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Amend A Tax Return

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Amend A Tax Return

Amend a tax return 7. Amend a tax return   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Amend a tax return For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Amend a tax return There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Amend a tax return However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Amend a tax return See Contributions , later. Amend a tax return This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Amend a tax return What is the tax benefit of the Coverdell ESA. Amend a tax return   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Amend a tax return   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Amend a tax return See Tax-Free Distributions , later. Amend a tax return    Table 7-1 summarizes the main features of the Coverdell ESA. Amend a tax return Table 7-1. Amend a tax return Coverdell ESA at a Glance Do not rely on this table alone. Amend a tax return It provides only general highlights. Amend a tax return See the text for definitions of terms in bold type and for more complete explanations. Amend a tax return Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Amend a tax return Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Amend a tax return Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Amend a tax return Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Amend a tax return Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Amend a tax return What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Amend a tax return When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Amend a tax return To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Amend a tax return The document creating and governing the account must be in writing and must satisfy the following requirements. Amend a tax return The trustee or custodian must be a bank or an entity approved by the IRS. Amend a tax return The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Amend a tax return The contribution is in cash. Amend a tax return The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Amend a tax return The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Amend a tax return Money in the account cannot be invested in life insurance contracts. Amend a tax return Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Amend a tax return The balance in the account generally must be distributed within 30 days after the earlier of the following events. Amend a tax return The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Amend a tax return The beneficiary's death. Amend a tax return Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Amend a tax return For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Amend a tax return Designated beneficiary. Amend a tax return   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Amend a tax return Contributions to a qualified tuition program (QTP). Amend a tax return   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Amend a tax return In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Amend a tax return See chapter 8, Qualified Tuition Program . Amend a tax return Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Amend a tax return Eligible postsecondary school. Amend a tax return   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Amend a tax return S. Amend a tax return Department of Education. Amend a tax return It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Amend a tax return The educational institution should be able to tell you if it is an eligible educational institution. Amend a tax return   Certain educational institutions located outside the United States also participate in the U. Amend a tax return S. Amend a tax return Department of Education's Federal Student Aid (FSA) programs. Amend a tax return Eligible elementary or secondary school. Amend a tax return   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Amend a tax return Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Amend a tax return As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Amend a tax return The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Amend a tax return Tuition and fees. Amend a tax return Books, supplies, and equipment. Amend a tax return Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Amend a tax return Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Amend a tax return The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Amend a tax return The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Amend a tax return The actual amount charged if the student is residing in housing owned or operated by the school. Amend a tax return Half-time student. Amend a tax return   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Amend a tax return Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Amend a tax return As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Amend a tax return There are special rules for computer-related expenses. Amend a tax return The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Amend a tax return Tuition and fees. Amend a tax return Books, supplies, and equipment. Amend a tax return Academic tutoring. Amend a tax return Special needs services for a special needs beneficiary. Amend a tax return The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Amend a tax return Room and board. Amend a tax return Uniforms. Amend a tax return Transportation. Amend a tax return Supplementary items and services (including extended day programs). Amend a tax return The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Amend a tax return (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Amend a tax return ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Amend a tax return For individuals filing joint returns, that amount is $220,000. Amend a tax return Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Amend a tax return There is no requirement that an organization's income be below a certain level. Amend a tax return Contributions must meet all of the following requirements. Amend a tax return They must be in cash. Amend a tax return They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Amend a tax return They must be made by the due date of the contributor's tax return (not including extensions). Amend a tax return Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Amend a tax return Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Amend a tax return Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Amend a tax return When contributions considered made. Amend a tax return   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Amend a tax return They must be made by the due date (not including extensions) for filing your return for the preceding year. Amend a tax return   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Amend a tax return Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Amend a tax return Limit for each designated beneficiary. Amend a tax return   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Amend a tax return This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Amend a tax return Rollovers are discussed under Rollovers and Other Transfers , later. Amend a tax return Example. Amend a tax return When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Amend a tax return In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Amend a tax return For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Amend a tax return Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Amend a tax return These contributions could be put into any of Maria's Coverdell ESA accounts. Amend a tax return Limit for each contributor. Amend a tax return   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Amend a tax return This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Amend a tax return Example. Amend a tax return The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Amend a tax return If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Amend a tax return Reduced limit. Amend a tax return   Your contribution limit may be reduced. Amend a tax return If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Amend a tax return If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Amend a tax return Table 7-2. Amend a tax return Coverdell ESA Contributions at a Glance Do not rely on this table alone. Amend a tax return It provides only general highlights. Amend a tax return See the text for more complete explanations. Amend a tax return Question Answer Are contributions deductible? No. Amend a tax return What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Amend a tax return What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Amend a tax return What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Amend a tax return Can contributions other than cash be made to a Coverdell ESA? No. Amend a tax return When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Amend a tax return Modified adjusted gross income (MAGI). Amend a tax return   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Amend a tax return MAGI when using Form 1040A. Amend a tax return   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Amend a tax return MAGI when using Form 1040. Amend a tax return   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Amend a tax return MAGI when using Form 1040NR. Amend a tax return   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Amend a tax return MAGI when using Form 1040NR-EZ. Amend a tax return   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Amend a tax return   If you have any of these adjustments, you can use Worksheet 7-1. Amend a tax return MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Amend a tax return Worksheet 7-1. Amend a tax return MAGI for a Coverdell ESA 1. Amend a tax return Enter your adjusted gross income  (Form 1040, line 38)   1. Amend a tax return   2. Amend a tax return Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Amend a tax return       3. Amend a tax return Enter your foreign housing deduction (Form 2555, line 50)   3. Amend a tax return         4. Amend a tax return Enter the amount of income from Puerto Rico you are excluding   4. Amend a tax return       5. Amend a tax return Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Amend a tax return       6. Amend a tax return Add lines 2, 3, 4, and 5   6. Amend a tax return   7. Amend a tax return Add lines 1 and 6. Amend a tax return This is your  modified adjusted gross income   7. Amend a tax return   Figuring the limit. Amend a tax return    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Amend a tax return The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Amend a tax return The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Amend a tax return Subtract the result from $2,000. Amend a tax return This is the amount you can contribute for each beneficiary. Amend a tax return You can use Worksheet 7-2. Amend a tax return Coverdell ESA Contribution Limit to figure the limit on contributions. Amend a tax return    Worksheet 7-2. Amend a tax return Coverdell ESA Contribution Limit 1. Amend a tax return Maximum contribution   1. Amend a tax return $2,000 2. Amend a tax return Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Amend a tax return   3. Amend a tax return Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Amend a tax return   4. Amend a tax return Subtract line 3 from line 2. Amend a tax return If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Amend a tax return   5. Amend a tax return Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Amend a tax return     Note. Amend a tax return If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Amend a tax return You are not allowed to contribute to a Coverdell ESA for 2013. Amend a tax return       6. Amend a tax return Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Amend a tax return . Amend a tax return 7. Amend a tax return Multiply line 1 by line 6   7. Amend a tax return   8. Amend a tax return Subtract line 7 from line 1   8. Amend a tax return   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Amend a tax return Example. Amend a tax return Paul, who is single, had a MAGI of $96,500 for 2013. Amend a tax return Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Amend a tax return Worksheet 7-2. Amend a tax return Coverdell ESA Contribution Limit—Illustrated 1. Amend a tax return Maximum contribution   1. Amend a tax return $2,000 2. Amend a tax return Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Amend a tax return 96,500 3. Amend a tax return Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Amend a tax return 95,000 4. Amend a tax return Subtract line 3 from line 2. Amend a tax return If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Amend a tax return 1,500 5. Amend a tax return Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Amend a tax return 15,000   Note. Amend a tax return If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Amend a tax return You are not allowed to  contribute to a Coverdell ESA for 2013. Amend a tax return       6. Amend a tax return Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Amend a tax return . Amend a tax return 100 7. Amend a tax return Multiply line 1 by line 6   7. Amend a tax return 200 8. Amend a tax return Subtract line 7 from line 1   8. Amend a tax return 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Amend a tax return Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Amend a tax return Excess contributions are the total of the following two amounts. Amend a tax return Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Amend a tax return Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Amend a tax return Exceptions. Amend a tax return   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Amend a tax return   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Amend a tax return You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Amend a tax return Box 2 of that form will show the amount of earnings on your excess contributions. Amend a tax return Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Amend a tax return See Instructions for Recipient on the back of copy B of your Form 1099-Q. Amend a tax return Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Amend a tax return For more information, see Taxable Distributions , later. Amend a tax return   The excise tax does not apply to any rollover contribution. Amend a tax return Note. Amend a tax return Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Amend a tax return Example. Amend a tax return In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Amend a tax return Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Amend a tax return In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Amend a tax return Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Amend a tax return (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Amend a tax return Figuring and reporting the additional tax. Amend a tax return   You figure this excise tax in Part V of Form 5329. Amend a tax return Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Amend a tax return Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Amend a tax return The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Amend a tax return Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Amend a tax return This age limitation does not apply if the new beneficiary is a special needs beneficiary. Amend a tax return An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Amend a tax return Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Amend a tax return These are not taxable distributions. Amend a tax return Members of the beneficiary's family. Amend a tax return   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Amend a tax return Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Amend a tax return Brother, sister, stepbrother, or stepsister. Amend a tax return Father or mother or ancestor of either. Amend a tax return Stepfather or stepmother. Amend a tax return Son or daughter of a brother or sister. Amend a tax return Brother or sister of father or mother. Amend a tax return Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Amend a tax return The spouse of any individual listed above. Amend a tax return First cousin. Amend a tax return Example. Amend a tax return When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Amend a tax return He wanted to give this money to his younger sister, who was still in high school. Amend a tax return In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Amend a tax return Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Amend a tax return This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Amend a tax return Military death gratuity. Amend a tax return   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Amend a tax return Such payments are made to an eligible survivor upon the death of a member of the armed forces. Amend a tax return The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Amend a tax return   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Amend a tax return The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Amend a tax return   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Amend a tax return See Distributions , later. Amend a tax return The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Amend a tax return Changing the Designated Beneficiary The designated beneficiary can be changed. Amend a tax return See Members of the beneficiary's family , earlier. Amend a tax return There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Amend a tax return Example. Amend a tax return Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Amend a tax return Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Amend a tax return Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Amend a tax return After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Amend a tax return Example. Amend a tax return In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Amend a tax return In this process, the account was transferred into her name. Amend a tax return Peg now treats the funds in this Coverdell ESA as if she were the original owner. Amend a tax return Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Amend a tax return Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Amend a tax return See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Amend a tax return Table 7-3. Amend a tax return Coverdell ESA Distributions at a Glance Do not rely on this table alone. Amend a tax return It provides only general highlights. Amend a tax return See the text for definitions of terms in bold type and for more complete explanations. Amend a tax return Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Amend a tax return After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Amend a tax return Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Amend a tax return Also, certain transfers to members of the beneficiary's family are permitted. Amend a tax return Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Amend a tax return Adjusted qualified education expenses. Amend a tax return   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Amend a tax return Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Amend a tax return The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Amend a tax return Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Amend a tax return Do not report tax-free distributions (including qualifying rollovers) on your tax return. Amend a tax return Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Amend a tax return Excess distribution. Amend a tax return   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Amend a tax return Earnings and basis. Amend a tax return   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Amend a tax return The amount of your gross distribution will be shown in box 1. Amend a tax return For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Amend a tax return This will be shown in the blank box below boxes 5 and 6. Amend a tax return   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Amend a tax return Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Amend a tax return Figure the taxable portion for 2013 as shown in the following steps. Amend a tax return Multiply the total amount distributed by a fraction. Amend a tax return The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Amend a tax return Subtract the amount figured in (1) from the total amount distributed during 2013. Amend a tax return The result is the amount of earnings included in the distribution(s). Amend a tax return Multiply the amount of earnings figured in (2) by a fraction. Amend a tax return The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Amend a tax return Subtract the amount figured in (3) from the amount figured in (2). Amend a tax return The result is the amount the beneficiary must include in income. Amend a tax return The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Amend a tax return Example. Amend a tax return You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Amend a tax return There were no contributions in 2013. Amend a tax return This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Amend a tax return The value (balance) of your account on December 31, 2013, was $950. Amend a tax return You had $700 of adjusted qualified education expenses (AQEE) for the year. Amend a tax return Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Amend a tax return   1. Amend a tax return $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Amend a tax return $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Amend a tax return $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Amend a tax return $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Amend a tax return Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Amend a tax return Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Amend a tax return Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Amend a tax return This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Amend a tax return Example. Amend a tax return Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Amend a tax return He paid his college expenses from the following sources. Amend a tax return     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Amend a tax return Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Amend a tax return Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Amend a tax return     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Amend a tax return The balance in Derek's account was $1,800 on December 31, 2013. Amend a tax return Prior to 2013, $2,100 had been contributed to this account. Amend a tax return Contributions for 2013 totaled $400. Amend a tax return Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Amend a tax return   1. Amend a tax return $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Amend a tax return $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Amend a tax return $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Amend a tax return $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Amend a tax return This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Amend a tax return Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Amend a tax return The following two examples illustrate possible allocations. Amend a tax return Example 1. Amend a tax return In 2013, Beatrice graduated from high school and began her first semester of college. Amend a tax return That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Amend a tax return To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Amend a tax return No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Amend a tax return She did not receive any tax-free educational assistance in 2013. Amend a tax return Beatrice must allocate her total qualified education expenses between the two distributions. Amend a tax return Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Amend a tax return The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Amend a tax return Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Amend a tax return She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Amend a tax return Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Amend a tax return (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Amend a tax return ) Example 2. Amend a tax return Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Amend a tax return In this case, she allocates her qualified education expenses as follows. Amend a tax return Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Amend a tax return Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Amend a tax return   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Amend a tax return See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Amend a tax return   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Amend a tax return The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Amend a tax return However, you do not have to allocate your expenses in the same way. Amend a tax return You can use any reasonable method. Amend a tax return Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Amend a tax return You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Amend a tax return Your basis is the total amount of contributions to that Coverdell ESA. Amend a tax return You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Amend a tax return If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Amend a tax return ) from all such accounts in order to determine your taxable earnings for the year. Amend a tax return By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Amend a tax return For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Amend a tax return Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Amend a tax return Exceptions. Amend a tax return   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Amend a tax return Made because the designated beneficiary is disabled. Amend a tax return A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Amend a tax return A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Amend a tax return Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Amend a tax return Made on account of the attendance of the designated beneficiary at a U. Amend a tax return S. Amend a tax return military academy (such as the USMA at West Point). Amend a tax return This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Amend a tax return S. Amend a tax return Code) attributable to such attendance. Amend a tax return Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Amend a tax return Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Amend a tax return The distributed earnings must be included in gross income for the year in which the excess contribution was made. Amend a tax return Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Amend a tax return Figuring the additional tax. Amend a tax return    Use Part II of Form 5329, to figure any additional tax. Amend a tax return Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Amend a tax return When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Amend a tax return The designated beneficiary reaches age 30. Amend a tax return In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Amend a tax return However, this rule does not apply if the beneficiary is a special needs beneficiary. Amend a tax return The designated beneficiary dies before reaching age 30. Amend a tax return In this case, the remaining assets must generally be distributed within 30 days after the date of death. Amend a tax return Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Amend a tax return (“Family member” was defined earlier under Rollovers . Amend a tax return ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Amend a tax return This age limitation does not apply if the new beneficiary is a special needs beneficiary. Amend a tax return There are no tax consequences as a result of the transfer. Amend a tax return How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Amend a tax return You determine these earnings as shown in the following two steps. Amend a tax return Multiply the amount distributed by a fraction. Amend a tax return The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Amend a tax return Subtract the amount figured in (1) from the total amount distributed during 2013. Amend a tax return The result is the amount of earnings included in the distribution. Amend a tax return For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Amend a tax return The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Amend a tax return Worksheet 7-3 Instructions. Amend a tax return Coverdell ESA—Taxable Distributions and Basis Line G. Amend a tax return Enter the total distributions received from all Coverdell ESAs during 2013. Amend a tax return Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Amend a tax return Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Amend a tax return Line 2. Amend a tax return Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Amend a tax return   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Amend a tax return For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Amend a tax return For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Amend a tax return You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Amend a tax return Line 4. Amend a tax return Enter the total distributions received from this Coverdell ESA in 2013. Amend a tax return Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Amend a tax return   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Amend a tax return Line 7. Amend a tax return Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Amend a tax return A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Amend a tax return   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Amend a tax return An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Amend a tax return Worksheet 7-3. Amend a tax return Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Amend a tax return • • • Complete Part I, lines A through H, on only one worksheet. Amend a tax return  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Amend a tax return  Complete Part III, the Summary (line 16), on only one worksheet. Amend a tax return Part I. Amend a tax return Qualified Education Expenses (Complete for total expenses)       A. Amend a tax return Enter your total qualified education expenses for 2013   A. Amend a tax return   B. Amend a tax return Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Amend a tax return         C. Amend a tax return Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Amend a tax return Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Amend a tax return         D. Amend a tax return Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Amend a tax return         E. Amend a tax return Add lines B, C, and D   D. Amend a tax return   F. Amend a tax return Subtract line E from line A. Amend a tax return This is your adjusted qualified education expense for 2013   E. Amend a tax return   G. Amend a tax return Enter your total distributions from all Coverdell ESAs during 2013. Amend a tax return Do not include rollovers  or the return of excess contributions (see instructions)   F. Amend a tax return   H. Amend a tax return Divide line F by line G. Amend a tax return Enter the result as a decimal (rounded to at least 3 places). Amend a tax return If the  result is 1. Amend a tax return 000 or more, enter 1. Amend a tax return 000   G. Amend a tax return . Amend a tax return Part II. Amend a tax return Taxable Distributions and Basis (Complete separately for each account) 1. Amend a tax return Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Amend a tax return Do not include rollovers or the return of excess contributions   1. Amend a tax return   2. Amend a tax return Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Amend a tax return   3. Amend a tax return Add lines 1 and 2   3. Amend a tax return   4. Amend a tax return Enter the total distributions from this Coverdell ESA during 2013. Amend a tax return Do not include rollovers  or the return of excess contributions (see instructions)   4. Amend a tax return   5. Amend a tax return Multiply line 4 by line H. Amend a tax return This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Amend a tax return         6. Amend a tax return Subtract line 5 from line 4   6. Amend a tax return         7. Amend a tax return Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Amend a tax return         8. Amend a tax return Add lines 4 and 7   8. Amend a tax return         9. Amend a tax return Divide line 3 by line 8. Amend a tax return Enter the result as a decimal (rounded to  at least 3 places). Amend a tax return If the result is 1. Amend a tax return 000 or more, enter 1. Amend a tax return 000   9. Amend a tax return . Amend a tax return       10. Amend a tax return Multiply line 4 by line 9. Amend a tax return This is the amount of basis allocated to your  distributions, and is tax free   10. Amend a tax return     Note. Amend a tax return If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Amend a tax return       11. Amend a tax return Subtract line 10 from line 4   11. Amend a tax return   12. Amend a tax return Divide line 5 by line 4. Amend a tax return Enter the result as a decimal (rounded to  at least 3 places). Amend a tax return If the result is 1. Amend a tax return 000 or more, enter 1. Amend a tax return 000   12. Amend a tax return . Amend a tax return       13. Amend a tax return Multiply line 11 by line 12. Amend a tax return This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Amend a tax return   14. Amend a tax return Subtract line 13 from line 11. Amend a tax return This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Amend a tax return   15. Amend a tax return Subtract line 10 from line 3. Amend a tax return This is your basis in this Coverdell ESA as of December 31, 2013   15. Amend a tax return   Part III. Amend a tax return Summary (Complete only once)       16. Amend a tax return Taxable amount. Amend a tax return Add together all amounts on line 14 for all your Coverdell ESAs. Amend a tax return Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Amend a tax return   Prev  Up  Next   Home   More Online Publications
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Amend a tax return Publication 15 - Main Content Table of Contents 1. Amend a tax return Employer Identification Number (EIN) 2. Amend a tax return Who Are Employees?Relief provisions. Amend a tax return Business Owned and Operated by Spouses 3. Amend a tax return Family Employees 4. Amend a tax return Employee's Social Security Number (SSN)Registering for SSNVS. Amend a tax return 5. Amend a tax return Wages and Other CompensationAccountable plan. Amend a tax return Nonaccountable plan. Amend a tax return Per diem or other fixed allowance. Amend a tax return 50% test. Amend a tax return Health Savings Accounts and medical savings accounts. Amend a tax return Nontaxable fringe benefits. Amend a tax return When fringe benefits are treated as paid. Amend a tax return Valuation of fringe benefits. Amend a tax return Withholding on fringe benefits. Amend a tax return Depositing taxes on fringe benefits. Amend a tax return 6. Amend a tax return TipsOrdering rule. Amend a tax return 7. Amend a tax return Supplemental Wages 8. Amend a tax return Payroll Period 9. Amend a tax return Withholding From Employees' WagesIncome Tax Withholding Social Security and Medicare Taxes Part-Time Workers 10. Amend a tax return Required Notice to Employees About the Earned Income Credit (EIC) 11. Amend a tax return Depositing TaxesWhen To Deposit How To Deposit Deposit Penalties 12. Amend a tax return Filing Form 941 or Form 944 13. Amend a tax return Reporting Adjustments to Form 941 or Form 944Current Period Adjustments Prior Period Adjustments Wage Repayments 14. Amend a tax return Federal Unemployment (FUTA) TaxSuccessor employer. Amend a tax return Household employees. Amend a tax return When to deposit. Amend a tax return Household employees. Amend a tax return Electronic filing by reporting agents. Amend a tax return 16. Amend a tax return How To Use the Income Tax Withholding TablesWage Bracket Method Percentage Method Alternative Methods of Income Tax Withholding How To Get Tax Help 1. Amend a tax return Employer Identification Number (EIN) If you are required to report employment taxes or give tax statements to employees or annuitants, you need an EIN. Amend a tax return The EIN is a nine-digit number the IRS issues. Amend a tax return The digits are arranged as follows: 00-0000000. Amend a tax return It is used to identify the tax accounts of employers and certain others who have no employees. Amend a tax return Use your EIN on all of the items you send to the IRS and SSA. Amend a tax return For more information, see Publication 1635, Employer Identification Number: Understanding Your EIN. Amend a tax return If you do not have an EIN, you may apply for one online. Amend a tax return Go to the IRS. Amend a tax return gov and click on the Apply for an EIN Online link under Tools. Amend a tax return You may also apply for an EIN by calling 1-800-829-4933, or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Amend a tax return Do not use an SSN in place of an EIN. Amend a tax return You should have only one EIN. Amend a tax return If you have more than one and are not sure which one to use, call 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Amend a tax return Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Amend a tax return The IRS will tell you which number to use. Amend a tax return If you took over another employer's business (see Successor employer in section 9), do not use that employer's EIN. Amend a tax return If you have applied for an EIN but do not have your EIN by the time a return is due, file a paper return and write “Applied For” and the date you applied for it in the space shown for the number. Amend a tax return 2. Amend a tax return Who Are Employees? Generally, employees are defined either under common law or under statutes for certain situations. Amend a tax return See Publication 15-A for details on statutory employees and nonemployees. Amend a tax return Employee status under common law. Amend a tax return   Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. Amend a tax return This is so even when you give the employee freedom of action. Amend a tax return What matters is that you have the right to control the details of how the services are performed. Amend a tax return See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Amend a tax return   Generally, people in business for themselves are not employees. Amend a tax return For example, doctors, lawyers, veterinarians, and others in an independent trade in which they offer their services to the public are usually not employees. Amend a tax return However, if the business is incorporated, corporate officers who work in the business are employees of the corporation. Amend a tax return   If an employer-employee relationship exists, it does not matter what it is called. Amend a tax return The employee may be called an agent or independent contractor. Amend a tax return It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. Amend a tax return Statutory employees. Amend a tax return   If someone who works for you is not an employee under the common law rules discussed earlier, do not withhold federal income tax from his or her pay, unless backup withholding applies. Amend a tax return Although the following persons may not be common law employees, they are considered employees by statute for social security, Medicare, and FUTA tax purposes under certain conditions. Amend a tax return An agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else. Amend a tax return A full-time life insurance salesperson who sells primarily for one company. Amend a tax return A homeworker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates. Amend a tax return A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. Amend a tax return The orders must be for merchandise for resale or supplies for use in the customer's business. Amend a tax return The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging. Amend a tax return    Statutory nonemployees. Amend a tax return   Direct sellers, qualified real estate agents, and certain companion sitters are, by law, considered nonemployees. Amend a tax return They are generally treated as self-employed for all federal tax purposes, including income and employment taxes. Amend a tax return H-2A agricultural workers. Amend a tax return   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Amend a tax return Treating employees as nonemployees. Amend a tax return   You will generally be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold these taxes because you treated an employee as a nonemployee. Amend a tax return You may be able to calculate your liability using special section 3509 rates for the employee share of social security and Medicare taxes and the federal income tax withholding. Amend a tax return The applicable rates depend on whether you filed required Forms 1099. Amend a tax return You cannot recover the employee share of social security, or Medicare tax, or income tax withholding from the employee if the tax is paid under section 3509. Amend a tax return You are liable for the income tax withholding regardless of whether the employee paid income tax on the wages. Amend a tax return You continue to owe the full employer share of social security and Medicare taxes. Amend a tax return The employee remains liable for the employee share of social security and Medicare taxes. Amend a tax return See Internal Revenue Code section 3509 for details. Amend a tax return Also see the Instructions for Form 941-X. Amend a tax return   Section 3509 rates are not available if you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes. Amend a tax return Section 3509 is not available for reclassifying statutory employees. Amend a tax return See Statutory employees , earlier in this section. Amend a tax return   If the employer issued required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Amend a tax return 2% plus 20% of the employee rate (see the Instructions for Form 941-X). Amend a tax return For Medicare taxes; employer rate of 1. Amend a tax return 45% plus 20% of the employee rate of 1. Amend a tax return 45%, for a total rate of 1. Amend a tax return 74% of wages. Amend a tax return For Additional Medicare Tax; 0. Amend a tax return 18% (20% of the employee rate of 0. Amend a tax return 9%) of wages subject to Additional Medicare Tax. Amend a tax return For income tax withholding, the rate is 1. Amend a tax return 5% of wages. Amend a tax return   If the employer did not issue required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Amend a tax return 2% plus 40% of the employee rate (see the Instructions for Form 941-X). Amend a tax return For Medicare taxes; employer rate of 1. Amend a tax return 45% plus 40% of the employee rate of 1. Amend a tax return 45%, for a total rate of 2. Amend a tax return 03% of wages. Amend a tax return For Additional Medicare Tax; 0. Amend a tax return 36% (40% of the employee rate of 0. Amend a tax return 9%) of wages subject to Additional Medicare Tax. Amend a tax return For income tax withholding, the rate is 3. Amend a tax return 0% of wages. Amend a tax return Relief provisions. Amend a tax return   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. Amend a tax return To get this relief, you must file all required federal tax returns, including information returns, on a basis consistent with your treatment of the worker. Amend a tax return You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. Amend a tax return See Publication 1976, Do You Qualify for Relief Under Section 530. Amend a tax return IRS help. Amend a tax return   If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Amend a tax return Voluntary Classification Settlement Program (VCSP). Amend a tax return   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. Amend a tax return To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Amend a tax return For more information visit IRS. Amend a tax return gov and enter “VCSP” in the search box. Amend a tax return Business Owned and Operated by Spouses If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Amend a tax return See Publication 541, Partnerships, for more details. Amend a tax return The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. Amend a tax return Exception—Qualified joint venture. Amend a tax return   For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. Amend a tax return A qualified joint venture conducts a trade or business where: The only members of the joint venture are spouses who file a joint income tax return, Both spouses materially participate (see Material participation in the Instructions for Schedule C (Form 1040), line G) in the trade or business (mere joint ownership of property is not enough), Both spouses elect to not be treated as a partnership, and The business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or limited liability company (LLC). Amend a tax return   To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse's interest in the venture, and reported on separate Schedules C or F as sole proprietors. Amend a tax return Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable. Amend a tax return   Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. Amend a tax return If employment taxes are owed by the qualified joint venture, either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse's sole proprietorship. Amend a tax return Generally, filing as a qualified joint venture will not increase the spouses' total tax owed on the joint income tax return. Amend a tax return However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return. Amend a tax return    Note. Amend a tax return If your spouse is your employee, not your partner, see One spouse employed by another in section 3. Amend a tax return   For more information on qualified joint ventures, visit IRS. Amend a tax return gov and enter “qualified joint venture” in the search box. Amend a tax return Exception—Community income. Amend a tax return   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Amend a tax return S. Amend a tax return possession, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. Amend a tax return You may still make an election to be taxed as a qualified joint venture instead of a partnership. Amend a tax return See Exception—Qualified joint venture , earlier. Amend a tax return 3. Amend a tax return Family Employees Child employed by parents. Amend a tax return   Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Amend a tax return If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they are not subject to social security and Medicare taxes until the child reaches age 21. Amend a tax return However, see Covered services of a child or spouse , later in this section. Amend a tax return Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, are not subject to FUTA tax. Amend a tax return Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child is not regularly employed to do such work. Amend a tax return One spouse employed by another. Amend a tax return   The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax. Amend a tax return However, the payments for services of one spouse employed by another in other than a trade or business, such as domestic service in a private home, are not subject to social security, Medicare, and FUTA taxes. Amend a tax return Covered services of a child or spouse. Amend a tax return   The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for: A corporation, even if it is controlled by the child's parent or the individual's spouse; A partnership, even if the child's parent is a partner, unless each partner is a parent of the child; A partnership, even if the individual's spouse is a partner; or An estate, even if it is the estate of a deceased parent. Amend a tax return Parent employed by son or daughter. Amend a tax return   When the employer is a son or daughter employing his or her parent the following rules apply. Amend a tax return Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes. Amend a tax return Payments for the services of a parent not in the son’s or daughter’s (the employer’s) trade or business are generally not subject to social security and Medicare taxes. Amend a tax return    Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply: The parent is employed by his or her son or daughter; The son or daughter (the employer) has a child or stepchild living in the home; The son or daughter (the employer) is a widow or widower, divorced, or living with a spouse who, because of a mental or physical condition, cannot care for the child or stepchild for at least 4 continuous weeks in a calendar quarter; and The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition. Amend a tax return   Payments made to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided. Amend a tax return 4. Amend a tax return Employee's Social Security Number (SSN) You are required to get each employee's name and SSN and to enter them on Form W-2. Amend a tax return This requirement also applies to resident and nonresident alien employees. Amend a tax return You should ask your employee to show you his or her social security card. Amend a tax return The employee may show the card if it is available. Amend a tax return Do not accept a social security card that says “Not valid for employment. Amend a tax return ” A social security number issued with this legend does not permit employment. Amend a tax return You may, but are not required to, photocopy the social security card if the employee provides it. Amend a tax return If you do not provide the correct employee name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. Amend a tax return See Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs, for information on the requirement to solicit the employee's SSN. Amend a tax return Applying for a social security card. Amend a tax return   Any employee who is legally eligible to work in the United States and does not have a social security card can get one by completing Form SS-5, Application for a Social Security Card, and submitting the necessary documentation. Amend a tax return You can get Form SS-5 at SSA offices, by calling 1-800-772-1213, or from the SSA website at www. Amend a tax return socialsecurity. Amend a tax return gov/online/ss-5. Amend a tax return html. Amend a tax return The employee must complete and sign Form SS-5; it cannot be filed by the employer. Amend a tax return You may be asked to supply a letter to accompany Form SS-5 if the employee has exceeded his or her yearly or lifetime limit for the number of replacement cards allowed. Amend a tax return Applying for a social security number. Amend a tax return   If you file Form W-2 on paper and your employee applied for an SSN but does not have one when you must file Form W-2, enter “Applied For” on the form. Amend a tax return If you are filing electronically, enter all zeros (000-00-000) in the social security number field. Amend a tax return When the employee receives the SSN, file Copy A of Form W-2c, Corrected Wage and Tax Statement, with the SSA to show the employee's SSN. Amend a tax return Furnish copies B, C, and 2 of Form W-2c to the employee. Amend a tax return Up to 25 Forms W-2c for each Form W-3c, Transmittal of Corrected Wage and Tax Statements, may now be filed per session over the Internet, with no limit on the number of sessions. Amend a tax return For more information, visit the SSA's Employer W-2 Filing Instructions & Information webpage at www. Amend a tax return socialsecurity. Amend a tax return gov/employer. Amend a tax return Advise your employee to correct the SSN on his or her original Form W-2. Amend a tax return Correctly record the employee's name and SSN. Amend a tax return   Record the name and number of each employee as they are shown on the employee's social security card. Amend a tax return If the employee's name is not correct as shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA. Amend a tax return Continue to report the employee's wages under the old name until the employee shows you an updated social security card with the new name. Amend a tax return If the SSA issues the employee a replacement card after a name change, or a new card with a different social security number after a change in alien work status, file a Form W-2c to correct the name/SSN reported for the most recently filed Form W-2. Amend a tax return It is not necessary to correct other years if the previous name and number were used for years before the most recent Form W-2. Amend a tax return IRS individual taxpayer identification numbers (ITINs) for aliens. Amend a tax return   Do not accept an ITIN in place of an SSN for employee identification or for work. Amend a tax return An ITIN is only available to resident and nonresident aliens who are not eligible for U. Amend a tax return S. Amend a tax return employment and need identification for other tax purposes. Amend a tax return You can identify an ITIN because it is a nine-digit number, beginning with the number “9” with either a “7” or “8” as the fourth digit and is formatted like an SSN (for example, 9NN-7N-NNNN). Amend a tax return    An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN. Amend a tax return If the individual is currently eligible to work in the United States, instruct the individual to apply for an SSN and follow the instructions under Applying for a social security number, earlier. Amend a tax return Do not use an ITIN in place of an SSN on Form W-2. Amend a tax return Verification of social security numbers. Amend a tax return   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive the results the next business day. Amend a tax return Visit www. Amend a tax return socialsecurity. Amend a tax return gov/employer/ssnv. Amend a tax return htm for more information. Amend a tax return Registering for SSNVS. Amend a tax return   You must register online and receive authorization from your employer to use SSNVS. Amend a tax return To register, visit SSA's website at www. Amend a tax return ssa. Amend a tax return gov/employer and click on the Business Services Online link. Amend a tax return Follow the registration instructions to obtain a user identification (ID) and password. Amend a tax return You will need to provide the following information about yourself and your company. Amend a tax return Name. Amend a tax return SSN. Amend a tax return Date of birth. Amend a tax return Type of employer. Amend a tax return EIN. Amend a tax return Company name, address, and telephone number. Amend a tax return Email address. Amend a tax return   When you have completed the online registration process, SSA will mail a one-time activation code to your employer. Amend a tax return You must enter the activation code online to use SSNVS. Amend a tax return 5. Amend a tax return Wages and Other Compensation Wages subject to federal employment taxes generally include all pay you give to an employee for services performed. Amend a tax return The pay may be in cash or in other forms. Amend a tax return It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. Amend a tax return It does not matter how you measure or make the payments. Amend a tax return Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and FUTA taxes and income tax withholding. Amend a tax return Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes. Amend a tax return More information. Amend a tax return   See section 6 for a discussion of tips and section 7 for a discussion of supplemental wages. Amend a tax return Also, see section 15 for exceptions to the general rules for wages. Amend a tax return Publication 15-A provides additional information on wages, including nonqualified deferred compensation, and other compensation. Amend a tax return Publication 15-B provides information on other forms of compensation, including: Accident and health benefits, Achievement awards, Adoption assistance, Athletic facilities, De minimis (minimal) benefits, Dependent care assistance, Educational assistance, Employee discounts, Employee stock options, Employer-provided cell phones, Group-term life insurance coverage, Health Savings Accounts, Lodging on your business premises, Meals, Moving expense reimbursements, No-additional-cost services, Retirement planning services, Transportation (commuting) benefits, Tuition reduction, and Working condition benefits. Amend a tax return Employee business expense reimbursements. Amend a tax return   A reimbursement or allowance arrangement is a system by which you pay the advances, reimbursements, and charges for your employees' business expenses. Amend a tax return How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan. Amend a tax return If a single payment includes both wages and an expense reimbursement, you must specify the amount of the reimbursement. Amend a tax return   These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee. Amend a tax return Accountable plan. Amend a tax return   To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules. Amend a tax return They must have paid or incurred deductible expenses while performing services as your employees. Amend a tax return The reimbursement or advance must be paid for the expense and must not be an amount that would have otherwise been paid by the employee. Amend a tax return They must substantiate these expenses to you within a reasonable period of time. Amend a tax return They must return any amounts in excess of substantiated expenses within a reasonable period of time. Amend a tax return   Amounts paid under an accountable plan are not wages and are not subject to income, social security, Medicare, and FUTA taxes. Amend a tax return   If the expenses covered by this arrangement are not substantiated (or amounts in excess of substantiated expenses are not returned within a reasonable period of time), the amount paid under the arrangement in excess of the substantiated expenses is treated as paid under a nonaccountable plan. Amend a tax return This amount is subject to income, social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period of time. Amend a tax return   A reasonable period of time depends on the facts and circumstances. Amend a tax return Generally, it is considered reasonable if your employees receive their advance within 30 days of the time they incur the expenses, adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the expenses were paid or incurred. Amend a tax return Also, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days. Amend a tax return Nonaccountable plan. Amend a tax return   Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes. Amend a tax return Your payments are treated as paid under a nonaccountable plan if: Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses, You advance or pay an amount to your employee regardless of whether you reasonably expect the employee to have business expenses related to your business, or You pay an amount as a reimbursement you would have otherwise paid as wages. Amend a tax return   See section 7 for more information on supplemental wages. Amend a tax return Per diem or other fixed allowance. Amend a tax return   You may reimburse your employees by travel days, miles, or some other fixed allowance under the applicable revenue procedure. Amend a tax return In these cases, your employee is considered to have accounted to you if your reimbursement does not exceed rates established by the Federal Government. Amend a tax return The 2013 standard mileage rate for auto expenses was 56. Amend a tax return 5 cents per mile. Amend a tax return The rate for 2014 is 56 cents per mile. Amend a tax return   The government per diem rates for meals and lodging in the continental United States are listed in Publication 1542, Per Diem Rates. Amend a tax return Other than the amount of these expenses, your employees' business expenses must be substantiated (for example, the business purpose of the travel or the number of business miles driven). Amend a tax return   If the per diem or allowance paid exceeds the amounts substantiated, you must report the excess amount as wages. Amend a tax return This excess amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Amend a tax return Show the amount equal to the substantiated amount (for example, the nontaxable portion) in box 12 of Form W-2 using code “L. Amend a tax return ” Wages not paid in money. Amend a tax return   If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument, such as a check, you are said to pay them “in kind. Amend a tax return ” Payments in kind may be in the form of goods, lodging, food, clothing, or services. Amend a tax return Generally, the fair market value of such payments at the time they are provided is subject to federal income tax withholding and social security, Medicare, and FUTA taxes. Amend a tax return   However, noncash payments for household work, agricultural labor, and service not in the employer's trade or business are exempt from social security, Medicare, and FUTA taxes. Amend a tax return Withhold income tax on these payments only if you and the employee agree to do so. Amend a tax return Nonetheless, noncash payments for agricultural labor, such as commodity wages, are treated as cash payments subject to employment taxes if the substance of the transaction is a cash payment. Amend a tax return Moving expenses. Amend a tax return   Reimbursed and employer-paid qualified moving expenses (those that would otherwise be deductible by the employee) paid under an accountable plan are not includible in an employee's income unless you have knowledge the employee deducted the expenses in a prior year. Amend a tax return Reimbursed and employer-paid nonqualified moving expenses are includible in income and are subject to employment taxes and income tax withholding. Amend a tax return For more information on moving expenses, see Publication 521, Moving Expenses. Amend a tax return Meals and lodging. Amend a tax return   The value of meals is not taxable income and is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the meals are furnished for the employer's convenience and on the employer's premises. Amend a tax return The value of lodging is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the lodging is furnished for the employer's convenience, on the employer's premises, and as a condition of employment. Amend a tax return    “For the convenience of the employer” means you have a substantial business reason for providing the meals and lodging other than to provide additional compensation to the employee. Amend a tax return For example, meals you provide at the place of work so that an employee is available for emergencies during his or her lunch period are generally considered to be for your convenience. Amend a tax return   However, whether meals or lodging are provided for the convenience of the employer depends on all of the facts and circumstances. Amend a tax return A written statement that the meals or lodging are for your convenience is not sufficient. Amend a tax return 50% test. Amend a tax return   If over 50% of the employees who are provided meals on an employer's business premises receive these meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Amend a tax return If this 50% test is met, the value of the meals is excludable from income for all employees and is not subject to federal income tax withholding or employment taxes. Amend a tax return For more information, see Publication 15-B. Amend a tax return Health insurance plans. Amend a tax return   If you pay the cost of an accident or health insurance plan for your employees, including an employee's spouse and dependents, your payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Amend a tax return Generally, this exclusion also applies to qualified long-term care insurance contracts. Amend a tax return However, for income tax withholding, the value of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the S corporation (2% shareholders). Amend a tax return For social security, Medicare, and FUTA taxes, the health insurance benefits are excluded from the wages only for employees and their dependents or for a class or classes of employees and their dependents. Amend a tax return See Announcement 92-16 for more information. Amend a tax return You can find Announcement 92-16 on page 53 of Internal Revenue Bulletin 1992-5. Amend a tax return Health Savings Accounts and medical savings accounts. Amend a tax return   Your contributions to an employee's Health Savings Account (HSA) or Archer medical savings account (MSA) are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they will be excludable from the income of the employee. Amend a tax return To the extent it is not reasonable to believe they will be excludable, your contributions are subject to these taxes. Amend a tax return Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. Amend a tax return However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. Amend a tax return For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs). Amend a tax return Medical care reimbursements. Amend a tax return   Generally, medical care reimbursements paid for an employee under an employer's self-insured medical reimbursement plan are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. Amend a tax return See Publication 15-B for an exception for highly compensated employees. Amend a tax return Differential wage payments. Amend a tax return   Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and represent all or a portion of the wages the individual would have received from the employer if the individual were performing services for the employer. Amend a tax return   Differential wage payments are wages for income tax withholding, but are not subject to social security, Medicare, or FUTA taxes. Amend a tax return Employers should report differential wage payments in box 1 of Form W-2. Amend a tax return For more information about the tax treatment of differential wage payments, visit IRS. Amend a tax return gov and enter “employees in a combat zone” in the search box. Amend a tax return Fringe benefits. Amend a tax return   You generally must include fringe benefits in an employee's gross income (but see Nontaxable fringe benefits next). Amend a tax return The benefits are subject to income tax withholding and employment taxes. Amend a tax return Fringe benefits include cars you provide, flights on aircraft you provide, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. Amend a tax return In general, the amount you must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount the law excludes. Amend a tax return There are other special rules you and your employees may use to value certain fringe benefits. Amend a tax return See Publication 15-B for more information. Amend a tax return Nontaxable fringe benefits. Amend a tax return   Some fringe benefits are not taxable (or are minimally taxable) if certain conditions are met. Amend a tax return See Publication 15-B for details. Amend a tax return The following are some examples of nontaxable fringe benefits. Amend a tax return Services provided to your employees at no additional cost to you. Amend a tax return Qualified employee discounts. Amend a tax return Working condition fringes that are property or services the employee could deduct as a business expense if he or she had paid for it. Amend a tax return Examples include a company car for business use and subscriptions to business magazines. Amend a tax return Certain minimal value fringes (including an occasional cab ride when an employee must work overtime and meals you provide at eating places you run for your employees if the meals are not furnished at below cost). Amend a tax return Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway vehicle, any transit pass, and qualified parking). Amend a tax return Qualified moving expense reimbursement. Amend a tax return See Moving expenses , earlier in this section, for details. Amend a tax return The use of on-premises athletic facilities, if substantially all of the use is by employees, their spouses, and their dependent children. Amend a tax return Qualified tuition reduction an educational organization provides to its employees for education. Amend a tax return For more information, see Publication 970, Tax Benefits for Education. Amend a tax return Employer-provided cell phones provided primarily for a noncompensatory business reason. Amend a tax return   However, do not exclude the following fringe benefits from the income of highly compensated employees unless the benefit is available to other employees on a nondiscriminatory basis. Amend a tax return No-additional-cost services. Amend a tax return Qualified employee discounts. Amend a tax return Meals provided at an employer operated eating facility. Amend a tax return Reduced tuition for education. Amend a tax return  For more information, including the definition of a highly compensated employee, see Publication 15-B. Amend a tax return When fringe benefits are treated as paid. Amend a tax return   You may choose to treat certain noncash fringe benefits as paid by the pay period, by the quarter, or on any other basis you choose as long as you treat the benefits as paid at least once a year. Amend a tax return You do not have to make a formal choice of payment dates or notify the IRS of the dates you choose. Amend a tax return You do not have to make this choice for all employees. Amend a tax return You may change methods as often as you like, as long as you treat all benefits provided in a calendar year as paid by December 31 of the calendar year. Amend a tax return See Publication 15-B for more information, including a discussion of the special accounting rule for fringe benefits provided during November and December. Amend a tax return Valuation of fringe benefits. Amend a tax return   Generally, you must determine the value of fringe benefits no later than January 31 of the next year. Amend a tax return Before January 31, you may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time. Amend a tax return Withholding on fringe benefits. Amend a tax return   You may add the value of fringe benefits to regular wages for a payroll period and figure withholding taxes on the total, or you may withhold federal income tax on the value of the fringe benefits at the optional flat 25% supplemental wage rate. Amend a tax return However, see Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages during the calendar year in section 7. Amend a tax return   You may choose not to withhold income tax on the value of an employee's personal use of a vehicle you provide. Amend a tax return You must, however, withhold social security and Medicare taxes on the use of the vehicle. Amend a tax return See Publication 15-B for more information on this election. Amend a tax return Depositing taxes on fringe benefits. Amend a tax return   Once you choose when fringe benefits are paid, you must deposit taxes in the same deposit period you treat the fringe benefits as paid. Amend a tax return To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period. Amend a tax return   If you determine by January 31 you overestimated the value of a fringe benefit at the time you withheld and deposited for it, you may claim a refund for the overpayment or have it applied to your next employment tax return. Amend a tax return See Valuation of fringe benefits , earlier. Amend a tax return If you underestimated the value and deposited too little, you may be subject to a failure-to-deposit penalty. Amend a tax return See section 11 for information on deposit penalties. Amend a tax return   If you deposited the required amount of taxes but withheld a lesser amount from the employee, you can recover from the employee the social security, Medicare, or income taxes you deposited on his or her behalf, and included in the employee's Form W-2. Amend a tax return However, you must recover the income taxes before April 1 of the following year. Amend a tax return Sick pay. Amend a tax return   In general, sick pay is any amount you pay under a plan to an employee who is unable to work because of sickness or injury. Amend a tax return These amounts are sometimes paid by a third party, such as an insurance company or an employees' trust. Amend a tax return In either case, these payments are subject to social security, Medicare, and FUTA taxes. Amend a tax return Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the employee last worked for the employer. Amend a tax return The payments are always subject to federal income tax. Amend a tax return See Publication 15-A for more information. Amend a tax return 6. Amend a tax return Tips Tips your employee receives from customers are generally subject to withholding. Amend a tax return Your employee must report cash tips to you by the 10th of the month after the month the tips are received. Amend a tax return The report should include tips you paid over to the employee for charge customers, tips the employee received directly from customers, and tips received from other employees under any tip-sharing arrangement. Amend a tax return Both directly and indirectly tipped employees must report tips to you. Amend a tax return No report is required for months when tips are less than $20. Amend a tax return Your employee reports the tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. Amend a tax return The statement must be signed by the employee and must include: The employee's name, address, and SSN, Your name and address, The month or period the report covers, and The total of tips received during the month or period. Amend a tax return Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. Amend a tax return You are permitted to establish a system for electronic tip reporting by employees. Amend a tax return See Regulations section 31. Amend a tax return 6053-1(d). Amend a tax return Collecting taxes on tips. Amend a tax return   You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. Amend a tax return The withholding rules for withholding an employee's share of Medicare tax on tips also apply to withholding the Additional Medicare Tax once wages and tips exceed $200,000 in the calendar year. Amend a tax return If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax. Amend a tax return   You can collect these taxes from the employee's wages or from other funds he or she makes available. Amend a tax return See Tips treated as supplemental wages in section 7 for more information. Amend a tax return Stop collecting the employee social security tax when his or her wages and tips for tax year 2014 reach $117,000; collect the income and employee Medicare taxes for the whole year on all wages and tips. Amend a tax return You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the limit. Amend a tax return You are responsible for the employer Medicare tax for the whole year on all wages and tips. Amend a tax return File Form 941 or Form 944 to report withholding and employment taxes on tips. Amend a tax return Ordering rule. Amend a tax return   If, by the 10th of the month after the month for which you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. Amend a tax return If there are not enough funds available, withhold taxes in the following order. Amend a tax return Withhold on regular wages and other compensation. Amend a tax return Withhold social security and Medicare taxes on tips. Amend a tax return Withhold income tax on tips. Amend a tax return Reporting tips. Amend a tax return   Report tips and any collected and uncollected social security and Medicare taxes on Form W-2 and on Form 941, lines 5b, 5c, and 5d (Form 944, lines 4b, 4c, and 4d). Amend a tax return Report an adjustment on Form 941, line 9 (Form 944, line 6), for the uncollected social security and Medicare taxes. Amend a tax return Enter the amount of uncollected social security tax and Medicare tax on Form W-2, box 12, with codes “A” and “B. Amend a tax return ” Do not include any uncollected Additional Medicare Tax in box 12 of Form W-2. Amend a tax return See section 13 and the General Instructions for Forms W-2 and W-3. Amend a tax return   Revenue Ruling 2012-18 provides guidance for employers regarding social security and Medicare taxes imposed on tips, including information on the reporting of the employer share of social security and Medicare taxes under section 3121(q), the difference between tips and service charges, and the section 45B credit. Amend a tax return See Revenue Ruling 2012-18, 2012-26 I. Amend a tax return R. Amend a tax return B. Amend a tax return 1032, available at www. Amend a tax return irs. Amend a tax return gov/irb/2012-26_IRB/ar07. Amend a tax return html. Amend a tax return Allocated tips. Amend a tax return   If you operate a large food or beverage establishment, you must report allocated tips under certain circumstances. Amend a tax return However, do not withhold income, social security, or Medicare taxes on allocated tips. Amend a tax return   A large food or beverage establishment is one that provides food or beverages for consumption on the premises, where tipping is customary, and where there were normally more than 10 employees on a typical business day during the preceding year. Amend a tax return   The tips may be allocated by one of three methods—hours worked, gross receipts, or good faith agreement. Amend a tax return For information about these allocation methods, including the requirement to file Forms 8027 electronically if 250 or more forms are filed, see the Instructions for Form 8027. Amend a tax return For information on filing Form 8027 electronically with the IRS, see Publication 1239. Amend a tax return Tip Rate Determination and Education Program. Amend a tax return   Employers may participate in the Tip Rate Determination and Education Program. Amend a tax return The program primarily consists of two voluntary agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. Amend a tax return The two agreements are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). Amend a tax return A tip agreement, the Gaming Industry Tip Compliance Agreement (GITCA), is available for the gaming (casino) industry. Amend a tax return To get more information about TRDA and TRAC agreements, see Publication 3144, Tips on Tips. Amend a tax return Additionally, visit IRS. Amend a tax return gov and enter “MSU tips” in the search box to get more information about GITCA, TRDA, or TRAC agreements. Amend a tax return 7. Amend a tax return Supplemental Wages Supplemental wages are wage payments to an employee that are not regular wages. Amend a tax return They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Amend a tax return Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. Amend a tax return How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. Amend a tax return See Regulations section 31. Amend a tax return 3402(g)-1 for additional guidance for wages paid after January 1, 2007. Amend a tax return Also see Revenue Ruling 2008-29, 2008-24 I. Amend a tax return R. Amend a tax return B. Amend a tax return 1149, available at www. Amend a tax return irs. Amend a tax return gov/irb/2008-24_IRB/ar08. Amend a tax return html. Amend a tax return Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages from you during the calendar year. Amend a tax return   Special rules apply to the extent supplemental wages paid to any one employee during the calendar year exceed $1 million. Amend a tax return If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39. Amend a tax return 6% (or the highest rate of income tax for the year). Amend a tax return Withhold using the 39. Amend a tax return 6% rate without regard to the employee's Form W-4. Amend a tax return In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. Amend a tax return For more information, see Treasury Decision 9276, 2006-37 I. Amend a tax return R. Amend a tax return B. Amend a tax return 423, available at www. Amend a tax return irs. Amend a tax return gov/irb/2006-37_IRB/ar09. Amend a tax return html. Amend a tax return Withholding on supplemental wage payments to an employee who does not receive $1 million of supplemental wages during the calendar year. Amend a tax return   If the supplemental wages paid to the employee during the calendar year are less than or equal to $1 million, the following rules apply in determining the amount of income tax to be withheld. Amend a tax return Supplemental wages combined with regular wages. Amend a tax return   If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period. Amend a tax return Supplemental wages identified separately from regular wages. Amend a tax return   If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. Amend a tax return If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages. Amend a tax return Withhold a flat 25% (no other percentage allowed). Amend a tax return If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. Amend a tax return If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Amend a tax return Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Amend a tax return Subtract the tax withheld from the regular wages. Amend a tax return Withhold the remaining tax from the supplemental wages. Amend a tax return If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax. Amend a tax return If you did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. Amend a tax return This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Amend a tax return Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes. Amend a tax return Example 1. Amend a tax return You pay John Peters a base salary on the 1st of each month. Amend a tax return He is single and claims one withholding allowance. Amend a tax return In January he is paid $1,000. Amend a tax return Using the wage bracket tables, you withhold $50 from this amount. Amend a tax return In February, he receives salary of $1,000 plus a commission of $2,000, which you combine with regular wages and do not separately identify. Amend a tax return You figure the withholding based on the total of $3,000. Amend a tax return The correct withholding from the tables is $338. Amend a tax return Example 2. Amend a tax return You pay Sharon Warren a base salary on the 1st of each month. Amend a tax return She is single and claims one allowance. Amend a tax return Her May 1 pay is $2,000. Amend a tax return Using the wage bracket tables, you withhold $188. Amend a tax return On May 14 she receives a bonus of $1,000. Amend a tax return Electing to use supplemental wage withholding method 1-b, you: Add the bonus amount to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 = $3,000). Amend a tax return Determine the amount of withholding on the combined $3,000 amount to be $338 using the wage bracket tables. Amend a tax return Subtract the amount withheld from wages on the most recent base salary pay date (May 1) from the combined withholding amount ($338 – $188 = $150). Amend a tax return Withhold $150 from the bonus payment. Amend a tax return Example 3. Amend a tax return The facts are the same as in Example 2, except you elect to use the flat rate method of withholding on the bonus. Amend a tax return You withhold 25% of $1,000, or $250, from Sharon's bonus payment. Amend a tax return Example 4. Amend a tax return The facts are the same as in Example 2, except you elect to pay Sharon a second bonus of $2,000 on May 28. Amend a tax return Using supplemental wage withholding method 1-b, you: Add the first and second bonus amounts to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 + $2,000 = $5,000). Amend a tax return Determine the amount of withholding on the combined $5,000 amount to be $781 using the wage bracket tables. Amend a tax return Subtract the amounts withheld from wages on the most recent base salary pay date (May 1) and the amounts withheld from the first bonus payment from the combined withholding amount ($781 – $188 – $150 = $443). Amend a tax return Withhold $443 from the second bonus payment. Amend a tax return Tips treated as supplemental wages. Amend a tax return   Withhold income tax on tips from wages earned by the employee or from other funds the employee makes available. Amend a tax return If an employee receives regular wages and reports tips, figure income tax withholding as if the tips were supplemental wages. Amend a tax return If you have not withheld income tax from the regular wages, add the tips to the regular wages. Amend a tax return Then withhold income tax on the total. Amend a tax return If you withheld income tax from the regular wages, you can withhold on the tips by method 1-a or 1-b discussed earlier in this section under Supplemental wages identified separately from regular wages. Amend a tax return Vacation pay. Amend a tax return   Vacation pay is subject to withholding as if it were a regular wage payment. Amend a tax return When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. Amend a tax return If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. Amend a tax return 8. Amend a tax return Payroll Period Your payroll period is a period of service for which you usually pay wages. Amend a tax return When you have a regular payroll period, withhold income tax for that time period even if your employee does not work the full period. Amend a tax return No regular payroll period. Amend a tax return   When you do not have a regular payroll period, withhold the tax as if you paid wages for a daily or miscellaneous payroll period. Amend a tax return Figure the number of days (including Sundays and holidays) in the period covered by the wage payment. Amend a tax return If the wages are unrelated to a specific length of time (for example, commissions paid on completion of a sale), count back the number of days from the payment period to the latest of: The last wage payment made during the same calendar year, The date employment began, if during the same calendar year, or January 1 of the same year. Amend a tax return Employee paid for period less than 1 week. Amend a tax return   When you pay an employee for a period of less than one week, and the employee signs a statement under penalties of perjury indicating he or she is not working for any other employer during the same week for wages subject to withholding, figure withholding based on a weekly payroll period. Amend a tax return If the employee later begins to work for another employer for wages subject to withholding, the employee must notify you within 10 days. Amend a tax return You then figure withholding based on the daily or miscellaneous period. Amend a tax return 9. Amend a tax return Withholding From Employees' Wages Income Tax Withholding Using Form W-4 to figure withholding. Amend a tax return   To know how much federal income tax to withhold from employees' wages, you should have a Form W-4 on file for each employee. Amend a tax return Encourage your employees to file an updated Form W-4 for 2014, especially if they owed taxes or received a large refund when filing their 2013 tax return. Amend a tax return Advise your employees to use the IRS Withholding Calculator on the IRS website at www. Amend a tax return irs. Amend a tax return gov/individuals for help in determining how many withholding allowances to claim on their Forms W-4. Amend a tax return   Ask all new employees to give you a signed Form W-4 when they start work. Amend a tax return Make the form effective with the first wage payment. Amend a tax return If a new employee does not give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances. Amend a tax return Form in Spanish. Amend a tax return   You can provide Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, in place of Form W-4, to your Spanish-speaking employees. Amend a tax return For more information, see Publicación 17(SP), El Impuesto Federal sobre los Ingresos (Para Personas Físicas). Amend a tax return The rules discussed in this section that apply to Form W-4 also apply to Formulario W-4(SP). Amend a tax return Electronic system to receive Form W-4. Amend a tax return   You may establish a system to electronically receive Forms W-4 from your employees. Amend a tax return See Regulations section 31. Amend a tax return 3402(f)(5)-1(c) for more information. Amend a tax return Effective date of Form W-4. Amend a tax return   A Form W-4 remains in effect until the employee gives you a new one. Amend a tax return When you receive a new Form W-4 from an employee, do not adjust withholding for pay periods before the effective date of the new form. Amend a tax return If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. Amend a tax return For exceptions, see Exemption from federal income tax withholding , IRS review of requested Forms W-4 , and Invalid Forms W-4 , later in this section. Amend a tax return A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year. Amend a tax return Successor employer. Amend a tax return   If you are a successor employer (see Successor employer , later in this section), secure new Forms W-4 from the transferred employees unless the “Alternative Procedure” in section 5 of Revenue Procedure 2004-53 applies. Amend a tax return See Revenue Procedure 2004-53, 2004-34 I. Amend a tax return R. Amend a tax return B. Amend a tax return 320, available at www. Amend a tax return irs. Amend a tax return gov/irb/2004-34_IRB/ar13. Amend a tax return html. Amend a tax return Completing Form W-4. Amend a tax return   The amount of any federal income tax withholding must be based on marital status and withholding allowances. Amend a tax return Your employees may not base their withholding amounts on a fixed dollar amount or percentage. Amend a tax return However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4. Amend a tax return Employees may claim fewer withholding allowances than they are entitled to claim. Amend a tax return They may wish to claim fewer allowances to ensure they have enough withholding or to offset the tax on other sources of taxable income not subject to withholding. Amend a tax return See Publication 505, Tax Withholding and Estimated Tax, for more information about completing Form W-4. Amend a tax return Along with Form W-4, you may wish to order Publication 505 for use by your employees. Amend a tax return Do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. Amend a tax return If they require additional withholding, they should submit a new Form W-4 and, if necessary, pay estimated tax by filing Form 1040-ES, Estimated Tax for Individuals, or by using the Electronic Federal Tax Payment System (EFTPS) to make estimated tax payments. Amend a tax return Exemption from federal income tax withholding. Amend a tax return   Generally, an employee may claim exemption from federal income tax withholding because he or she had no income tax liability last year and expects none this year. Amend a tax return See the Form W-4 instructions for more information. Amend a tax return However, the wages are still subject to social security and Medicare taxes. Amend a tax return See also Invalid Forms W-4 , later in this section. Amend a tax return   A Form W-4 claiming exemption from withholding is effective when it is filed with the employer and only for that calendar year. Amend a tax return To continue to be exempt from withholding in the next calendar year, an employee must give you a new Form W-4 by February 15. Amend a tax return If the employee does not give you a new Form W-4 by February 15, begin withholding based on the last Form W-4 for the employee that did not claim an exemption from withholding or, if one was not filed, then withhold tax as if he or she is single with zero withholding allowances. Amend a tax return If the employee provides a new Form W-4 claiming exemption from withholding on February 16 or later, you may apply it to future wages but do not refund any taxes already withheld. Amend a tax return Withholding income taxes on the wages of nonresident alien employees. Amend a tax return   In general, you must withhold federal income taxes on the wages of nonresident alien employees. Amend a tax return However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to this general rule. Amend a tax return Also see section 3 of Publication 51 (Circular A), Agricultural Employer's Tax Guide, for guidance on H-2A visa workers. Amend a tax return Withholding adjustment for nonresident alien employees. Amend a tax return   For 2014, apply the procedure discussed next to figure the amount of income tax to withhold from the wages of nonresident alien employees performing services within the United States. Amend a tax return Nonresident alien students from India and business apprentices from India are not subject to this procedure. Amend a tax return Instructions. Amend a tax return   To figure how much income tax to withhold from the wages paid to a nonresident alien employee performing services in the United States, use the following steps. Amend a tax return Step 1. Amend a tax return   Add to the wages paid to the nonresident alien employee for the payroll period the amount shown in the chart below for the applicable payroll period. Amend a tax return    Amount to Add to Nonresident Alien Employee's Wages for Calculating Income Tax Withholding Only   Payroll Period Add Additional     Weekly $ 43. Amend a tax return 30     Biweekly 86. Amend a tax return 50     Semimonthly 93. Amend a tax return 80     Monthly 187. Amend a tax return 50     Quarterly 562. Amend a tax return 50     Semiannually 1,125. Amend a tax return 00     Annually 2,250. Amend a tax return 00     Daily or Miscellaneous (each day of the payroll period) 8. Amend a tax return 70   Step 2. Amend a tax return   Use the amount figured in Step 1 and the number of withholding allowances claimed (generally limited to one allowance) to figure income tax withholding. Amend a tax return Determine the value of withholding allowances by multiplying the number of withholding allowances claimed by the appropriate amount from Table 5. Amend a tax return Percentage Method—2014 Amount for One Withholding Allowance shown on page 41. Amend a tax return If you are using the Percentage Method Tables for Income Tax Withholding, provided on pages 43–44, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure the income tax withholding. Amend a tax return If you are using the Wage Bracket Method for Income Tax Withholding, provided on pages 45–64, use the amount figured in Step 1 and the number of withholding allowances to figure income tax withholding. Amend a tax return The amounts from the chart above are added to wages solely for calculating income tax withholding on the wages of the nonresident alien employee. Amend a tax return The amounts from the chart should not be included in any box on the employee's Form W-2 and do not increase the income tax liability of the employee. Amend a tax return Also, the amounts from the chart do not increase the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Amend a tax return This procedure only applies to nonresident alien employees who have wages subject to income tax withholding. Amend a tax return Example. Amend a tax return An employer using the percentage method of withholding pays wages of $500 for a biweekly payroll period to a married nonresident alien employee. Amend a tax return The nonresident alien has properly completed Form W-4, entering marital status as “single” with one withholding allowance and indicating status as a nonresident alien on Form W-4, line 6 (see Nonresident alien employee's Form W-4 , later in this section). Amend a tax return The employer determines the wages to be used in the withholding tables by adding to the $500 amount of wages paid the amount of $86. Amend a tax return 50 from the chart under Step 1 ($586. Amend a tax return 50 total). Amend a tax return The employer then applies the applicable tables to determine the income tax withholding for nonresident aliens (see Step 2 ). Amend a tax return Reminder: If you use the Percentage Method Tables for Income Tax Withholding, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure income tax withholding. Amend a tax return The $86. Amend a tax return 50 added to wages for calculating income tax withholding is not reported on Form W-2, and does not increase the income tax liability of the employee. Amend a tax return Also, the $86. Amend a tax return 50 added to wages does not affect the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Amend a tax return Supplemental wage payment. Amend a tax return   This procedure for determining the amount of income tax withholding does not apply to a supplemental wage payment (see section 7) if the 39. Amend a tax return 6% mandatory flat rate withholding applies or if the 25% optional flat rate withholding is being used to calculate income tax withholding on the supplemental wage payment. Amend a tax return Nonresident alien employee's Form W-4. Amend a tax return   When completing Forms W-4, nonresident aliens are required to: Not claim exemption from income tax withholding, Request withholding as if they are single, regardless of their actual marital status, Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or South Korea, or a student or business apprentice from India, he or she may claim more than one allowance), and Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4. Amend a tax return   If you maintain an electronic Form W-4 system, you should provide a field for nonresident aliens to enter nonresident alien status in lieu of writing “Nonresident Alien” or “NRA” above the dotted line on line 6. Amend a tax return A nonresident alien employee may request additional withholding at his or her option for other purposes, although such additions should not be necessary for withholding to cover federal income tax liability related to employment. Amend a tax return Form 8233. Amend a tax return   If a nonresident alien employee claims a tax treaty exemption from withholding, the employee must submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to the income exempt under the treaty, instead of Form W-4. Amend a tax return See Publication 515 for details. Amend a tax return IRS review of requested Forms W-4. Amend a tax return   When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. Amend a tax return You may also be directed to send certain Forms W-4 to the IRS. Amend a tax return You may receive a notice from the IRS requiring you to submit a copy of Form W-4 for one or more of your named employees. Amend a tax return Send the requested copy or copies of Form W-4 to the IRS at the address provided and in the manner directed by the notice. Amend a tax return The IRS may also require you to submit copies of Form W-4 to the IRS as directed by Treasury Decision 9337, 2007-35 I. Amend a tax return R. Amend a tax return B. Amend a tax return 455, which is available at www. Amend a tax return irs. Amend a tax return gov/irb/2007-35_IRB/ar10. Amend a tax return html. Amend a tax return When we refer to Form W-4, the same rules apply to Formulario W-4(SP), its Spanish translation. Amend a tax return After submitting a copy of a requested Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if it is valid (see Invalid Forms W-4 , later in this section). Amend a tax return However, if the IRS later notifies you in writing the employee is not entitled to claim exemption from withholding or a claimed number of withholding allowances, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the IRS notice (commonly referred to as a "lock-in letter