New client did not issue 1099/W2's to Caretakers

[ea_rva aka acctgtaxmatters]

I am preparing a new client's 2020 return who has significant payments to Caretakers - round the clock care - $160,595 before LTC reimbursements of $69,175. She began using the Caretakers in 2019 and I'm guessing the prior tax preparer (the client became mine via an acquisition in 2020) did not advise the client to report the payments either via 1099 or W2. She is now on board with reporting for 2021 however the Caretakers may walk (oh well...). I have explained the consequences of not reporting this compensation and taking the deduction. My question is, how should I include on the 2020 return knowing what I know? 1) Do I include all knowing we will do the right thing next year by reporting the comp paid to the Caretakers? or 2) exclude from Sch A the all comp exp & recognize LTC reimbursements income - this results in owing $20k in federal taxes or 3) exclude from Sch A the net $90k that wasn't reimbursed? Or maybe the better question is where is it written that you cannot deduct subcontractor expenses if they were not reported as income to the subcontractors? Should my client be audited, would not claiming these deductions in 2020 mitigate the situation?

[TaxGuyBill · Accepted solution]

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@ea_rva aka acctgtaxmatters wrote:

 Or maybe the better question is where is it written that you cannot deduct subcontractor expenses if they were not reported as income to the subcontractors?

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There is no such rule.  You certainly can take a deduction for any valid expenses, regardless if a 1099 or W-2 was issued.

The bigger problem is if they do qualify as Household Employees, your client is responsible for the payroll taxes on that employee.  Social Security and Medicare is 15.3%, Federal Unemployment is between 0.6% and 6.0%, plus State unemployment.

[PATAX]

Taxguybill is right on that ..Also it is the clients responsibility to make sure 1099 forms are issued... Unless that client has a specific written agreement with the CPA for that CPA to provide advice concerning that matter or to prepare those returns, one cannot expect it and one cannot blame the accountant for that... most individual 1040 clients only come in once a year, we cannot be expected to hold their hands throughout the year and babysit them... disgruntled clients like to blame accountants for everything, they need to look in the mirror... Just my opinion...

[ea_rva aka acctgtaxmatters]

I completely agree that they are more than likely household employees. My client was advised by a family lawyer that as long as they are making their own schedules, they are not considered employees. I told her family that there are other things that need to be considered in making this distinction. Your input was very helpful, thank you!

[qbteachmt]

There is good news for the penalty for not issuing the 1099:

https://turbotax.intuit.com/tax-tips/small-business-taxes/penalties-for-not-filing-a-1099-misc-irs-f...

"If a business fails to issue a form by the 1099-NEC or 1099-MISC deadline, the penalty varies from $50 to $270 per form, depending on how long past the deadline the business issues the form. There is a $556,500 maximum in fines per year. If a business intentionally disregards the requirement to provide a correct payee statement, it's subject to a minimum penalty of $550 per form or 10% of the income reported on the form, with no maximum."

[PATAX]

Will they penalize themselves for the errors they make? Just wondering and just asking....