Signing Bonuses

[MrsIMDoc]

I am curious about the taxation of signing bonuses, because I have heard variable things on the internet.  Should a signing bonus be 1099 or W2 income?  The current group I am signing with said I can take the signing bonus now but it would be 1099 income.  If I wait until I start working in August then it will be W2 income.

The benefit of having it be 1099 income is that I could put money into a Solo 401K at the employer rate (because I am already maxing out my 401K space).  I have other 1099 income (moonlighting) so I can use that to deduct expenses such as boards.  My concern with the 1099 option is that the IRS will later tell me that it was inappropriately characterized and some how my Solo 401K contributions will be void.

Anyone else have experience with this?

[iglord]

I don't have direct experience with this problem, but personally I'd prefer to get 1099 income over W-2 any day. It doesn't seem too much of a stretch to justify a signing bonus paid before you start working as 1099 if they call it consulting work or something like that. Not only do you have the ability to put it into a Solo 401k, but you will also avoid the employer withholding on the bonus by taking it as 1099 income. Yes, you'll still pay marginal rate taxes and OASDI, but you have a lot more options to make other legitimate business deductions out of that income.

[docnews]

I assumed all sign on bonuses would be 1099 since W2 I thought was only for "salary" income especially since I thought a W2 income had to have taxes withheld prior to handing it out to the employee. Anyone know for sure?

[jfoxcpacfp]

Chances that the IRS will recharacterize are slim to none. the reason for the 1099 is that your current group is not employing you yet, i.e. your pay does not fit the characteristics of an employee per IRS Tax Top 762, particularly Behavioral Control. You're overthinking the threat, imho, and you have a fabulous opportunity to contribute to a profit share SOLO-K - go for it.

[jfoxcpacfp]

No, @docnews, all sign-on bonuses are not 1099 income. It varies by group/employer and the terms of the contract. All W2 income is not "salary" income as W2 income includes hourly pay, overtime, year-end production bonuses, etc. You are correct that taxes are always withheld from employee pay. If a sign-on bonus is paid when you are or have become an employee, you will almost certainly have taxes withheld. I hope this helps.

[Vascular Doc]

I got a small signing bonus that they would only pay as W-2 income or not at all.  Better than nothing at all, which is what they originally offered. But I signed in January and didn't get my bonus until I started working in August and I really needed that money to relocate.  I also had stipulation that it had to be paid back if I left before 1 year.   I guess this helps them from losing money if things break down at the last minute before you start working.

 

[jfoxcpacfp]

Vascular Doc wrote:

I got a small signing bonus that they would only pay as W-2 income or not at all.  Better than nothing at all, which is what they originally offered. But I signed in January and didn’t get my bonus until I started working in August and I really needed that money to relocate.  I also had stipulation that it had to be paid back if I left before 1 year.   I guess this helps them from losing money if things break down at the last minute before you start working.

 

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Protecting their risk of seeing you and the bonus walk away was evidently more valuable than the minimal payroll tax match your employer had to give up. Makes sense, but, in theory, you were not actually an employee at that point. Not worth the argument from you, obviously.

[PhysicianOnFIRE]

Mine was included in the W-2, paid after I had been employed for a month or 2.

[Joseph]

100k paid on w2

[MrsIMDoc]

Thanks for all the replies.  I posted another question on bogleheads a few weeks ago and when I mentioned using my signing bonus to help fund a Solo 401K, someone had said, "[signing bonuses are] self-employment income and not eligible for a self-employed retirement plan contribution. The proper way to report this income is on box 7 as wages and you should use Form 8819 to pay the FICA."

To be honest, I do not know what that means. So after this comment, I am concerned that if I get paid with a 1099, it will not be considered self-employment income eligible for a Solo 401k. The other reason I wanted to have this as 1099 income was so that I could deduct the cost of the physician contract negotiator/evaluator that I used as a business expense, which was $2000.

[jfoxcpacfp]

Of course this is self-employment income. Report on schedule C and take related deductions. You may not have a lot left for your SOLO-k but what's important is that you get one started for possible future rollovers.

If you copied and pasted the response verbatim, it doesn't even make sense. Curious as to whether a CPA wrote it...

[Tim]

jfoxcpacfp wrote:

Report on schedule C and take related deductions.

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Schedule C: Signing bonus Income.

Schedule C deductions:

physician contract negotiator/evaluator that I used as a business expense, which was $2000.

Unreimbursed job search expenses

What other related deductions?

Many times moving and relocation expense are bundled into the signing bonus. Still report on 3903 as adjust to income on 1040?

 

[Tuxedo]

I guess I'm confused about signing bonuses in general and this in particular.  I thought IRS rule 2004-109 covered this and says such a bonus is subject to withholding.

On an unrelated note.  Is there any benefit to an employer to characterizing a bonus as a "student loan repayment"?  It seems like there isn't, but I am curious.

[Zzyzx]

I would prefer 1099 vs w2 for signing bonus, mine was w2 and overtaxed.  However, the amount you can contribute to your solo 401k contribution will depend on how much you contribute to your w2's 401/403 plan for the year.

[Peds]

[2.5yo thread warning...]