Employee -- 1099

I know something similar has been asked here before, but after 15 minutes of searching I give up.

Facts: Quite a while ago, my client worked for a company as an employee. Employment contract, W-2, bona fide. No longer works there. During 2022, the company sent my client an amount of money. The company states that sum relates to a period when the company was successful and the client worked there (likely profit sharing). Company issues a 1099-NEC to my client for this sum. Company claims it is not for services rendered, that's why it's on a 1099.

I am about 95% sure this should have been reported on a W-2 with FICA withholding and remittals. Doesn't matter that it's profit sharing, that doesn't change the dynamic. What say you?

Company is unlikely to budge. My client's options are to eat the 1/2 of FICA that they shouldn't be paying or file Form 8919 and the SS-8?

How much money are we talking about?
Maybe he shouldn't look a gift horse in the mouth and just pay?

I agree with you.
There's no reason a payment of that nature should be reported on a 1099.
I'd propose the 8919 to the client.

How much money are we talking about?
Maybe he shouldn't look a gift horse in the mouth and just pay?

Low five figures. Not insignificant. I understand some clients are less confrontational and may want to put it behind them in that manner. I just want to make sure that I'm advising properly on the nature of the income and the options.

I agree with you.
There's no reason a payment of that nature should be reported on a 1099.
I'd propose the 8919 to the client.

Thanks.

If the employer thinks it was not for services rendered, why on earth did they issue a form whose only purpose is to report Non-Employee Compensation?

The obvious explanation is the former employer (or their tax advisor) does not know what they're doing.

Or they don't want to pay the payroll taxes.

Or from a practical matter, he's not on the payroll anymore.

So are they going to put him on pr for this one check? And pay WC on him as well? I can understand why they did it that way...maybe they should have grossed it up 7.65%....

I agree with you.
There's no reason a payment of that nature should be reported on a 1099.
I'd propose the 8919 to the client.

In principle I agree with this. With 2 caveates:
1. The form specifically states you received a W2 and a 1099Nec in the same period. That doesn't seem to be the case here.
2. You will absolutely burn your bridge with that company. If that bothers you, just eat the tax. You can deduct half of it anyway. Hopefully he can also come up with some expenses that would be disallowed under the W2 so that he's not out of pocket for the self-employment taxes. But even if he can't, he should decide if he wants to burn that bridge.

1. The form specifically states you received a W2 and a 1099Nec in the same period. That doesn't seem to be the case here.

Correct, that's not what's happening here. But that's only one reason to file the 8919. Revisit the form and the form instructions. My fact pattern falls within the purview of the 8919.

2. You will absolutely burn your bridge with that company. If that bothers you, just eat the tax. You can deduct half of it anyway. Hopefully he can also come up with some expenses that would be disallowed under the W2 so that he's not out of pocket for the self-employment taxes. But even if he can't, he should decide if he wants to burn that bridge.

I'm aware. But it's not my decision. Part of the talk with the client in this situation is that if we file the 8919 and SS-8, you'll likely burn a bridge. It's up to the client to make that decision, not me. My job is just to properly inform the client.

I don't really follow the last sentence. What "expenses" could he possibly have in 2022 for work done years ago. Assuming we're okay with "perpetuating the fraud" and treating the client like a bona fide independent contractor on his personal return too.

Low five figures.

I don’t know what this means – How about a number - $11k or $35k?

Anyway, one-half FICA isn’t a ton here, even on $35k. And you get the income tax deduction also. Then drop 25% into a SEP. That’s the route I’d go if pushing back on employer isn’t wise, for whatever reason.

Client's definition of low four figures isn't the same as mine. It's close to $50k.

Thanks everyone for your input.