA contribution. As discussed, the IRS Revenue Ruling 2004-109 states, “amounts an employer pays as bonuses for signing or ratifying a contract in connection with the establishment of the employer-employee relationship are wages for the purpose of FICA, FUTA and Federal income tax withholdings.” Therefore, while the contract states the bonus will be paid as 1099 income, we do not recommend taking the position it represents business income.

Is this correct??

Also, they prepared vouchers for me to submit my payment to the IRS now rather than be hit with it April next year.  The number they were estimating seemed pretty high to me ($14,700). Besides federal and state income tax, they also added another $1,200 just as "self employment tax".   Is this right?

Thanks.

[jfoxcpacfp]

Good for you for going straight to your accountant - I wish all of our clients did that! Sorry it backfired in this instance.

Part 1: Revenue Ruling 2004-109 is directed at the payer, who is trying to save payroll taxes, not the recipient. In this case, I doubt it's even the payroll taxes at issue, just not ready to put you on the payroll yet. As far as I'm concerned, you can contribute to a SEP (regardless of what the accountant said, s/he cannot stop you from contributing to a SEP, that is your choice. They can only refuse to sign the tax return).

In this case, I think the CPA is being unnecessarily rigid - I don't find justification for choosing this hill to die on.

Part 2: Is this your first job out of training? If so, you probably can wait until next April to pay the taxes on the bonus. If this is not your 1st job as an attending and you are just making a lateral change, I d/n/h enough information to advise on the timing of your tax payment. The SE tax w/b ~$1,200. I cannot comment on the income taxes without knowing more.

 

[edwinebert]

Thanks so much.  It's not my first job out of training.  I've been out 2 years, and I've had some 1099 income every year since my last year of residency.

Is self employment tax a thing?  Sorry, super ignorant on this topic...

[MPMD]

i would be really curious why you accountant thinks that this IC income is different from all other IC income?

[edwinebert]

ME TOO!

We exchanged several emails, and then I received a bill for $500 and still felt confused and like I was getting the right answers.

 

[SerrateAndDominate]

Does this accountant even know what a backdoor Roth is? That may be a good screening tool for dropping this person

[bean1970]

Can you clarify? You were paid a bonus on. 1099 for a contractor job or you were paid a bonus on a 1099 for an upcoming W2 job?

[edwinebert]

Well last year I thought they did a great job.  We had withheld taxes for a nanny we had, I had my physician income, my wife was a student, and I had 1099 income.  It cost $2,000  but I think they got your Federal tax rate down pretty low.  This year, I got a bill for $3,500. I don't really think it was all that more difficult than last year so I was kind of shocked.  And then I was trying to talk to them about a backdoor roth and this is part of the response for how they thought where I should put money above my 401k.

1. While your tax-deferred investment options would be maximized at this point, we would encourage pursing other measures including:


2. Accelerating repayment of higher-interest student loans


3. Setting up a taxable brokerage account


4. Investigate life insurance products

Number 4 is when I realized I needed a new accountant.  When I asked about a backdoor Roth, they told me they would have to do some research.  I was afraid I would get billed a rate for the amount of hours they spent researching so I told them to stop anything further.

[jfoxcpacfp]

edwinebert wrote:

Thanks so much.  It’s not my first job out of training.  I’ve been out 2 years, and I’ve had some 1099 income every year since my last year of residency.

Is self employment tax a thing?  Sorry, super ignorant on this topic…

Click to expand...

No need to apologize.

Yes, SE tax is due on 1099 income. If you are an employee (receive W2), it is referred to as "FICA", which encompasses both employEE withholding and employER matching. When you are paid as an IC, you pay both the EE and the ER shares (double what you pay as an employee, iow).

Since you have already been working as an attending, not enough info to determine if you'll need to pay an estimate now.

[jfoxcpacfp]

edwinebert wrote:

Well last year I thought they did a great job.  We had withheld taxes for a nanny we had, I had my physician income, my wife was a student, and I had 1099 income.  It cost $2,000  but I think they got your Federal tax rate down pretty low.  This year, I got a bill for $3,500. I don’t really think it was all that more difficult than last year so I was kind of shocked.  And then I was trying to talk to them about a backdoor roth and this is part of the response for how they thought where I should put money above my 401k.

1. While your tax-deferred investment options would be maximized at this point, we would encourage pursing other measures including:


2. Accelerating repayment of higher-interest student loans


3. Setting up a taxable brokerage account


4. Investigate life insurance products

Number 4 is when I realized I needed a new accountant.  When I asked about a backdoor Roth, they told me they would have to do some research.  I was afraid I would get billed a rate for the amount of hours they spent researching so I told them to stop anything further.

Click to expand...

I'll say it once again: and some doctors say we're expensive...

[edwinebert]

To clarify: I was paid a bonus as 1099 prior to my official start date for a W2 job.

[I Find This Humerus]

edwinebert wrote:

Well last year I thought they did a great job.  We had withheld taxes for a nanny we had, I had my physician income, my wife was a student, and I had 1099 income.  It cost $2,000  but I think they got your Federal tax rate down pretty low.  This year, I got a bill for $3,500. I don’t really think it was all that more difficult than last year so I was kind of shocked.  And then I was trying to talk to them about a backdoor roth and this is part of the response for how they thought where I should put money above my 401k.

1. While your tax-deferred investment options would be maximized at this point, we would encourage pursing other measures including:


2. Accelerating repayment of higher-interest student loans


3. Setting up a taxable brokerage account


4. Investigate life insurance products

Number 4 is when I realized I needed a new accountant.  When I asked about a backdoor Roth, they told me they would have to do some research.  I was afraid I would get billed a rate for the amount of hours they spent researching so I told them to stop anything further.

Click to expand...

I wouldn't pay anyone 2k for knowledge I could get on my own.

[MPMD]

edwinebert wrote:

Well last year I thought they did a great job.  We had withheld taxes for a nanny we had, I had my physician income, my wife was a student, and I had 1099 income.  It cost $2,000  but I think they got your Federal tax rate down pretty low.  This year, I got a bill for $3,500. I don’t really think it was all that more difficult than last year so I was kind of shocked.  And then I was trying to talk to them about a backdoor roth and this is part of the response for how they thought where I should put money above my 401k.

1. While your tax-deferred investment options would be maximized at this point, we would encourage pursing other measures including:


2. Accelerating repayment of higher-interest student loans


3. Setting up a taxable brokerage account


4. Investigate life insurance products

Number 4 is when I realized I needed a new accountant.  When I asked about a backdoor Roth, they told me they would have to do some research.  I was afraid I would get billed a rate for the amount of hours they spent researching so I told them to stop anything further.

Click to expand...

Dude you need a new accountant.

Not knowing all about the backdoor roth IRA is such a deal breaker. I mean seriously this is all over the internet and surely it has been discussed endlessly in the CPA world?

Everything they did for you can be done in a short afternoon using the built in knowledge base on turbotax.

You don't just have blindly pay these bills. I would immediately ask them why your tax prep fee nearly doubled and ask for a detailed list of differences between the two returns that justified this massive increase.

[L]

This is a great opportunity to buy TurboTax and learn for yourself how to do the taxes. What you have doesn't sound that complicated, and there are so many resources for all these questions on the internet.... And in this forum. Even if you use an accountant in the future, knowing the basics of doing your own taxes is huge.

Also, I would open a solo 401k with that 1099 income. If you do a SEP IRA, this will prevent your back door Roth later on.