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2011 1040

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2011 1040

2011 1040 Publication 15-A - Main Content Table of Contents 1. 2011 1040 Who Are Employees?Independent Contractors Common-Law Employees Statutory Employees Statutory Nonemployees Misclassification of Employees 2. 2011 1040 Employee or Independent Contractor?Common-Law Rules Industry Examples 3. 2011 1040 Employees of Exempt OrganizationsSocial security and Medicare taxes. 2011 1040 FUTA tax. 2011 1040 4. 2011 1040 Religious Exemptions and Special Rules for MinistersForm W-2. 2011 1040 Self-employed. 2011 1040 Employees. 2011 1040 5. 2011 1040 Wages and Other CompensationRelocating for Temporary Work Assignments Employee Achievement Awards Scholarship and Fellowship Payments Outplacement Services Withholding for Idle Time Back Pay Supplemental Unemployment Benefits Golden Parachute Payments Interest-Free and Below-Market-Interest-Rate Loans Leave Sharing Plans Nonqualified Deferred Compensation Plans Tax-Sheltered Annuities Contributions to a Simplified Employee Pension (SEP) SIMPLE Retirement Plans 6. 2011 1040 Sick Pay ReportingSick Pay Payments That Are Not Sick Pay Sick Pay Plan Third-Party Payers of Sick Pay Social Security, Medicare, and FUTA Taxes on Sick Pay Income Tax Withholding on Sick Pay Depositing and Reporting Example of Figuring and Reporting Sick Pay 7. 2011 1040 Special Rules for Paying TaxesCommon Paymaster Agents Reporting Agents Employee's Portion of Taxes Paid by Employer International Social Security Agreements 8. 2011 1040 Pensions and AnnuitiesFederal Income Tax Withholding 9. 2011 1040 Alternative Methods for Figuring WithholdingTerm of continuous employment. 2011 1040 Formula Tables for Percentage Method Withholding (for Automated Payroll Systems) Wage Bracket Percentage Method Tables (for Automated Payroll Systems) Combined Federal Income Tax, Employee Social Security Tax, and Employee Medicare Tax Withholding Tables 10. 2011 1040 Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersWithholding Tables How To Get Tax Help 1. 2011 1040 Who Are Employees? Before you can know how to treat payments that you make to workers for services, you must first know the business relationship that exists between you and the person performing the services. 2011 1040 The person performing the services may be: An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee. 2011 1040 This discussion explains these four categories. 2011 1040 A later discussion, Employee or Independent Contractor in section 2, points out the differences between an independent contractor and an employee and gives examples from various types of occupations. 2011 1040 If an individual who works for you is not an employee under the common-law rules (see section 2), you generally do not have to withhold federal income tax from that individual's pay. 2011 1040 However, in some cases you may be required to withhold under the backup withholding requirements on these payments. 2011 1040 See Publication 15 (Circular E) for information on backup withholding. 2011 1040 Independent Contractors People such as doctors, veterinarians, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. 2011 1040 However, whether such people are employees or independent contractors depends on the facts in each case. 2011 1040 The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result. 2011 1040 Common-Law Employees Under common-law rules, anyone who performs services for you is generally your employee if you have the right to control what will be done and how it will be done. 2011 1040 This is so even when you give the employee freedom of action. 2011 1040 What matters is that you have the right to control the details of how the services are performed. 2011 1040 For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2. 2011 1040 If you have an employer-employee relationship, it makes no difference how it is labeled. 2011 1040 The substance of the relationship, not the label, governs the worker's status. 2011 1040 It does not matter whether the individual is employed full time or part time. 2011 1040 For employment tax purposes, no distinction is made between classes of employees. 2011 1040 Superintendents, managers, and other supervisory personnel are all employees. 2011 1040 An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. 2011 1040 A director of a corporation is not an employee with respect to services performed as a director. 2011 1040 You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. 2011 1040 However, the wages of certain employees may be exempt from one or more of these taxes. 2011 1040 See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4). 2011 1040 Leased employees. 2011 1040   Under certain circumstances, a firm that furnishes workers to other firms is the employer of those workers for employment tax purposes. 2011 1040 For example, a temporary staffing service may provide the services of secretaries, nurses, and other similarly trained workers to its clients on a temporary basis. 2011 1040   The staffing service enters into contracts with the clients under which the clients specify the services to be provided and a fee is paid to the staffing service for each individual furnished. 2011 1040 The staffing service has the right to control and direct the worker's services for the client, including the right to discharge or reassign the worker. 2011 1040 The staffing service hires the workers, controls the payment of their wages, provides them with unemployment insurance and other benefits, and is the employer for employment tax purposes. 2011 1040 For information on employee leasing as it relates to pension plan qualification requirements, see Leased employee in Publication 560, Retirement Plans for Small Business. 2011 1040 Additional information. 2011 1040   For more information about the treatment of special types of employment, the treatment of special types of payments, and similar subjects, see Publication 15 (Circular E) or Publication 51 (Circular A), Agricultural Employer's Tax Guide. 2011 1040 Statutory Employees If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute, (also known as “statutory employees”) for certain employment tax purposes. 2011 1040 This would happen if they fall within any one of the following four categories and meet the three conditions described next under Social security and Medicare taxes . 2011 1040 A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission. 2011 1040 A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company. 2011 1040 An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done. 2011 1040 A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. 2011 1040 The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. 2011 1040 The work performed for you must be the salesperson's principal business activity. 2011 1040 See Salesperson in section 2. 2011 1040 Social security and Medicare taxes. 2011 1040   You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. 2011 1040 The service contract states or implies that substantially all the services are to be performed personally by them. 2011 1040 They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation, such as a car or truck). 2011 1040 The services are performed on a continuing basis for the same payer. 2011 1040 Federal unemployment (FUTA) tax. 2011 1040   For FUTA tax (the unemployment tax paid under the Federal Unemployment Tax Act), the term “employee” means the same as it does for social security and Medicare taxes, except that it does not include statutory employees defined above in categories 2 and 3. 2011 1040 Any individual who is a statutory employee described above under category 1 or 4 is also an employee for FUTA tax purposes and subject to FUTA tax. 2011 1040 Income tax. 2011 1040   Do not withhold federal income tax from the wages of statutory employees. 2011 1040 Reporting payments to statutory employees. 2011 1040   Furnish Form W-2 to a statutory employee, and check “Statutory employee” in box 13. 2011 1040 Show your payments to the employee as “other compensation” in box 1. 2011 1040 Also, show social security wages in box 3, social security tax withheld in box 4, Medicare wages in box 5, and Medicare tax withheld in box 6. 2011 1040 The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. 2011 1040 He or she reports earnings as a statutory employee on line 1 of Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. 2011 1040 A statutory employee's business expenses are deductible on Schedule C (Form 1040) or C-EZ (Form 1040) and are not subject to the reduction by 2% of his or her adjusted gross income that applies to common-law employees. 2011 1040 H-2A agricultural workers. 2011 1040   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. 2011 1040 Statutory Nonemployees There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. 2011 1040 Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if: Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked, and Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes. 2011 1040 Direct sellers. 2011 1040   Direct sellers include persons falling within any of the following three groups. 2011 1040 Persons engaged in selling (or soliciting the sale of) consumer products in the home or place of business other than in a permanent retail establishment. 2011 1040 Persons engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment. 2011 1040 Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution). 2011 1040   Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. 2011 1040 Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. 2011 1040 Licensed real estate agents. 2011 1040   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. 2011 1040 Companion sitters. 2011 1040   Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. 2011 1040 A person engaged in the trade or business of putting the sitters in touch with individuals who wish to employ them (that is, a companion sitting placement service) will not be treated as the employer of the sitters if that person does not receive or pay the salary or wages of the sitters and is compensated by the sitters or the persons who employ them on a fee basis. 2011 1040 Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. 2011 1040 Misclassification of Employees Consequences of treating an employee as an independent contractor. 2011 1040   If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you are liable for employment taxes for that worker and the relief provision, discussed next, will not apply. 2011 1040 See section 2 in Publication 15 (Circular E) for more information. 2011 1040 Relief provision. 2011 1040   If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. 2011 1040 To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. 2011 1040 You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. 2011 1040 Technical service specialists. 2011 1040   This relief provision does not apply for a technical services specialist you provide to another business under an arrangement between you and the other business. 2011 1040 A technical service specialist is an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. 2011 1040   This limit on the application of the rule does not affect the determination of whether such workers are employees under the common-law rules. 2011 1040 The common-law rules control whether the specialist is treated as an employee or an independent contractor. 2011 1040 However, if you directly contract with a technical service specialist to provide services for your business and not for another business, you may still be entitled to the relief provision. 2011 1040 Test proctors and room supervisors. 2011 1040   The consistent treatment requirement does not apply to services performed after December 31, 2006, by an individual as a test proctor or room supervisor assisting in the administration of college entrance or placement examinations if the individual: Is performing the services for a section 501(c) organization exempt from tax under section 501(a) of the code, and Is not otherwise treated as an employee of the organization for employment taxes. 2011 1040 Voluntary Classification Settlement Program (VCSP). 2011 1040   Employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP if certain requirements are met. 2011 1040 To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). 2011 1040 For more information, visit IRS. 2011 1040 gov and enter “VCSP” in the search box. 2011 1040 2. 2011 1040 Employee or Independent Contractor? An employer must generally withhold federal income taxes, withhold and pay over social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. 2011 1040 An employer does not generally have to withhold or pay over any federal taxes on payments to independent contractors. 2011 1040 Common-Law Rules To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. 2011 1040 In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. 2011 1040 Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. 2011 1040 These facts are discussed next. 2011 1040 Behavioral control. 2011 1040   Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of: Instructions that the business gives to the worker. 2011 1040   An employee is generally subject to the business' instructions about when, where, and how to work. 2011 1040 All of the following are examples of types of instructions about how to do work. 2011 1040 When and where to do the work. 2011 1040 What tools or equipment to use. 2011 1040 What workers to hire or to assist with the work. 2011 1040 Where to purchase supplies and services. 2011 1040 What work must be performed by a specified  individual. 2011 1040 What order or sequence to follow. 2011 1040   The amount of instruction needed varies among different jobs. 2011 1040 Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. 2011 1040 A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. 2011 1040 The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right. 2011 1040 Training that the business gives to the worker. 2011 1040   An employee may be trained to perform services in a particular manner. 2011 1040 Independent contractors ordinarily use their own methods. 2011 1040 Financial control. 2011 1040   Facts that show whether the business has a right to control the business aspects of the worker's job include: The extent to which the worker has unreimbursed business expenses. 2011 1040   Independent contractors are more likely to have unreimbursed expenses than are employees. 2011 1040 Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. 2011 1040 However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer. 2011 1040 The extent of the worker's investment. 2011 1040   An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. 2011 1040 However, a significant investment is not necessary for independent contractor status. 2011 1040 The extent to which the worker makes his or her services available to the relevant market. 2011 1040   An independent contractor is generally free to seek out business opportunities. 2011 1040 Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. 2011 1040 How the business pays the worker. 2011 1040   An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. 2011 1040 This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. 2011 1040 An independent contractor is often paid a flat fee or on a time and materials basis for the job. 2011 1040 However, it is common in some professions, such as law, to pay independent contractors hourly. 2011 1040 The extent to which the worker can realize a profit or loss. 2011 1040   An independent contractor can make a profit or loss. 2011 1040 Type of relationship. 2011 1040   Facts that show the parties' type of relationship include: Written contracts describing the relationship the parties intended to create. 2011 1040 Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. 2011 1040 The permanency of the relationship. 2011 1040 If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship. 2011 1040 The extent to which services performed by the worker are a key aspect of the regular business of the company. 2011 1040 If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. 2011 1040 For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. 2011 1040 This would indicate an employer-employee relationship. 2011 1040 IRS help. 2011 1040   If you want the IRS to determine whether or not a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. 2011 1040 Industry Examples The following examples may help you properly classify your workers. 2011 1040 Building and Construction Industry Example 1. 2011 1040 Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. 2011 1040 She did not advance funds to help him carry on the work. 2011 1040 She makes direct payments to the suppliers for all necessary materials. 2011 1040 She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. 2011 1040 She pays them an hourly rate and exercises almost constant supervision over the work. 2011 1040 Jerry is not free to transfer his assistants to other jobs. 2011 1040 He may not work on other jobs while working for Wilma. 2011 1040 He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. 2011 1040 He and his assistants perform personal services for hourly wages. 2011 1040 Jerry Jones and his assistants are employees of Wilma White. 2011 1040 Example 2. 2011 1040 Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. 2011 1040 He uses his own tools and performs services in the order designated by the corporation and according to its specifications. 2011 1040 The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. 2011 1040 He does not have a place of business or hold himself out to perform similar services for others. 2011 1040 Either party can end the services at any time. 2011 1040 Milton Manning is an employee of the corporation. 2011 1040 Example 3. 2011 1040 Wallace Black agreed with the Sawdust Co. 2011 1040 to supply the construction labor for a group of houses. 2011 1040 The company agreed to pay all construction costs. 2011 1040 However, he supplies all the tools and equipment. 2011 1040 He performs personal services as a carpenter and mechanic for an hourly wage. 2011 1040 He also acts as superintendent and foreman and engages other individuals to assist him. 2011 1040 The company has the right to select, approve, or discharge any helper. 2011 1040 A company representative makes frequent inspections of the construction site. 2011 1040 When a house is finished, Wallace is paid a certain percentage of its costs. 2011 1040 He is not responsible for faults, defects of construction, or wasteful operation. 2011 1040 At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. 2011 1040 The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages. 2011 1040 Wallace Black and his assistants are employees of the Sawdust Co. 2011 1040 Example 4. 2011 1040 Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. 2011 1040 A signed contract established a flat amount for the services rendered by Bill Plum. 2011 1040 Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. 2011 1040 He hires his own roofers who are treated as employees for federal employment tax purposes. 2011 1040 If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. 2011 1040 Bill Plum, doing business as Plum Roofing, is an independent contractor. 2011 1040 Example 5. 2011 1040 Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. 2011 1040 She is to receive $1,280 every 2 weeks for the next 10 weeks. 2011 1040 This is not considered payment by the hour. 2011 1040 Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. 2011 1040 She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. 2011 1040 Vera is an independent contractor. 2011 1040 Trucking Industry Example. 2011 1040 Rose Trucking contracts to deliver material for Forest, Inc. 2011 1040 , at $140 per ton. 2011 1040 Rose Trucking is not paid for any articles that are not delivered. 2011 1040 At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. 2011 1040 All operating expenses, including insurance coverage, are paid by Jan Rose. 2011 1040 All equipment is owned or rented by Jan and she is responsible for all maintenance. 2011 1040 None of the drivers are provided by Forest, Inc. 2011 1040 Jan Rose, operating as Rose Trucking, is an independent contractor. 2011 1040 Computer Industry Example. 2011 1040 Steve Smith, a computer programmer, is laid off when Megabyte, Inc. 2011 1040 , downsizes. 2011 1040 Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. 2011 1040 It is not clear how long that it will take to complete the project, and Steve is not guaranteed any minimum payment for the hours spent on the program. 2011 1040 Megabyte provides Steve with no instructions beyond the specifications for the product itself. 2011 1040 Steve and Megabyte have a written contract, which provides that Steve is considered to be an independent contractor, is required to pay federal and state taxes, and receives no benefits from Megabyte. 2011 1040 Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. 2011 1040 Steve works at home and is not expected or allowed to attend meetings of the software development group. 2011 1040 Steve is an independent contractor. 2011 1040 Automobile Industry Example 1. 2011 1040 Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. 2011 1040 She works six days a week and is on duty in Bob's showroom on certain assigned days and times. 2011 1040 She appraises trade-ins, but her appraisals are subject to the sales manager's approval. 2011 1040 Lists of prospective customers belong to the dealer. 2011 1040 She is required to develop leads and report results to the sales manager. 2011 1040 Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. 2011 1040 She is paid a commission and is eligible for prizes and bonuses offered by Bob. 2011 1040 Bob also pays the cost of health insurance and group-term life insurance for Donna. 2011 1040 Donna is an employee of Bob Blue. 2011 1040 Example 2. 2011 1040 Sam Sparks performs auto repair services in the repair department of an auto sales company. 2011 1040 He works regular hours and is paid on a percentage basis. 2011 1040 He has no investment in the repair department. 2011 1040 The sales company supplies all facilities, repair parts, and supplies; issues instructions on the amounts to be charged, parts to be used, and the time for completion of each job; and checks all estimates and repair orders. 2011 1040 Sam is an employee of the sales company. 2011 1040 Example 3. 2011 1040 An auto sales agency furnishes space for Helen Bach to perform auto repair services. 2011 1040 She provides her own tools, equipment, and supplies. 2011 1040 She seeks out business from insurance adjusters and other individuals and does all of the body and paint work that comes to the agency. 2011 1040 She hires and discharges her own helpers, determines her own and her helpers' working hours, quotes prices for repair work, makes all necessary adjustments, assumes all losses from uncollectible accounts, and receives, as compensation for her services, a large percentage of the gross collections from the auto repair shop. 2011 1040 Helen is an independent contractor and the helpers are her employees. 2011 1040 Attorney Example. 2011 1040 Donna Yuma is a sole practitioner who rents office space and pays for the following items: telephone, computer, on-line legal research linkup, fax machine, and photocopier. 2011 1040 Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. 2011 1040 Donna has a part-time receptionist who also does the bookkeeping. 2011 1040 She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. 2011 1040 For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. 2011 1040 Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. 2011 1040 The bills include charges for long distance calls, on-line research time, fax charges, photocopies, postage, and travel, costs for which the corporations have agreed to reimburse her. 2011 1040 Donna is an independent contractor. 2011 1040 Taxicab Driver Example. 2011 1040 Tom Spruce rents a cab from Taft Cab Co. 2011 1040 for $150 per day. 2011 1040 He pays the costs of maintaining and operating the cab. 2011 1040 Tom Spruce keeps all fares that he receives from customers. 2011 1040 Although he receives the benefit of Taft's two-way radio communication equipment, dispatcher, and advertising, these items benefit both Taft and Tom Spruce. 2011 1040 Tom Spruce is an independent contractor. 2011 1040 Salesperson To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. 2011 1040 If a salesperson who works for you does not meet the tests for a common-law employee, discussed earlier in this section, you do not have to withhold federal income tax from his or her pay (see Statutory Employees in section 1). 2011 1040 However, even if a salesperson is not an employee under the usual common-law rules for income tax withholding, his or her pay may still be subject to social security, Medicare, and FUTA taxes as a statutory employee. 2011 1040 To determine whether a salesperson is an employee for social security, Medicare, and FUTA tax purposes, the salesperson must meet all eight elements of the statutory employee test. 2011 1040 A salesperson is a statutory employee for social security, Medicare, and FUTA tax purposes if he or she: Works full time for one person or company except, possibly, for sideline sales activities on behalf of some other person, Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works, Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments, Sells merchandise for resale, or supplies for use in the customer's business, Agrees to do substantially all of this work personally, Has no substantial investment in the facilities used to do the work, other than in facilities for transportation, Maintains a continuing relationship with the person or company for which he or she works, and Is not an employee under common-law rules. 2011 1040 3. 2011 1040 Employees of Exempt Organizations Many nonprofit organizations are exempt from federal income tax. 2011 1040 Although they do not have to pay federal income tax themselves, they must still withhold federal income tax from the pay of their employees. 2011 1040 However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees. 2011 1040 Section 501(c)(3) organizations. 2011 1040   Nonprofit organizations that are exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code include any community chest, fund, or foundation organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals. 2011 1040 These organizations are usually corporations and are exempt from federal income tax under section 501(a). 2011 1040 Social security and Medicare taxes. 2011 1040   Wages paid to employees of section 501(c)(3) organizations are subject to social security and Medicare taxes unless one of the following situations applies. 2011 1040 The organization pays an employee less than $100 in a calendar year. 2011 1040 The organization is a church or church-controlled organization opposed for religious reasons to the payment of social security and Medicare taxes and has filed Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption From Employer Social Security and Medicare Taxes, to elect exemption from social security and Medicare taxes. 2011 1040 The organization must have filed for exemption before the first date on which a quarterly employment tax return (Form 941) or annual employment tax return (Form 944) would otherwise be due. 2011 1040   An employee of a church or church-controlled organization that is exempt from social security and Medicare taxes must pay self-employment tax if the employee is paid $108. 2011 1040 28 or more in a year. 2011 1040 However, an employee who is a member of a qualified religious sect can apply for an exemption from the self-employment tax by filing Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits. 2011 1040 See Members of recognized religious sects opposed to insurance in section 4. 2011 1040 FUTA tax. 2011 1040   An organization that is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from FUTA tax. 2011 1040 This exemption cannot be waived. 2011 1040 Do not file Form 940 to report wages paid by these organizations or pay the tax. 2011 1040 Note. 2011 1040 An organization wholly owned by a state or its political subdivision should contact the appropriate state official for information about reporting and getting social security and Medicare coverage for its employees. 2011 1040 Other than section 501(c)(3) organizations. 2011 1040   Nonprofit organizations that are not section 501(c)(3) organizations may also be exempt from federal income tax under section 501(a) or section 521. 2011 1040 However, these organizations are not exempt from withholding federal income, social security, or Medicare tax from their employees' pay, or from paying FUTA tax. 2011 1040 Two special rules for social security, Medicare, and FUTA taxes apply. 2011 1040 If an employee is paid less than $100 during a calendar year, his or her wages are not subject to social security and Medicare taxes. 2011 1040 If an employee is paid less than $50 in a calendar quarter, his or her wages are not subject to FUTA tax for the quarter. 2011 1040 The above rules do not apply to employees who work for pension plans and other similar organizations described in section 401(a). 2011 1040 4. 2011 1040 Religious Exemptions and Special Rules for Ministers Special rules apply to the treatment of ministers for social security and Medicare tax purposes. 2011 1040 An exemption from social security and Medicare taxes is available for ministers and certain other religious workers and members of certain recognized religious sects. 2011 1040 For more information on getting an exemption, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. 2011 1040 Ministers. 2011 1040   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. 2011 1040 They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances and sacraments according to the prescribed tenets and practices of that religious organization. 2011 1040   Ministers are employees if they perform services in the exercise of ministry and are subject to your will and control. 2011 1040 The common-law rules discussed in section 1 and section 2 should be applied to determine whether a minister is your employee or is self-employed. 2011 1040 Whether the minister is an employee or self-employed, the earnings of a minister are not subject to federal income, social security, and Medicare tax withholding. 2011 1040 However, even if the minister is a common law employee, the earnings as reported on the minister's Form 1040 are subject to self-employment tax and federal income tax. 2011 1040 You do not withhold these taxes from wages earned by a minister, but if the minister is your employee, you may agree with the minister to voluntarily withhold tax to cover the minister's liability for self-employment tax and federal income tax. 2011 1040 For more information, see Publication 517. 2011 1040 Form W-2. 2011 1040   If your minister is an employee, report all taxable compensation as wages in box 1 on Form W-2. 2011 1040 Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Publication 15 (Circular E). 2011 1040 Do not include a parsonage allowance (excludable housing allowance) in this amount. 2011 1040 You may report a designated parsonage or rental allowance (housing allowance) and a utilities allowance, or the rental value of housing provided in a separate statement or in box 14 on Form W-2. 2011 1040 Do not show on Form W-2, Form 941, or Form 944 any amount as social security or Medicare wages, or any withholding for social security or Medicare taxes. 2011 1040 If you withheld federal income tax from the minister under a voluntary agreement, this amount should be shown in box 2 on Form W-2 as federal income tax withheld. 2011 1040 For more information on ministers, see Publication 517. 2011 1040 Exemptions for ministers and others. 2011 1040   Certain ordained ministers, Christian Science practitioners, and members of religious orders who have not taken a vow of poverty may apply to exempt their earnings from self-employment tax on religious grounds. 2011 1040 The application must be based on conscientious opposition because of personal considerations to public insurance that makes payments in the event of death, disability, old age, or retirement, or that makes payments toward the cost of, or provides services for, medical care, including social security and Medicare benefits. 2011 1040 The exemption applies only to qualified services performed for the religious organization. 2011 1040 See Revenue Procedure 91-20, 1991-1 C. 2011 1040 B. 2011 1040 524, for guidelines to determine whether an organization is a religious order or whether an individual is a member of a religious order. 2011 1040   To apply for the exemption, the employee should file Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners. 2011 1040 See Publication 517 for more information about claiming an exemption from self-employment tax using Form 4361. 2011 1040 Members of recognized religious sects opposed to insurance. 2011 1040   If you belong to a recognized religious sect or to a division of such sect that is opposed to insurance, you may qualify for an exemption from the self-employment tax. 2011 1040 To qualify, you must be conscientiously opposed to accepting the benefits of any public or private insurance that makes payments because of death, disability, old age, or retirement, or makes payments toward the cost of, or provides services for, medical care (including social security and Medicare benefits). 2011 1040 If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. 2011 1040 Religious opposition based on the teachings of the sect is the only legal basis for the exemption. 2011 1040 In addition, your religious sect (or division) must have existed since December 31, 1950. 2011 1040 Self-employed. 2011 1040   If you are self-employed and a member of a recognized religious sect opposed to insurance, you can apply for exemption by filing Form 4029 to waive all social security and Medicare benefits. 2011 1040 Employees. 2011 1040   The social security and Medicare tax exemption available to the self-employed who are members of a recognized religious sect opposed to insurance is also available to their employees who are members of such a sect. 2011 1040 This applies to partnerships only if each partner is a member of the sect. 2011 1040 This exemption for employees applies only if both the employee and the employer are members of such a sect, and the employer has an exemption. 2011 1040 To get the exemption, the employee must file Form 4029. 2011 1040   An employee of a church or church-controlled organization that is exempt from social security and Medicare taxes can also apply for an exemption on Form 4029. 2011 1040 5. 2011 1040 Wages and Other Compensation Publication 15 (Circular E) provides a general discussion of taxable wages. 2011 1040 Publication 15-B discusses fringe benefits. 2011 1040 The following topics supplement those discussions. 2011 1040 Relocating for Temporary Work Assignments If an employee is given a temporary work assignment away from his or her regular place of work, certain travel expenses reimbursed or paid directly by the employer in accordance with an accountable plan (see section 5 in Publication 15 (Circular E)) may be excludable from the employee's wages. 2011 1040 Generally, a temporary work assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. 2011 1040 If the employee's new work assignment is indefinite, any living expenses reimbursed or paid by the employer (other than qualified moving expenses) must be included in the employee's wages as compensation. 2011 1040 For the travel expenses to be excludable: The new work location must be outside of the city or general area of the employee's regular work place or post of duty, The travel expenses must otherwise qualify as deductible by the employee, and The expenses must be for the period during which the employee is at the temporary work location. 2011 1040 If you reimburse or pay any personal expenses of an employee during his or her temporary work assignment, such as expenses for home leave for family members or for vacations, these amounts must be included in the employee's wages. 2011 1040 See chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Publication 15 (Circular E), for more information. 2011 1040 These rules generally apply to temporary work assignments both inside and outside the U. 2011 1040 S. 2011 1040 Employee Achievement Awards Do not withhold federal income, social security, or Medicare taxes on the fair market value of an employee achievement award if it is excludable from your employee's gross income. 2011 1040 To be excludable from your employee's gross income, the award must be tangible personal property (not cash, gift certificates, or securities) given to an employee for length of service or safety achievement, awarded as part of a meaningful presentation, and awarded under circumstances that do not indicate that the payment is disguised compensation. 2011 1040 Excludable employee achievement awards also are not subject to FUTA tax. 2011 1040 Limits. 2011 1040   The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. 2011 1040 A higher limit of $1,600 applies to qualified plan awards. 2011 1040 Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. 2011 1040 An award cannot be treated as a qualified plan award if the average cost per recipient of all awards under all of your qualified plans is more than $400. 2011 1040   If during the year an employee receives awards not made under a qualified plan and also receives awards under a qualified plan, the exclusion for the total cost of all awards to that employee cannot be more than $1,600. 2011 1040 The $400 and $1,600 limits cannot be added together to exclude more than $1,600 for the cost of awards to any one employee during the year. 2011 1040 Scholarship and Fellowship Payments Only amounts that you pay as a qualified scholarship to a candidate for a degree may be excluded from the recipient's gross income. 2011 1040 A qualified scholarship is any amount granted as a scholarship or fellowship that is used for: Tuition and fees required to enroll in, or to attend, an educational institution, or Fees, books, supplies, and equipment that are required for courses at the educational institution. 2011 1040 The exclusion from income does not apply to the portion of any amount received that represents payment for teaching, research, or other services required as a condition of receiving the scholarship or tuition reduction. 2011 1040 These amounts are reportable on Form W-2. 2011 1040 However, the exclusion will still apply for any amount received under two specific programs—the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program—despite any service condition attached to those amounts. 2011 1040 Any amounts that you pay for room and board are not excludable from the recipient's gross income. 2011 1040 A qualified scholarship is not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. 2011 1040 For more information, see Publication 970, Tax Benefits for Education. 2011 1040 Outplacement Services If you provide outplacement services to your employees to help them find new employment (such as career counseling, resume assistance, or skills assessment), the value of these benefits may be income to them and subject to all withholding taxes. 2011 1040 However, the value of these services will not be subject to any employment taxes if: You derive a substantial business benefit from providing the services (such as improved employee morale or business image) separate from the benefit that you would receive from the mere payment of additional compensation, and The employee would be able to deduct the cost of the services as employee business expenses if he or she had paid for them. 2011 1040 However, if you receive no additional benefit from providing the services, or if the services are not provided on the basis of employee need, then the value of the services is treated as wages and is subject to federal income tax withholding and social security and Medicare taxes. 2011 1040 Similarly, if an employee receives the outplacement services in exchange for reduced severance pay (or other taxable compensation), then the amount the severance pay is reduced is treated as wages for employment tax purposes. 2011 1040 Withholding for Idle Time Payments made under a voluntary guarantee to employees for idle time (any time during which an employee performs no services) are wages for the purposes of social security, Medicare, and FUTA taxes, and federal income tax withholding. 2011 1040 Back Pay Treat back pay as wages in the year paid and withhold and pay employment taxes as required. 2011 1040 If back pay was awarded by a court or government agency to enforce a federal or state statute protecting an employee's right to employment or wages, special rules apply for reporting those wages to the Social Security Administration. 2011 1040 These rules also apply to litigation actions and settlement agreements or agency directives that are resolved out of court and not under a court decree or order. 2011 1040 Examples of pertinent statutes include, but are not limited to, the National Labor Relations Act, Fair Labor Standards Act, Equal Pay Act, and Age Discrimination in Employment Act. 2011 1040 See Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, and Form SSA-131, Employer Report of Special Wage Payments, for details. 2011 1040 Supplemental Unemployment Benefits If you pay, under a plan, supplemental unemployment benefits to a former employee, all or part of the payments may be taxable and subject to federal income tax withholding, depending on how the plan is funded. 2011 1040 Amounts that represent a return to the employee of amounts previously subject to tax are not taxable and are not subject to withholding. 2011 1040 You should withhold federal income tax on the taxable part of the payments made, under a plan, to an employee who is involuntarily separated because of a reduction in force, discontinuance of a plant or operation, or other similar condition. 2011 1040 It does not matter whether the separation is temporary or permanent. 2011 1040 There are special rules that apply in determining whether benefits qualify as supplemental unemployment benefits that are excluded from wages for social security, Medicare, and FUTA tax purposes. 2011 1040 To qualify as supplemental unemployment benefits for these purposes, the benefits must meet the following requirements. 2011 1040 Benefits are paid only to unemployed former employees who are laid off by the employer. 2011 1040 Eligibility for benefits depends on meeting prescribed conditions after termination. 2011 1040 The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state law, and the amount of regular weekly pay. 2011 1040 The right to benefits does not accrue until a prescribed period after termination. 2011 1040 Benefits are not attributable to the performance of particular services. 2011 1040 No employee has any right to the benefits until qualified and eligible to receive benefits. 2011 1040 Benefits may not be paid in a lump sum. 2011 1040 Withholding on taxable supplemental unemployment benefits must be based on the withholding certificate (Form W-4) that the employee gave to you. 2011 1040 Golden Parachute Payments A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. 2011 1040 Under the agreement, the corporation agrees to pay certain amounts to its key personnel in the event of a change in ownership or control of the corporation. 2011 1040 Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. 2011 1040 See Regulations section 1. 2011 1040 280G-1 for more information. 2011 1040 No deduction is allowed to the corporation for any excess parachute payment. 2011 1040 To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. 2011 1040 A parachute payment for purposes of section 280G is any payment that meets all of the following. 2011 1040 The payment is in the nature of compensation. 2011 1040 The payment is to, or for the benefit of, a disqualified individual. 2011 1040 A disqualified individual is anyone who at any time during the 12-month period prior to and ending on the date of the change in ownership or control of the corporation (the disqualified individual determination period) was an employee or independent contractor and was, in regard to that corporation, a shareholder, an officer, or highly compensated individual. 2011 1040 The payment is contingent on a change in ownership of the corporation, the effective control of the corporation, or the ownership of a substantial portion of the assets of the corporation. 2011 1040 The payment has an aggregate present value of at least three times the individual's base amount. 2011 1040 The base amount is the average annual compensation for service includible in the individual's gross income over the most recent 5 taxable years. 2011 1040 An excess parachute payment amount is the excess of any parachute payment over the base amount. 2011 1040 For more information, see Regulations section 1. 2011 1040 280G-1. 2011 1040 The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. 2011 1040 If the recipient is an employee, the 20% excise tax is to be withheld by the corporation. 2011 1040 Example. 2011 1040 An officer of a corporation receives a golden parachute payment of $400,000. 2011 1040 This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. 2011 1040 The excess parachute payment is $300,000 ($400,000 minus $100,000). 2011 1040 The corporation cannot deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). 2011 1040 Reporting golden parachute payments. 2011 1040   Golden parachute payments to employees must be reported on Form W-2. 2011 1040 See the General Instructions for Forms W-2 and W-3 for details. 2011 1040 For nonemployee reporting of these payments, see Box 7. 2011 1040 Nonemployee Compensation in the Instructions for Form 1099-MISC. 2011 1040 Exempt payments. 2011 1040   Payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules. 2011 1040 See section 280G(b)(5) and (6) for more information. 2011 1040 Interest-Free and Below-Market-Interest-Rate Loans In general, if an employer lends an employee more than $10,000 at an interest rate less than the current applicable federal rate (AFR), the difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee. 2011 1040 This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. 2011 1040 This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. 2011 1040 Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). 2011 1040 The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. 2011 1040 You can get these rates by calling 1-800-829-4933 or by visiting IRS. 2011 1040 gov. 2011 1040 For more information, see section 7872 and its related regulations. 2011 1040 Leave Sharing Plans If you establish a leave sharing plan for your employees that allows them to transfer leave to other employees for medical emergencies, the amounts paid to the recipients of the leave are considered wages. 2011 1040 These amounts are includible in the gross income of the recipients and are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. 2011 1040 Do not include these amounts in the income of the transferors. 2011 1040 These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies. 2011 1040 Nonqualified Deferred Compensation Plans Income Tax and Reporting Section 409A provides that all amounts deferred under a nonqualified deferred compensation (NQDC) plan for all tax years are currently includible in gross income (to the extent not subject to a substantial risk of forfeiture and not previously included in gross income) and subject to additional taxes, unless certain requirements are met pertaining to, among other things, elections to defer compensation and distributions under a NQDC plan. 2011 1040 Section 409A also includes rules that apply to certain trusts or similar arrangements associated with NQDC plans if the trusts or arrangements are located outside of the United States, are restricted to the provision of benefits in connection with a decline in the financial health of the plan sponsor, or contributions are made to the trust during certain periods such as when a qualified plan of the service recipient is underfunded. 2011 1040 Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. 2011 1040 Other changes to the Internal Revenue Code provide that the deferrals under a NQDC plan must be reported separately on Form W-2 or Form 1099-MISC, whichever applies. 2011 1040 Specific rules for reporting are provided in the instructions to the forms. 2011 1040 The provisions do not affect the application or reporting of social security, Medicare, or FUTA taxes. 2011 1040 The provisions do not prevent the inclusion of amounts in income or wages under other provisions of the Internal Revenue Code or common law principles, such as when amounts are actually or constructively received or irrevocably contributed to a separate fund. 2011 1040 For more information about nonqualified deferred compensation plans, see Regulations sections 1. 2011 1040 409A-1 through 1. 2011 1040 409A-6. 2011 1040 Notice 2008-113 provides guidance on the correction of certain operation failures of a NQDC plan. 2011 1040 Notice 2008-113, 2008-51 I. 2011 1040 R. 2011 1040 B. 2011 1040 1305, is available at www. 2011 1040 irs. 2011 1040 gov/irb/2008-51_IRB/ar12. 2011 1040 html. 2011 1040 Also see Notice 2010-6, 2010-3 I. 2011 1040 R. 2011 1040 B. 2011 1040 275, available at www. 2011 1040 irs. 2011 1040 gov/irb/2010-03_IRB/ar08. 2011 1040 html and Notice 2010-80, 2010-51 I. 2011 1040 R. 2011 1040 B. 2011 1040 853, available at www. 2011 1040 irs. 2011 1040 gov/irb/2010-51_IRB/ar08. 2011 1040 html. 2011 1040 Social security, Medicare, and FUTA taxes. 2011 1040   Employer contributions to nonqualified deferred compensation (NQDC) plans, as defined in the applicable regulations, are treated as wages subject to social security, Medicare, and FUTA taxes when the services are performed or the employee no longer has a substantial risk of forfeiting the right to the deferred compensation, whichever is later. 2011 1040   Amounts deferred are subject to social security, Medicare, and FUTA taxes at that time unless the amount that is deferred cannot be reasonably ascertained; for example, if benefits are based on final pay. 2011 1040 If the value of the future benefit is based on any factors that are not yet reasonably ascertainable, you may choose to estimate the value of the future benefit and withhold and pay social security, Medicare, and FUTA taxes on that amount. 2011 1040 You will have to determine later, when the amount is reasonably ascertainable, whether any additional taxes are required. 2011 1040 If taxes are not paid before the amounts become reasonably ascertainable, when the amounts become reasonably ascertainable they are subject to social security, Medicare, and FUTA taxes on the amounts deferred plus the income attributable to those amounts deferred. 2011 1040 For more information, see Regulations sections 31. 2011 1040 3121(v)(2)-1 and 31. 2011 1040 3306(r)(2)-1. 2011 1040 Tax-Sheltered Annuities Employer payments made by a public educational institution or a tax-exempt organization to purchase a tax-sheltered annuity for an employee (annual deferrals) are included in the employee's social security and Medicare wages, if the payments are made because of a salary reduction agreement. 2011 1040 However, they are not included in box 1 on Form W-2 in the year the deferrals are made and are not subject to federal income tax withholding. 2011 1040 See Regulations section 31. 2011 1040 3121(a)(5)-2 for the definition of a salary reduction agreement. 2011 1040 Contributions to a Simplified Employee Pension (SEP) An employer's SEP contributions to an employee's individual retirement arrangement (IRA) are excluded from the employee's gross income. 2011 1040 These excluded amounts are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. 2011 1040 However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. 2011 1040 See Publication 560 for more information about SEPs. 2011 1040 Salary reduction simplified employee pensions (SARSEP) repealed. 2011 1040   You may not establish a SARSEP after 1996. 2011 1040 However, SARSEPs established before January 1, 1997, may continue to receive contributions. 2011 1040 SIMPLE Retirement Plans Employer and employee contributions to a savings incentive match plan for employees (SIMPLE) retirement account (subject to limitations) are excludable from the employee's income and are exempt from federal income tax withholding. 2011 1040 An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. 2011 1040 However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. 2011 1040 For more information about SIMPLE retirement plans, see Publication 560. 2011 1040 6. 2011 1040 Sick Pay Reporting The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014. 2011 1040 Information about this change will be included in the revision of Publication 15-A that is expected to post to IRS. 2011 1040 gov in December 2014. 2011 1040 Special rules apply to the reporting of sick pay payments to employees. 2011 1040 How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company. 2011 1040 Sick pay is usually subject to social security, Medicare, and FUTA taxes. 2011 1040 For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. 2011 1040 Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. 2011 1040 Sick Pay Sick pay generally means any amount paid under a plan because of an employee's temporary absence from work due to injury, sickness, or disability. 2011 1040 It may be paid by either the employer or a third party, such as an insurance company. 2011 1040 Sick pay includes both short- and long-term benefits. 2011 1040 It is often expressed as a percentage of the employee's regular wages. 2011 1040 Payments That Are Not Sick Pay Sick pay does not include the following payments. 2011 1040 Disability retirement payments. 2011 1040 Disability retirement payments are not sick pay and are not discussed in this section. 2011 1040 Those payments are subject to the rules for federal income tax withholding from pensions and annuities. 2011 1040 See section 8. 2011 1040 Workers' compensation. 2011 1040 Payments because of a work-related injury or sickness that are made under a workers' compensation law are not sick pay and are not subject to employment taxes. 2011 1040 But see Payments in the nature of workers' compensation—public employees next. 2011 1040 Payments in the nature of workers' compensation—public employees. 2011 1040 State and local government employees, such as police officers and firefighters, sometimes receive payments due to an injury in the line of duty under a statute that is not the general workers' compensation law of a state. 2011 1040 If the statute limits benefits to work-related injuries or sickness and does not base payments on the employee's age, length of service, or prior contributions, the statute is “in the nature of” a workers' compensation law. 2011 1040 Payments under a statute in the nature of a workers' compensation law are not sick pay and are not subject to employment taxes. 2011 1040 For more information, see Regulations section 31. 2011 1040 3121(a)(2)-1. 2011 1040 Medical expense payments. 2011 1040 Payments under a definite plan or system for medical and hospitalization expenses, or for insurance covering these expenses, are not sick pay and are not subject to employment taxes. 2011 1040 Payments unrelated to absence from work. 2011 1040 Accident or health insurance payments unrelated to absence from work are not sick pay and are not subject to employment taxes. 2011 1040 These include payments for: Permanent loss of a member or function of the body, Permanent loss of the use of a member or function of the body, or Permanent disfigurement of the body. 2011 1040 Example. 2011 1040 Donald was injured in a car accident and lost an eye. 2011 1040 Under a policy paid for by Donald's employer, Delta Insurance Co. 2011 1040 paid Donald $20,000 as compensation for the loss of his eye. 2011 1040 Because the payment was determined by the type of injury and was unrelated to Donald's absence from work, it is not sick pay and is not subject to federal employment taxes. 2011 1040 Sick Pay Plan A sick pay plan is a plan or system established by an employer under which sick pay is available to employees generally or to a class or classes of employees. 2011 1040 This does not include a situation in which benefits are provided on a discretionary or occasional basis with merely an intention to aid particular employees in time of need. 2011 1040 You have a sick pay plan or system if the plan is in writing or is otherwise made known to employees, such as by a bulletin board notice or your long and established practice. 2011 1040 Some indications that you have a sick pay plan or system include references to the plan or system in the contract of employment, employer contributions to a plan, or segregated accounts for the payment of benefits. 2011 1040 Definition of employer. 2011 1040   The employer for whom the employee normally works, a term used in the following discussion, is either the employer for whom the employee was working at the time that the employee became sick or disabled or the last employer for whom the employee worked before becoming sick or disabled, if that employer made contributions to the sick pay plan on behalf of the sick or disabled employee. 2011 1040 Note. 2011 1040 Contributions to a sick pay plan through a cafeteria plan (by direct employer contributions or salary reduction) are employer contributions unless they are after-tax employee contributions (that is, included in taxable wages). 2011 1040 Third-Party Payers of Sick Pay Employer's agent. 2011 1040   An employer's agent is a third party that bears no insurance risk and is reimbursed on a cost-plus-fee basis for payment of sick pay and similar amounts. 2011 1040 A third party may be your agent even if the third party is responsible for determining which employees are eligible to receive payments. 2011 1040 For example, if a third party provides administrative services only, the third party is your agent. 2011 1040 If the third party is paid an insurance premium and is not reimbursed on a cost-plus-fee basis, the third party is not your agent. 2011 1040 Whether an insurance company or other third party is your agent depends on the terms of their agreement with you. 2011 1040   A third party that makes payments of sick pay as your agent is not considered the employer and generally has no responsibility for employment taxes. 2011 1040 This responsibility remains with you. 2011 1040 However, under an exception to this rule, the parties may enter into an agreement that makes the third-party agent responsible for employment taxes. 2011 1040 In this situation, the third-party agent should use its own name and EIN (rather than your name and EIN) for the responsibilities that it has assumed. 2011 1040 Third party not employer's agent. 2011 1040   A third party that makes payments of sick pay other than as an agent of the employer is liable for federal income tax withholding (if requested by the employee) and the employee part of the social security and Medicare taxes. 2011 1040   The third party is also liable for the employer part of the social security and Medicare taxes, and the FUTA tax, unless the third party transfers this liability to the employer for whom the employee normally works. 2011 1040 This liability is transferred if the third party takes the following steps. 2011 1040 Withholds the employee social security and Medicare taxes from the sick pay payments. 2011 1040 Makes timely deposits of the employee social security and Medicare taxes. 2011 1040 Notifies the employer for whom the employee normally works of the payments on which employee taxes were withheld and deposited. 2011 1040 The third party must notify the employer within the time required for the third party's deposit of the employee part of the social security and Medicare taxes. 2011 1040 For instance, if the third party is a monthly schedule depositor, it must notify the employer by the 15th day of the month following the month in which the sick pay payment is made because that is the day by which the deposit is required to be made. 2011 1040 The third party should notify the employer as soon as information on payments is available so that an employer required to make electronic deposits can make them timely. 2011 1040 For multi-employer plans, see the special rule discussed next. 2011 1040 Multi-employer plan timing rule. 2011 1040   A special rule applies to sick pay payments made to employees by a third-party insurer under an insurance contract with a multi-employer plan established under a collectively bargained agreement. 2011 1040 If the third-party insurer making the payments complies wi
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The 2011 1040

2011 1040 Index A Accelerated death benefits, Accelerated Death Benefits Accounting periods Change in, standard deduction not allowed, Persons not eligible for the standard deduction. 2011 1040 Accrued leave payment Disability retirement and, Accrued leave payment. 2011 1040 Adjusted gross income (AGI), Adjustments to Income Adjustments to income, Adjustments to Income Age Standard deduction for age 65 or older, Higher standard deduction for age (65 or older). 2011 1040 Age 65, Qualified Individual American Association of Retired Persons (AARP), Volunteer Income Tax Assistance and Tax Counseling for the Elderly. 2011 1040 Annuities, Pensions and Annuities Assistance (see Tax help) B Base amount, social security benefits, Base Amount Benefits Accident or health, Other compensation. 2011 1040 Long-term care, Long-Term Care Insurance Contracts No-fault insurance, Other compensation. 2011 1040 Sickness and injury, Sickness and Injury Benefits Social security, Are Any of Your Benefits Taxable? Veterans', Veterans' benefits. 2011 1040 Bequests, Gifts and inheritances. 2011 1040 Blind persons Standard deduction for, Higher standard deduction for blindness. 2011 1040 C Child and dependent care credit, Child and Dependent Care Credit Children Standard deduction for, Standard Deduction for Dependents Chronically ill persons, Chronically ill individual. 2011 1040 Chronically ill, defined, Terminally or chronically ill defined. 2011 1040 Compensation For services, Compensation for Services Loss or disfigurement, Other compensation. 2011 1040 Contributions Foreign employment, Foreign employment contributions. 2011 1040 Pension or annuity, Cost. 2011 1040 Cost, pension or annuity, Cost. 2011 1040 Credit Child and dependent care, Child and Dependent Care Credit Earned income, Earned Income Credit (EIC) The elderly or the disabled, Credit for the Elderly or the Disabled Credit for the elderly or the disabled, Credit for the Elderly or the Disabled D Death benefit, accelerated, Accelerated Death Benefits Decedents, Dependents. 2011 1040 Standard deduction, Decedent's final return. 2011 1040 Deductions Generally, Deductions Insurance premiums, Medical Insurance Premiums Itemized, Itemized Deductions Meals and lodging, Meals and Lodging Medical and dental, Medical and Dental Expenses Standard, Standard Deduction Dependents, Dependents. 2011 1040 Standard deduction for, Standard Deduction for Dependents Disabilities, individuals with Ownership and use test, Exception to use test for individuals with a disability. 2011 1040 Disability Person with, Persons with disabilities. 2011 1040 Physician's statement, Physician's statement. 2011 1040 Total and permanent, Permanent and total disability. 2011 1040 Disability income, Disability Pensions, Other compensation. 2011 1040 , Disability income. 2011 1040 Distributions, retirement plan, Retirement Plan Distributions Drugs (see Medicines) Dual-status taxpayers Standard deduction, Persons not eligible for the standard deduction. 2011 1040 E Early distributions, tax, Tax on Early Distributions Earned income credit, Earned Income Credit (EIC) Elderly or disabled credit, Credit for the Elderly or the Disabled Elderly persons Standard deduction for age 65 or older, Higher standard deduction for age (65 or older). 2011 1040 Employment tax withholding, Reminders Employment taxes, Employment taxes. 2011 1040 Endowment proceeds, Endowment Contract Proceeds Estimated tax, Tax Withholding and Estimated Tax, Estimated Tax, Who Must Make Estimated Tax Payments Excess accumulation, tax on, Tax on Excess Accumulation Exclusion, gain on sale of home, Maximum Amount of Exclusion F Federal Employees Compensation Act (FECA) payments, Federal Employees' Compensation Act (FECA). 2011 1040 Filing requirements Decedents, Dependents. 2011 1040 General requirements, General Requirements Surviving spouse, Surviving spouse. 2011 1040 Final return for decedent Standard deduction, Decedent's final return. 2011 1040 First-time homebuyer credit Recapture, Repaying the first-time homebuyer credit because you sold your home. 2011 1040 Form, Credit for the Elderly or the Disabled, Physician's statement. 2011 1040 1099-R, Form 1099-R. 2011 1040 , Form 1099-R. 2011 1040 5329, Form 5329. 2011 1040 8853, Accelerated Death Benefits Schedule R, Credit for the Elderly or the Disabled, Physician's statement. 2011 1040 W-4P, Withholding. 2011 1040 Free tax services, Free help with your tax return. 2011 1040 G Gain on sale of home (see Sale of home) General rule, pension or annuity, Pensions and Annuities Gifts, Gifts and inheritances. 2011 1040 H Help (see Tax help) Home care (see Nursing services) Home improvements, Home Improvements Home, sale of, Sale of Home Hospital services, Hospital Services Household help, Household Help I Income Adjustments, Adjustments to Income Disability, Disability Pensions, Disability income. 2011 1040 Gross, defined, Gross income. 2011 1040 Nontaxable, Taxable and Nontaxable Income Sale of home, Sale of Home Self-employment, Self-employed persons. 2011 1040 Taxable, Taxable and Nontaxable Income Individual retirement arrangement (IRA) Adjustments to income, Individual Retirement Arrangement (IRA) Contributions and Deductions Contributions, Contributions. 2011 1040 Deductible contribution, Deductible contribution. 2011 1040 Distributions, Individual Retirement Arrangements (IRAs) Inheritances, Gifts and inheritances. 2011 1040 Injury benefits, Sickness and Injury Benefits, Cost paid by you. 2011 1040 Insurance Accident and health, Other compensation. 2011 1040 , Medical Insurance Premiums Benefits, long-term care, Long-Term Care Insurance Contracts Benefits, no-fault insurance, Other compensation. 2011 1040 Life insurance proceeds, Life Insurance Proceeds Proceeds paid after death, Life Insurance Proceeds Proceeds paid before death, Accelerated Death Benefits Insurance premiums for retired public safety officers, Insurance Premiums for Retired Public Safety Officers Itemized deductions, Itemized Deductions Married filing separately One spouse has itemized, Persons not eligible for the standard deduction. 2011 1040 L Life insurance proceeds, Life Insurance Proceeds Long-term care, Long-Term Care Chronically ill individuals, Chronically ill individual. 2011 1040 Maintenance and personal care services, Maintenance and personal care services. 2011 1040 Qualified insurance contracts, Qualified long-term care insurance contracts. 2011 1040 Qualified services, Qualified long-term care services. 2011 1040 Long-term care insurance, Long-Term Care Insurance Contracts Loss or disfigurement compensation, Other compensation. 2011 1040 Lump-sum distributions, Lump-sum distributions. 2011 1040 Lump-sum election, social security, Lump-Sum Election M Maintenance and personal care services, Maintenance and personal care services. 2011 1040 Married filing separately Itemized deductions One spouse has itemized so other must as well, Persons not eligible for the standard deduction. 2011 1040 Married taxpayers Age 65 or older spouse Standard deduction, Spouse 65 or older or blind. 2011 1040 Blind spouse Standard deduction, Spouse 65 or older or blind. 2011 1040 Meals and lodging expenses, Meals and Lodging Medical expenses, Medical and Dental Expenses Medicare, Medicare Part A. 2011 1040 , Medicare Part B. 2011 1040 , Medicare Part D. 2011 1040 Benefits, Medicare. 2011 1040 Medicines, Medicines Imported, Imported medicines and drugs. 2011 1040 Military retirement pay, Military Retirement Pay Minimum distributions, Tax on Excess Accumulation Minimum wage, Substantial gainful activity. 2011 1040 Missing children, Reminders Mortgage assistance payments, Mortgage assistance payments. 2011 1040 N Nonperiodic distributions, Nonperiodic Distributions Nonqualified use, Period of nonqualified use. 2011 1040 Nonresident aliens Standard deduction, Persons not eligible for the standard deduction. 2011 1040 Nontaxable income, Payments from a state fund for victims of crime. 2011 1040 Accident or health insurance benefits, Other compensation. 2011 1040 Bequests, Gifts and inheritances. 2011 1040 Generally, Taxable and Nontaxable Income Gifts, Gifts and inheritances. 2011 1040 Inheritances, Gifts and inheritances. 2011 1040 Mortgage assistance payments, Mortgage assistance payments. 2011 1040 No-fault insurance benefits, Other compensation. 2011 1040 Nutrition program for elderly, Nutrition Program for the Elderly. 2011 1040 Public assistance payments, Welfare benefits. 2011 1040 Sickness and injury benefits, Sickness and Injury Benefits Veterans' benefits, Veterans' benefits. 2011 1040 Winter energy use, Payments to reduce cost of winter energy use. 2011 1040 Workers' compensation, Workers' Compensation Nursing home, Nursing home. 2011 1040 Nursing services, Nursing Services Chronically ill individuals, Chronically ill individual. 2011 1040 Nutrition program for elderly, Nutrition Program for the Elderly. 2011 1040 O Old-age, survivors, and disability insurance benefits (OASDI), Old-age, survivors, and disability insurance benefits (OASDI). 2011 1040 Other items, Other Items Overall limitation, Overall limitation. 2011 1040 P Payments, estimated tax, Estimated Tax Pensions, Pensions and Annuities Pensions, disability, Disability Pensions Photographs, missing children, Reminders Physician's statement, disability, Physician's statement. 2011 1040 Prepaid insurance premiums, Prepaid insurance premiums. 2011 1040 Preparer, paid, Reminders Preparing your return, Return preparation assistance. 2011 1040 Profit-sharing plan, Retirement and profit-sharing plans. 2011 1040 Public assistance payments, Welfare benefits. 2011 1040 Publications (see Tax help) Q Qualified retirement plan, Tax on Early Distributions R Railroad retirement benefits, Railroad Retirement Benefits, Social Security and Equivalent Railroad Retirement Benefits Repayments Social security benefits, Repayment of Benefits Reporting pension income, How to report. 2011 1040 Residence, sale of, Sale of Home Retirement plans, distributions, Retirement Plan Distributions Returns Decedent, Dependents. 2011 1040 Executors and administrators, Dependents. 2011 1040 Filing requirements, 2013 Filing Requirements Surviving spouse, Surviving spouse. 2011 1040 Reverse mortgages, Reverse Mortgages S Salaries (see Compensation) Sale of Home First-time homebuyer credit, Repaying the first-time homebuyer credit because you sold your home. 2011 1040 Surviving spouse, Reminders Sale of home, Sale of Home Self-employed, Self-employed persons. 2011 1040 Short tax year Change in annual accounting period, Persons not eligible for the standard deduction. 2011 1040 Sickness and injury benefits, Sickness and Injury Benefits Simplified method, Pensions and Annuities Social security benefits, Social Security and Equivalent Railroad Retirement Benefits Standard deduction, Standard Deduction Age 65 or older, Higher standard deduction for age (65 or older). 2011 1040 Blind persons, Higher standard deduction for blindness. 2011 1040 Dependents, Standard Deduction for Dependents Final return of decedent, Decedent's final return. 2011 1040 Married filing separately One spouse has itemized, Persons not eligible for the standard deduction. 2011 1040 Starting date, annuity, Cost. 2011 1040 State fund for victims of crime, Payments from a state fund for victims of crime. 2011 1040 Substantial gainful activity, Substantial gainful activity. 2011 1040 Surrender of Iife insurance, Surrender of policy for cash. 2011 1040 Surviving Spouse, Reminders Surviving spouse, Surviving spouse. 2011 1040 Surviving spouse, insurance, Surviving spouse. 2011 1040 Survivors of retirees, Survivors of retirees. 2011 1040 T Tax Early distributions, Tax on Early Distributions Estimated, Tax Withholding and Estimated Tax, Estimated Tax Excess accumulation, Tax on Excess Accumulation Tax counseling for the elderly (TCE), Volunteer Income Tax Assistance and Tax Counseling for the Elderly. 2011 1040 Tax help, How To Get Tax Help Tax option, 10-year, Lump-sum distributions. 2011 1040 Tax return preparers, Reminders Taxable income, Taxable and Nontaxable Income Taxation of benefits, Are Any of Your Benefits Taxable? Terminally ill, defined, Terminally or chronically ill defined. 2011 1040 Total and permanent disability, defined, Permanent and total disability. 2011 1040 Transportation expenses, Transportation TTY/TDD information, How To Get Tax Help U U. 2011 1040 S. 2011 1040 citizen or resident, U. 2011 1040 S. 2011 1040 citizen or resident alien. 2011 1040 Unemployment compensation, Unemployment compensation. 2011 1040 V Veterans' benefits, Veterans' benefits. 2011 1040 Viatical settlement, Accelerated Death Benefits Victims of crime, Payments from a state fund for victims of crime. 2011 1040 Volunteer income tax assistance (VITA), Volunteer Income Tax Assistance and Tax Counseling for the Elderly. 2011 1040 Volunteer work, Volunteer work. 2011 1040 W Wages (see Compensation) Winter energy use payments, Payments to reduce cost of winter energy use. 2011 1040 Withholding Employment tax, Reminders Pensions and annuities, Withholding. 2011 1040 Workers' compensation, Workers' Compensation Worksheets, social security, Which worksheet to use. 2011 1040 Prev  Up     Home   More Online Publications