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The fund you received is classified as a government grant; thus, it's taxable (see footnote2). The question is which tax is
applicable.
If you are a sole proprietor, WPC sent you a 1099-NEC (non-employee compensation) IRS form listing your grant amount in Box
1. It's incorrect.
This error causes you to pay employment tax (Social Security and Medicare) that is not due. For example, if you received $10,000,
you must pay about $750 in addition to income tax.
If correct, the 1099-NEC would reflect payments to you from WPC in the course of doing business with them by being an independent
contractor. None of you were in business with WPC, nor performed any services to WPC (footnote 1). That is why a 1099-NEC
is the wrong form.
WPC has an auditor named Chris who caused all this problem. His focus is on how businesses report this grant; it's not his
nor WPC's concern. WPC's responsibility is to issue a correct 1099, and 1099-NEC is not the one.
Despite of my intervention, WPC has not acknowledged their error and will not issue a correction. They are breaking the
law, the Internal Revenue Code (IRC) by issuing 1099-NEC that is false; and hurt people financially in the process.
To save you the expense of paying unfair employment tax, WPC should issue for each of you:
1. a corrected 1099-NEC with $0.00 in box 1 (printed in red ink)
2. a new 1099-MISC with box, "Other Income," showing the amount you received that is not taxable as employment would be.
Thus this grant would be included in the gross income (footnote 2).
Call and email WPC. See https://www.city-woodlandpark.org/
Use any other means you think of to have WPC make these corrections:
newspapers, TV, social media, your Congressperson, your attorney. Talk to your CPA.
In conclusion, this grant was meant to help people, not punish them with extra tax. In this time of the virus, closures, and
less income, every dollar counts.
"Taxpayers have the right to pay only the amount of tax legally due..."
(Taxpayers Bill of Rights)
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NOTES
If an S-Corporation received this grant, there is no problem because all of its income is ordinary (unearned) income (except
the portion that relates to W2s issued). No 1099 is needed.
If a partnership received this grant, the issue is the same as with sole proprietors. All income received is earned income
(except for limited partners). Therefore, according to their share, 1099-MISC box 3, "Other Income," should be issued to
each partner (person).
Thus for sole proprietors, 1099-MISC should be issued to a person also, not to a business name.
It is unfair that S-Corps do not have to pay employment tax on this grant, but sole proprietors and partnerships do. This
is another reason to use a 1099-MISC.
A prominent banker in town agrees with 1099-MISC and added that it could have been 1099-G, unemployment benefit (issued by
Colorado Department of Labor,
not WPC).
This also means:
1. that this grant is unearned income (unemployment benefits are not subject to Social Security and Medicare taxes)
2. that 1099-MISC should be issued to a personal name, not to the business name.
Footnotes:
1. Instructions for 1099-NEC, see page 7, keyword "services"
2. The receipt of a government grant by a business generally is not excluded from the business's gross income under the Code
and therefore is taxable.
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Published by Eva Putnam
All Tax Solutions Ltd
Woodland Park, Colorado
03/09/2021
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