Uncollectable Payroll Advance

Discussion in 'Businesses / Corporations' started by fjd_98, Sep 17, 2018.

  1. fjd_98

    fjd_98

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    When an employee is terminated, how is the unpaid portion of a payroll advance handled? There is no note, no interest charged. There is zero chance that the employee will pay the balance ($1200). Can I write it off like a bad debt? Do I report it on a 1099, or a W-2? Reporting it on the W-2 seems like the worst option. How would I deal with employee and employer FICA? I thought of grossing up the $1280 to include EE FICA. Then I would need to pay both EE & ER FICA. Not a great option, as I am already out the $1280 balance.
     
    fjd_98, Sep 17, 2018
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  2. fjd_98

    kp1

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    Give him a 1099C. It will be taxable to him and deduction for you.

    Form
    1099-C. According to the IRS, nearly any debt you owe that is canceled, forgiven or discharged becomes taxable income to you. You'll receive a Form 1099-C, "Cancellationof Debt," from the lender that forgave the debt.
     
    kp1, Sep 17, 2018
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  3. fjd_98

    fjd_98

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    Someone told me that because there is no note and no interest charge, and the debtor is an employee, the debt must be grossed up for FICA and reported on the W-2, and that the employer must pay in the FICA. That seems ridiculous to me, but I want to make sure I get this right.
     
    fjd_98, Sep 17, 2018
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  4. fjd_98

    kp1

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    Two things are going for you:

    1. You can probably claim that amount is not material. So it is a loan and not a couched compensation.
    2. Timing
    In contrast, income from the discharge of indebtedness is taxed at the time “it becomes clear that a debt will never have to be paid”. the case of Starke v. Commissioner, TC Summary Opinion 2015‑40.

    I do agree that the conservative route would be W-2.
     
    kp1, Sep 17, 2018
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