Hello,

I am hoping someone on here can help me with a tax issue I am having. I worked for a financial planner for a few months in 2013. It was my first job in finance and the employer paid for me to get my Series 7 and 66. I had received my CFP on my own before I entered the industry. I left that position later in 2013 because I received an offer in another financial planning firm with more mentoring and money. My old boss was rightfully angry and I felt bad leaving, but, ever since I left in July '13, he has been trying to get back at me for quitting. Without getting into the drama-side of things, I am looking for help on the following tax issue:

My boss followed through on his promise, made in an email after I left, that he would issue me a 1099-MISC for the education expenses he paid for my series 7 and 66 classes and test and I want to make sure that this is the correct way to deal with this tax issue before I file. I was a W-2 employee and received a W-2 in the amount of my gross income that matches up with my paystubs. I also received a 1099-MISC for $1,926 which is for the education expenses. The classes and tests only amount to $1,189 so I am fairly certain the extra amount on the 1099-MISC is due to the time I spent sitting in class since he directly said "As well, you will be 1099'd for all licensure expenses incurred, and all time off from work to sit in class. Any expenses incurred to advance your professional career with the agreement that during your probation period, if you left you would be taxed on the economic benefit of what you took with you."

We did not have any written or verbal agreement regarding the education expenses and a probationary period was never mentioned to me. The tests were mandatory for my job. It was a small firm with no handbook or anything setup that would prevent confusion such as this.

My questions here are:
1) Do I have to pay tax on the education expenses?
2) If I do, should they be on the W-2 instead of a 1099-MISC? I was never an independent contractor and was told to be at work M-F 8-5.
3) If I do not have to pay the tax, what would be the reason to tell the IRS? Is it a work-related education expense or is there another tax principle that would exclude me from paying tax on this?
4) The amount on the 1099-MISC that is over the actual expenses are, I assume, from my wages while sitting in class. I received paychecks for class days so this amount is also included in my W-2. It is not correct to have my wages paid while sitting in class reflected on the 1099, right?

Thank you very much for reading and I appreciate anyone who could help.

1) it depends; as long as the reimbursement program fits within IRS parameters, you do not have to pay tax on any money you receive for educational expenses. If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments, and academic or vocational courses. You can deduct the costs of qualifying work-related education as business expenses by itemizing your deductions on Sch A.

2) you need to report the 1099 income on line 21 of 1040. This is "unearned" income. Report the edu expenses as work-related education which goes on Sch A and is subject to the 2% AGI limitation. However, that income could be included in box 3 of the 1099-Misc as an award or bonus. Then you would enter that amount on the other income line of the 1040. If your employer is coding it non-employee compensation (box 7), maintaining that your time at school was paid but not employee wages, then you would enter that income on Sch C as self employment income. Usually, the employer has not withheld federal income tax, social security tax, or medicare taxes (box 4 will be empty), and you will owe these amounts. The good thing is that you are allowed to deduct expenses needed to gain that income, so you would be able to deduct parking and mileage, and other expenses, listing them all on the Sch C along with the income.
3) as mentioned above,
4) I guess you need to contact the issuer of 1099 for sure; The only problem is that he claimed a deduction (for the amount he paid you on 1099) could have been accidental or could have been deliberate tax evasion .

If the amount difference is something like $100 or less, it was probably just a mistake, and probably not worth fighting over. If it's thousands of dollars, then it's either a major mistake or more likely deliberate, and you're on real thin ice if you just take the extra money.. If he refuses to make the correction, then notify the IRS of the problem.

Thank you very much for the info. I have no problem paying taxes that are due- I just have no trust in my past boss so I wanted this issue checked out. A couple followups if you do not mind.

1) If the education plan is not in writing and I know for a fact my previous employer will argue that it is a taxable benefit now that I quit (verbally, during my job interview, he said the education expenses would be paid by him), can it still qualify as work-related if it maintains and improves my skills for the current position? Because it definitely does do that. Or is there more required to qualify for this?

2) The 1099 income is marked as box 7 with all the other boxes empty. I was always an employee of his and going to class was not optional. I do not know if this changes anything. I do have the paystub from the week I was in class and he paid it out just like all my other paystubs with FICA, Medicare, etc. taken out. He is changing his mind now on how to tax my education since I quit.

Thanks again!

I did see that qualifying work education can not be used if the education is needed to meet the minimum education needed for the job. I'm confused on whether the employer funded education program needs to be in writing though for this situation, because it is not.

1) I guess you need to make sure the educational expenses are work-related, in order to claim the tax deduction.for example, if you are in the insurance industry and decide to take a class to further your career or obtain additional licenses or designations, the educational cost is tax deductible. However, an insurance professional could not claim the cost of taking a cooking class. To Qualify, you must meet 3 requirements:
Your education must maintain or improve your skills in your pre-grad occupation. If you worked in the same industry both before and after graduate school, your pre-grad occupation had some managerial duties, and your MBA courses related to your previous occupation, you have a better case for the deduction.
-OR-
Your education must be required by your employer, or by law or regulations, to keep your present salary, status, or job. You have a better case for claiming the deduction if your employer requested you to get the MBA (and have a letter to support that).

The education must not be needed to meet the minimum requirements for a trade or business. To become a doctor, you must go to medical school, to become a lawyer, you must go to law school. For these occupations, the education would not be deductible as a business expense because the education is the minimum requirement. However, it is possible to work in management or finance, etc., without an advanced degree, so expenses to obtain an MBA degree could possibly qualify.

The education must not qualify you for a new job, trade, or business. If you had limited managerial and/or business duties in your occupation prior to getting your MBA, (less than one or two years of business experience), your MBA might be construed as qualifying you for a new trade or business, and would therefore not be deductible. If you are an employee, a change of duties that involves the same general kind of work is not a new trade or business. However, some IRS officers focus on this particular rule to try to disallow deductions for MBA expenses.

If you are unsure if your work related education qualifies as a tax deduction, visit the IRS website and download Publication 970 - Tax Benefits for Education.




2) This is partially the fault of employers. Or simply he may not want to pay additional fica tax on the edu related payments for you by reporting it on 1099 rather than on w2.While most American businesses receive generous subsidies and tax breaks to provide tuition assistance for certain employees, many companies simply don't publicize these educational opportunities. In other cases, the fault may lie with employees who prefer not to "work" overtime to learn new skills. Workers with grueling jobs often have little appetite for demanding night classes that can meet three or four times per week.
If you've taken advantage of your employer's tuition reimbursement program and received a Form-1099 to account for this extra "income," you'll need to keep a few things in mind. First, the reimbursements that you received through your employer's program count as "unearned income" for tax purposes. "Unearned income" is reported on line 21 of your Form 1040.
In addition, you can add the full value of each credit that you took under your employer's plan to the "Lifetime Learning Credit" to which each taxpayer is entitled. This is a tax credit designed to offset tuition payments associated with stand-alone higher-education classes taken outside of the purview of a traditional degree program. If you're over a certain age, it's likely that you'll be able to claim all of your education costs under this credit.
In certain circumstances, you may be exempt from paying any reimbursement-related taxes. Depending upon the amount of education assistance that you received from your employer, the IRS may consider this unearned income to be completely tax-free. The federal limit for such a tax-free reimbursement designation fluctuates from year to year. As of the most recent tax year, this limit was set at about $5,500.
If your employer designates the tuition reimbursement as an "employee benefit" of your position, it may also be exempt from taxation. Such a benefit might be included in your employment contract or in the "employee handbook" that you received . In order for the IRS to accept this "employee benefit" designation, you and your employer will have to prove that the instruction that you received either maintained or enhanced your job-related skills base.

Again thank you. You are being more of a help than I'm sure you even realize. One last question...

You said:
"Your education must be required by your employer, or by law or regulations, to keep your present salary, status, or job. You have a better case for claiming the deduction if your employer requested you to get the MBA (and have a letter to support that)."

In the situation you described you state that I would have a better case for claiming a deduction on education expenses paid by me if my employer required it. Can I expand that and say if the education is required by the employer, is in writing, is necessary to keep the current position and is paid by the employer in the amount of $1,926, that I would have a better case for that to be a tax free benefit?? You stated the deduction would have a good case, but that is only if I paid for the education expenses I believe. So if the employer paid for it in the same situation, the employee would have a good case for it being tax free.

To be deductible, your expenses must be for education that (1) maintains or improves your job skills or (2) is required by your employer or by law to keep your salary, status or job. However, even if the education meets either of these tests, the education cannot be part of a program that will qualify you for a new trade or business, or is needed to meet the minimal educational requirements of your trade or business.
.
in genral,Self-employed individuals include educational expenses on Form 1040, Sch C , Form 1040, SchC-EZ ;Your employer may report the educational assistance payments on your Form W-2 ( in the appropriate box under "other." Taxable reimbursements will be reported by your employer as income to you in the appropriate box of Form W-2. For more information on educational expenses, education tax credits or information for specific types of employees, please, refer to Publication 970, Or you can contact the IRS for more info in detail.