Dear Liz: I just received my tax forms from my employer for last year. I was originally a W-2 employee, paid hourly, as a receptionist. But it seems that at some point during the year, my employer changed me to a 1099 employee without telling me or having me fill out paperwork. After researching the characteristics of a 1099 employee, I found I do not qualify at all. I am upset that I will have to pay taxes on this income, since I thought they were being withheld from my pay. Do I have any recourse?
Answer: Your employer has put you in an impossible situation. If you tell the truth, you'll tip off the
"The good news is the IRS is really busy and probably won't [audit your employer] for a couple of years," said Eva Rosenberg, an enrolled agent who runs the TaxMama site. "By then, you should have a better job elsewhere."
To fix this, first report your income from this job as "other income" on line 21 of your 1040 tax return, Rosenberg said.
If you got both a W-2 and a 1099, you can use IRS Form 8919 to pay only your share of the Social Security and Medicare taxes. You'll pay 7.65% instead of the 15.3% you normally would pay with 1099s, Rosenberg said. You'll have to select a "reason code" for why you're using the form. You can use code H, which says that the amount on the 1099 form should have been included as wages on Form W-2.
If you got only a 1099, you'll need to fill out Form SS-8 to explain why you're an employee, not a contractor, Rosenberg said. Then use Form 4852 as a substitute for your missing W-2. Use the data from the last pay stub that shows your year-to-date withholding as a W-2 employee so you can get credit for those taxes paid. This process is complicated but is the approach a tax pro "would and should use" when an employee is misclassified as an independent contractor, Rosenberg said.
Some employers pretend that their employees are independent contractors as a way to reduce the company tax burden and perhaps dodge new health insurance requirements. It's a scam that tax authorities are keen to uncover and penalize.
When inheritances don't come
Dear Liz: I read with interest the question you received from the widower who thought he should inherit from his father-in-law, despite the death of his wife. Your answer was great, but it got me thinking about the mind-set that makes someone even think to ask the question. It's obvious that the asker and his late wife clearly lived their life expecting to inherit a large amount of money. Which leaves unasked, how did they live and what did they save on their own? Did they take vacations instead of save? Did they not save at all? The bottom line here is that you need to reinforce that there is no "sure thing" in expected inheritances and encourage people to amass wealth on their own. Someone else's money is someone else's money, and even if he intends to leave it to you, an illness, a lawsuit or some other loss could wipe out anything he meant you to have.
Answer: People who expect an inheritance to save them from a life of not saving are courting disappointment.
About half of those who die leave less than $10,000 in assets, according to a 2012 study for the National Bureau of Economic Research. Many failed to save adequately during their working lives, but even those with substantial assets can find their wealth eroded by longer lives, market setbacks, chronic illness and nursing home or other custodial care.
Hopes of an inheritance also can be dashed by remarriages, poor planning or both. For example: Dad dies without a will and Stepmom inherits the bulk of the estate, which she gives to her own kids. Or Mom thinks she's tied up everything in a trust, but her surviving spouse figures out a way to invade the principal. Or Grandma gets victimized by a gold-digger or a con artist, leaving nothing but hard feelings.
Most of those who do inherit don't get fortunes. The median inheritance for today's baby boomers is $64,000, which means half get less, according to a 2010 study from the Center for Retirement Research at Boston College.
So you're right that the best approach for most people is to prepare as if there will be no inheritance, since if there is one, it probably won't be much.