I worked for a bit over 4 months under a verbal agreement that I would be paid off the books for purposes of still collecting unemployment during the pandemic.
My employer recently let me know that I'll be receiving a 1099 for the compensation that was paid to me during those 4 months. I received my pay through a digital money transfer app. What happens now?
Is there a way for a 1099 to show that I was working while receiving unemployment benefits?
Unemployment fraud is a crime.
If you believe that what you were doing could be seen as fraud, you may want to contact an attorney to discuss your options.
To answer your follow-up question: A 1099 only shows a total compensation for the year; it does not include the dates of the payments.
You and your employer face multiple potential problems, some legal legal and some tax issues:
You and potentially your employer may be accused of conspiring to commit unemployment fraud. States know how to identify this. People have been trying to do this for years. Even if a 1009 or W-2 don't show dates, the state may ask for additional information.
They gave you a 1099. It is possible that you were not an independent contractor. The state and the federal government don't like when this happens. They may also go after your employer for this.
You could face tax issues. If the 1099 income was significant enough you may have been required to file quarterly tax forms because of the lack of withholding. The need to file wasn't changed by the fact that you though there wasn't going to be 1099 evidence.
Did you account for your legal income, this income you didn't report, and the unemployment income from the state when setting aside money to pay your taxes? Many people forget that unemployment income is still taxable income.
You know why they sent you the 1099? They couldn't claim your income as an expense once it exceed $600. To claim it they had to tell the government where it went.
Is there a way for a 1099 to show that I was working during unemployment benefits?
The only date on a 1099 is the calendar year. If the IRS audits the company, they might see the company paying you cash, ask about it, and "discover" that you were getting unemployment at the time.
Prepare to pay back all that unemployment insurance, plus a possible penalty.
Be prepared to pay the unemployment back.
All states are required to assess a penalty of not less than 15% of the amount of the fraudulent payment. Other penalties under state unemployment insurance laws generally include criminal prosecution with fines and/or incarceration; required repayment of fraudulently collected benefits; forfeiting future income tax refunds; and/or permanent loss of eligibility for unemployment compensation.
You face choices:
While self reporting does not change the potential penalties, it speaks favorably of your intent, and has a good chance of reducing the overall cost of the events.
A 1099-MISC is just that, miscellaneous. Include it in your income when you file your taxes.
As for your dastardly deeds, that's for you to figure out.
