Expert: Carole Dunton - 11/18/2008

Question
QUESTION: Hello,

I will be receiving a $30k lump settlement in January 2009.  I was told that it would be considered 1099 income.  How do I figure and file this income?  I was told by my lawyer that she isn't sure how it works, but believes it's something that's done quarterly.  I've searched online, but most of the information I find is for people who are paying out, not for people who are receiving.

Thanks for any help you can provide.

ANSWER: Hi,

I'm assuming that the entire $30,000 will be taxable.  You didn't mention that federal income tax will be withheld so I'll assume that there will be nothing withheld.  

First of all you need to estimate your total income for 2009 including the $30,000.  Then you need to estimate your deductions, either the standard deduction or itemized deductions.

From your total income you subtract your deductions and your exemptions.  What remains is your taxable income.  You calculate the tax on that and deduct your estimated withholding tax from wages or other income.  If your withholdings will not cover your tax liability, you make quarterly estimated payments using Form 1040ES.

For example, if your total income for 2009 is $50,000 ($30,000 lump sum plus $20,000 wages) and you are single.  You would deduct $3,650 for your exemption and $5,700 for your standard deduction leaving a taxable income of $40,650.  The tax on that would be approximately $6,500 (they haven't published the 2009 tables yet).  If your withholding from your wages is $2,000 you would owe a balance of $4,500.  Since your lump sum will come in January you should make that payment by April 15, 2009 using form 1040ES.  As an alternative you could have your withholding from your wages increased to cover the additional taxes.

Regards,
Carole

---------- FOLLOW-UP ----------

QUESTION: Thank you for your fast response.

Just to clarify, I was told that the entire $30,000 will be 1099 taxable, I have no idea what that means and there was no mention of federal income taxes.  

I am married, but this will be MY only income for the year.

In order to make my quarterly payments, would it be possible to file as married but filing separately, and then do as you described for just the settlement money each quarter in 2009?

Thanks again for any direction you can provide.  We are always just the standard deductions and have always done our taxes on our own with no problem. Is this something that someone can do on their own or is it absolutely necessary to hire an accountant?

Best,
Tanya

ANSWER: Hi,

You can file separately but unless your spouse's income is fairly high it wouldn't make a difference in the taxes you pay.  If you would tell me your spouse's income I could better answer that question.

When you get the check you will know whether or not taxes are withheld.

I don't think you need an accountant unless you would feel more comfortable having a professional do your tax return.

Regards,
Carole

---------- FOLLOW-UP ----------

QUESTION: Hi,

My spouse's income will be somewhere in the $50's.

When I get the check I know that no taxes will have already been withheld, it will be the full $30,000.  Pardon my ignorance, but I didn't quite know the difference between 1099 income and federal income tax, but I now assume what I will be doing is filing federal income tax on my 1099 income. Is this correct?  The way my lawyer talks I will be PAYING 1099 taxes on 1099 income, so I'm confused.

The only reason I asked about going to an accountant is because my lawyer told me that is what I would HAVE to do, but I feel fairly certain that this is something that can be accomplished on my own with the right bits of information.

Thanks again,
Tanya

Answer
Hi,

With your spouse's income somewhere in the $50's, part of your taxable income would be taxed at 25%, but not very much of it.

You're correct that you will be filing a federal income tax return reporting your 1099 income.  There is no such thing as 1099 taxes.

I think you can do it on your own.  

Regards,
Carole