Treatment of income from sale of employer's business

[PatGale]

My client is receiving payments as a result of the sale of his former employer's business.  Total of payments based upon a percentage of total sale amount.

[jeffmcpa2010]

What form are the payments being reported to him on?

[IRonMaN]

Assuming the payments are being reported 😁

[sjrcpa]

Was your client a part owner of the business?

Are these payments a retention bonus?

Are they shut up and don't sue us payments?

[PatGale]

1099

[PatGale]

He received a percentage of sale as a benefit from working hard to make business better. 1% per year worked

[jeffmcpa2010]

• Misc?
• NEC?
• Div?
• Int?

The type of 1099 and the box description will likely get you headed in the right direction

[PatGale]

Current year, received NEC

Not sure sending party correctly identified form to select

[qbteachmt]

"Not sure sending party correctly identified form to select"

Was the employer the reporting entity, or the new owner (buyer)? Was this in lieu of termination pay? Or, a Bonus?

A bonus from the employer = W2.

[IRonMaN]

My turn.

Who is paying him?  The buyer or the former employer?

[qbteachmt]

I am keeping up with the counter.

13

[PatGale]

Former employer

[qbteachmt]

"Former employer"

= W2. It's related to Employment.

[PatGale]

Why would it not be a commission on the sale?

Or profit sharing?

[qbteachmt]

"Why would it not be a commission on the sale?"

He would only get a commission not reportable on the W2 if the party paying is Not his employer, or if the commission is because of some other business he runs, such as he has a Side Gig as a real estate agent and he facilitated the property sale.

"Or profit sharing?"

Nearly anything related to his employer would be subject to employment taxes and W2 reporting. About the only exclusion would be Safety Award. Tangible goods are not necessarily taxable, but money is taxable.

If the new owner still is not his employer, and they paid all the ex-employees, that would be an example of 1099-Misc. Under most cases, this sale will result in all employees being fired (unless the sale included the entity) and needing to be formally hired by the new entity.

These are just guidelines, of course. Specifics matter, and that is why you see so many requests for more details.

You called it, right here:

"Current year, received NEC" <== NEC is for Services, so wrong form from your Employer

"Not sure sending party correctly identified form to select" <== Apparently, it is the wrong form

[qbteachmt]

"Why would it not be a commission on the sale?"

He would only get a commission not reportable on the W2 if the party paying is Not his employer, or if the commission is because of some other business he runs, such as he has a Side Gig as a real estate agent and he facilitated the property sale.

"Or profit sharing?"

Nearly anything related to his employer would be subject to employment taxes and W2 reporting. About the only exclusion would be Safety Award. Tangible goods are not necessarily taxable, but money is taxable.

If the new owner still is not his employer, and they paid all the ex-employees, that would be an example of 1099-Misc. Under most cases, this sale will result in all employees being fired (unless the sale included the entity) and needing to be formally hired by the new entity.

These are just guidelines, of course. Specifics matter, and that is why you see so many requests for more details.

You called it, right here:

"Current year, received NEC" <== NEC is for Services, so wrong form from your Employer

"Not sure sending party correctly identified form to select" <== Apparently, it is the wrong form

[jeffmcpa2010]

Here's is what it comes down to.

Possibly/Probably/Likely it should have been on a W-2 which could save him some SE tax depending on other earned income etc during the year.

Does he want to approach the former boss about changing the form to a W-2, ( and possibly be asked to pay back the SStax and other payroll taxes that would have been withheld?

Other possibility the irs instructions for schedule c include the following in the first paragraph

"An activity qualifies as a business if
your primary purpose for engaging in the activity is for income or profit and you are
involved in the activity with continuity and regularity. For example, a sporadic activity, not-for-profit activity, or a hobby does not qualify as a business. To report income
from a nonbusiness activity, see the instructions for Schedule 1 (Form 1040), line 8i."

You may conclude that he does not qualify as a trade or business due to lack of continuity and regularity. If so you can record the NEC on the Nonemployee Compensation Worksheet, and if you think it is the correct thing to do select the "other income" box under within box 1.

[qbteachmt]

"and if you think it is the correct thing to do select the "other income" box under within box 1"

Well, at the least, try some due diligence, such as: the last date of employment, can you prove that the payoff came Afterwards? That would help prove he was separated from the employer at that time.