Virtual currency sign on bonus

[Avs19]

A client of mine just informed me that in 2022 a company he started working for gave him 40K in virtual currency as a sign on bonus. It was not on his W2. I told him to check if the company can amend his W2 but they gave him an odd reason why they couldn't and to file it as other income. I believe he should have paid fica taxes and am contemplating on how to properly report this.

[itonewbie · Accepted solution]

That's what F.4852 is for.

Before filing that with the return, you should advise your client to speak with the employer again, point them to Notice 2014-21, and let them know the IRS could come knocking on their door if F.4852 is used to report the income as required.

Hopefully, that would be enough to change their mind.

[itonewbie]

Virtual currency has been and remains on the IRS' LB&I campaigns.  If I were the employer, I'd really get my act together to avoid bigger problems.

[Avs19]

This is exactly what I'll do

Thanks!

[TaxGuyBill]

If the employer doesn't correct it, I think you'll also need Form 8919 to pay the employee's share of FICA.

[itonewbie]

@TaxGuyBill Don't believe Form 8919 is applicable.  The form is only to be filed in the case of alleged worker misclassification.

[TaxGuyBill]

I agree that is what it is set up for.  But isn't compensating a worker outside of payroll (like this the OPs situation) basically the same thing?  Code "H" is if the employee receives both a W-2 and a 1099, and I view this as pretty much the same (but the employer forgot to file the 1099).  But maybe I'm wrong.

Doesn't the taxpayer need to pay their share of FICA?  If so, how is that done?  Do they just wait until the IRS follows up on the 4852?

[itonewbie]

The OP is not saying the taxpayer was treated as both an employee and independent contractor (which is often dodgy in any case).

By indicating that "they gave him an odd reason why they couldn't and to file it as other income", the employer just appears to be unwilling to report that on the W-2 for whatever reason.  Furthermore, this was given to him as a sign-on bonus (with no reference to this being contingent on services he was to perform outside of his employment capacity with the company).

Under §3402 as well as Treas. Reg. §§31.3402(d)-1 and 31.3403-1, the employer carries the liability for all taxes that are required to be withheld whether or not the proper amount, if any at all, was actually withheld from the employee and would only be relieved of the portion of tax owed (but not the penalties) which is proven to have been paid (e.g. by the employee incorrectly paying over SE-tax).

In the case of worker misclassification, the liability on tax withholdings is dealt with by §3509, which is a different statute.  §3509(d)(1)(B) also prohibits the employer from recovering any tax so determined from the employee and holds the employee accountable for his/her share of FICA under §31.3102–1(d).  That's where F.8919 comes into play.

[Avs19]

It's now sounding like the employer will adjust the W2 as long as my client pays back the employee fica portion.

[itonewbie]

@Avs19 I hope they're on the ball with payroll accounting.  With what you've told us thus far, it just doesn't instill a lot of confidence.

[Avs19]

I agree. I have a hunch that my client is not the only one they did this to. 

[TaxGuyBill]

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@itonewbie wrote:

Furthermore, this was given to him as a sign-on bonus

Under §3402 as well as Treas. Reg. §§31.3402(d)-1 and 31.3403-1, the employer carries the liability for all taxes that are required to be withheld whether or not the proper amount, if any at all, was actually withheld from the employee and would only be relieved of the portion of tax owed (but not the penalties) which is proven to have been paid (e.g. by the employee incorrectly paying over SE-tax).

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Interesting. 

I haven't had a chance to dig through those Regs that you cited yet, but let's change this to a hypothetical situation that has one tiny difference - let's say the employer issued a 1099-MISC or 1099-NEC for this bonus (which is somewhat common from clueless employers).

That one slight change would fit the exact criteria that is listed on the 8919 (with code "H"), wouldn't it?

[itonewbie]

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@TaxGuyBill wrote:

Interesting. 

I haven't had a chance to dig through those Regs that you cited yet, but let's change this to a hypothetical situation that has one tiny difference - let's say the employer issued a 1099-MISC or 1099-NEC for this bonus (which is somewhat common from clueless employers).

That one slight change would fit the exact criteria that is listed on the 8919 (with code "H"), wouldn't it

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Agree.  In that case, it would be appropriate to file F.8919.

[Avs19]

I plan to share the regs with my client. We'll see what happens

[itonewbie]

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@itonewbie wrote:

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@TaxGuyBill wrote:

Interesting. 

I haven't had a chance to dig through those Regs that you cited yet, but let's change this to a hypothetical situation that has one tiny difference - let's say the employer issued a 1099-MISC or 1099-NEC for this bonus (which is somewhat common from clueless employers).

That one slight change would fit the exact criteria that is listed on the 8919 (with code "H"), wouldn't it

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Agree.  In that case, it would be appropriate to file F.8919.

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But then, again, that's because it will fall under §3509 and the employee would remain liable for his/her share of FICA.  At the same time, the employer would be subject to a much larger penalty for failure to deduct/withhold by misclassifying the worker, regardless of whether the employee pays up.  From the employee's perspective, not only would this settle the FICA he/she would otherwise have to pay, it would also be a cheaper alternative than paying SE-tax.