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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7567
Experience:  15years with H & R Block. Divisional leader, Instructor
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Hi, I have a question. I am a permanent resident. When I

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Hi, I have a question. I am a permanent resident. When I came to U.S, my sister (she is in Michigan) helped me financially. Now, I have got employed ( I am in New York). In my recruitment agreement, it was agreed that the amount that my sister helped me with would be repaid as loan repayment. Now, she is being asked to fill out a W9 form. I understand, that leads to a 1099 form in which case the amount she gets would be taxable. I was given to understand initially that since this would be loan repayment the amount would be nontaxable, except for any interest that she charge me with. Are there different W forms or tax forms in cases like this so that the money does not get taxed. Pls let me know
Submitted: 3 years ago.
Category: Tax
Expert:  Robin D. replied 3 years ago.

Hello and thank you for using Just Answer.

If the company is willing to pay of your loan to your sister then the amount that she receives for the interest will be taxable to her. The company must have the W9 to show that she is exempt from backup withholding on the interest payment. The company should then issue her the 1099 so they can use the amount to claim as an expense for the company.

Customer: replied 3 years ago.

The amount that she would be getting will be interest and part of the principal amount. So, would these be reflected differently on the forms. I am not clear. Would the exemption from backup witholding be on the interest payment or the principal amount repayment. I was under the impression that if you get a 1099 form you always need to file tax. Would there be a different W9 form for this to show she is exempt from backup witholding. Thank You

Expert:  Robin D. replied 3 years ago.
No the W9 that the company is requesting is for her basic information (Name, Social Security Number or ITIN, ....). The 1099 that they issue should just show the interest that they are paying her for the loan. You should have the principal reflected on your W2 as income. You will pay tax on the principal she will pay tax on the interest. She will add that amount to her regular income and report it on her US tax return. Ask the company again to make sure this is the way they are handling the amounts.
Customer: replied 3 years ago.

O.K, This is something that never came up before in my discussions with my previous attorneys - that I would have to pay the tax on the principal. I was told that paying the amount directly to my sister ensures everything is nontaxable except for the interest. So, we were given to understand that I and my sister do not have to pay any taxes except for the interest because they are paying her directly. Thanks

Expert:  Robin D. replied 3 years ago.

If the company is looking at this as a loan to you, if the company forgives the loan to you then the principal amount will be taxable to you. If you are required to repay the loan then it is not taxable to you. The interest that they pay to your sister will be taxable to her regardless.

 

Customer: replied 3 years ago.

As of now the company would be forgiving the loan after 2 years. So, when would I have to file it in my W2 form.

Expert:  Robin D. replied 3 years ago.
They will show it on the W2 you receive for your first year of working for the company. If that is 2011 then it will be on the W2 you receive in Jan of 2012 to file your 2011 tax return.
Customer: replied 3 years ago.

I am asking because the company is also not very clear on some of the issues. Like I said earlier the loan would be forgiven if I worked for at least 2 years with them. Otherwise I would have to repay the entire amount plus interest. In that case do I still have to show it on the W2 of my first year, or after the loan is forgiven.

 

Second question, if the company while giving the w9 form to my sister does not exempt from backup witholding, and the 1099 shows the entire amount - principal and interest, would that mean she pays the taxes, and I do not have to show it on my W2 form.

 

And again, I am confused, the exemption from backup witholding for my sister: is it for the interest or principal?

 

 

Expert:  Robin D. replied 3 years ago.
If you are forgiven the loan it will be shown in the year that the loan is forgiven (not the first year of employment). If that is 2 years down the road then it should be on your W2 for 2013. Your sister should not have the total shown on the 1099. That would not be correct. Only the interest should be shown on her 1099. If the total is reported as taxable to her she needs to have them correct that. You are responsible for any tax on the loan not your sister. I doubt the company would show any more than the interest to your sister.
The exemption for backup withholding will be on the interest. The company shows this so they are not required to withhold any tax from the payment to your sister on the interest.
Customer: replied 3 years ago.

I think I am clearer on this issue now. But like I said before - I am not sure the company is very clear about it too, because this has been going on for quiet some time now. So, I am asking the same question again - if in the 1099 form to my sister they show the full amount - principal & tax, then she would be paying the tax. (I could then pay my sister whatever tax she had to from my personal funds). But in that case if my sister officially paid the tax, then what would that imply for me - my w2 forms, would I still be required to pay. I am all confused about this.

 

The company said that they would pay my sister, and at the time of filing taxes, she would have to calculate the interest, and her tax preparer would have to say that since part of the amount is interest, only that alone is taxable. So, from what I understand, as of now, they would probably reflect the entire amount on the 1099 form.

Expert:  Robin D. replied 3 years ago.
Your sister is not going to be required to pay the tax on the principal. If you are forgiven the loan then the company will add that to your W2 in the year it is forgiven. Even if your sister added the entire amount to her tax return you would still have the principal added to your W2 by the company in the year the loan is forgiven.
Customer: replied 3 years ago.
Thank You, XXXXX XXXXX have any more questions on this after communicating with the company, I will let you know. Thank You again
Expert:  Robin D. replied 3 years ago.

You are welcome. Please remember you can always come back even after you click ACCEPT.

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7567
Experience: 15years with H & R Block. Divisional leader, Instructor
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Robin D.
Robin D.
Tax Professional
7567 Satisfied Customers
15years with H & R Block. Divisional leader, Instructor