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Free federal and free state tax filing Publication 15-A - Main Content Table of Contents 1. Free federal and free state tax filing Who Are Employees?Independent Contractors Common-Law Employees Statutory Employees Statutory Nonemployees Misclassification of Employees 2. Free federal and free state tax filing Employee or Independent Contractor?Common-Law Rules Industry Examples 3. Free federal and free state tax filing Employees of Exempt OrganizationsSocial security and Medicare taxes. Free federal and free state tax filing FUTA tax. Free federal and free state tax filing 4. Free federal and free state tax filing Religious Exemptions and Special Rules for MinistersForm W-2. Free federal and free state tax filing Self-employed. Free federal and free state tax filing Employees. Free federal and free state tax filing 5. Free federal and free state tax filing Wages and Other CompensationRelocating for Temporary Work Assignments Employee Achievement Awards Scholarship and Fellowship Payments Outplacement Services Withholding for Idle Time Back Pay Supplemental Unemployment Benefits Golden Parachute Payments Interest-Free and Below-Market-Interest-Rate Loans Leave Sharing Plans Nonqualified Deferred Compensation Plans Tax-Sheltered Annuities Contributions to a Simplified Employee Pension (SEP) SIMPLE Retirement Plans 6. Free federal and free state tax filing Sick Pay ReportingSick Pay Payments That Are Not Sick Pay Sick Pay Plan Third-Party Payers of Sick Pay Social Security, Medicare, and FUTA Taxes on Sick Pay Income Tax Withholding on Sick Pay Depositing and Reporting Example of Figuring and Reporting Sick Pay 7. Free federal and free state tax filing Special Rules for Paying TaxesCommon Paymaster Agents Reporting Agents Employee's Portion of Taxes Paid by Employer International Social Security Agreements 8. Free federal and free state tax filing Pensions and AnnuitiesFederal Income Tax Withholding 9. Free federal and free state tax filing Alternative Methods for Figuring WithholdingTerm of continuous employment. Free federal and free state tax filing Formula Tables for Percentage Method Withholding (for Automated Payroll Systems) Wage Bracket Percentage Method Tables (for Automated Payroll Systems) Combined Federal Income Tax, Employee Social Security Tax, and Employee Medicare Tax Withholding Tables 10. Free federal and free state tax filing Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersWithholding Tables How To Get Tax Help 1. Free federal and free state tax filing Who Are Employees? Before you can know how to treat payments that you make to workers for services, you must first know the business relationship that exists between you and the person performing the services. Free federal and free state tax filing The person performing the services may be: An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee. Free federal and free state tax filing This discussion explains these four categories. Free federal and free state tax filing A later discussion, Employee or Independent Contractor in section 2, points out the differences between an independent contractor and an employee and gives examples from various types of occupations. Free federal and free state tax filing If an individual who works for you is not an employee under the common-law rules (see section 2), you generally do not have to withhold federal income tax from that individual's pay. Free federal and free state tax filing However, in some cases you may be required to withhold under the backup withholding requirements on these payments. Free federal and free state tax filing See Publication 15 (Circular E) for information on backup withholding. Free federal and free state tax filing Independent Contractors People such as doctors, veterinarians, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. Free federal and free state tax filing However, whether such people are employees or independent contractors depends on the facts in each case. Free federal and free state tax filing The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result. Free federal and free state tax filing Common-Law Employees Under common-law rules, anyone who performs services for you is generally your employee if you have the right to control what will be done and how it will be done. Free federal and free state tax filing This is so even when you give the employee freedom of action. Free federal and free state tax filing What matters is that you have the right to control the details of how the services are performed. Free federal and free state tax filing For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2. Free federal and free state tax filing If you have an employer-employee relationship, it makes no difference how it is labeled. Free federal and free state tax filing The substance of the relationship, not the label, governs the worker's status. Free federal and free state tax filing It does not matter whether the individual is employed full time or part time. Free federal and free state tax filing For employment tax purposes, no distinction is made between classes of employees. Free federal and free state tax filing Superintendents, managers, and other supervisory personnel are all employees. Free federal and free state tax filing An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. Free federal and free state tax filing A director of a corporation is not an employee with respect to services performed as a director. Free federal and free state tax filing You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. Free federal and free state tax filing However, the wages of certain employees may be exempt from one or more of these taxes. Free federal and free state tax filing See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4). Free federal and free state tax filing Leased employees. Free federal and free state tax filing   Under certain circumstances, a firm that furnishes workers to other firms is the employer of those workers for employment tax purposes. Free federal and free state tax filing For example, a temporary staffing service may provide the services of secretaries, nurses, and other similarly trained workers to its clients on a temporary basis. Free federal and free state tax filing   The staffing service enters into contracts with the clients under which the clients specify the services to be provided and a fee is paid to the staffing service for each individual furnished. Free federal and free state tax filing The staffing service has the right to control and direct the worker's services for the client, including the right to discharge or reassign the worker. Free federal and free state tax filing The staffing service hires the workers, controls the payment of their wages, provides them with unemployment insurance and other benefits, and is the employer for employment tax purposes. Free federal and free state tax filing For information on employee leasing as it relates to pension plan qualification requirements, see Leased employee in Publication 560, Retirement Plans for Small Business. Free federal and free state tax filing Additional information. Free federal and free state tax filing   For more information about the treatment of special types of employment, the treatment of special types of payments, and similar subjects, see Publication 15 (Circular E) or Publication 51 (Circular A), Agricultural Employer's Tax Guide. Free federal and free state tax filing Statutory Employees If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute, (also known as “statutory employees”) for certain employment tax purposes. Free federal and free state tax filing This would happen if they fall within any one of the following four categories and meet the three conditions described next under Social security and Medicare taxes . Free federal and free state tax filing A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission. Free federal and free state tax filing A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company. Free federal and free state tax filing An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done. Free federal and free state tax filing A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. Free federal and free state tax filing The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. Free federal and free state tax filing The work performed for you must be the salesperson's principal business activity. Free federal and free state tax filing See Salesperson in section 2. Free federal and free state tax filing Social security and Medicare taxes. Free federal and free state tax filing   You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. Free federal and free state tax filing The service contract states or implies that substantially all the services are to be performed personally by them. Free federal and free state tax filing They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation, such as a car or truck). Free federal and free state tax filing The services are performed on a continuing basis for the same payer. Free federal and free state tax filing Federal unemployment (FUTA) tax. Free federal and free state tax filing   For FUTA tax (the unemployment tax paid under the Federal Unemployment Tax Act), the term “employee” means the same as it does for social security and Medicare taxes, except that it does not include statutory employees defined above in categories 2 and 3. Free federal and free state tax filing Any individual who is a statutory employee described above under category 1 or 4 is also an employee for FUTA tax purposes and subject to FUTA tax. Free federal and free state tax filing Income tax. Free federal and free state tax filing   Do not withhold federal income tax from the wages of statutory employees. Free federal and free state tax filing Reporting payments to statutory employees. Free federal and free state tax filing   Furnish Form W-2 to a statutory employee, and check “Statutory employee” in box 13. Free federal and free state tax filing Show your payments to the employee as “other compensation” in box 1. Free federal and free state tax filing Also, show social security wages in box 3, social security tax withheld in box 4, Medicare wages in box 5, and Medicare tax withheld in box 6. Free federal and free state tax filing The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. Free federal and free state tax filing He or she reports earnings as a statutory employee on line 1 of Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Free federal and free state tax filing A statutory employee's business expenses are deductible on Schedule C (Form 1040) or C-EZ (Form 1040) and are not subject to the reduction by 2% of his or her adjusted gross income that applies to common-law employees. Free federal and free state tax filing H-2A agricultural workers. Free federal and free state tax filing   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Free federal and free state tax filing Statutory Nonemployees There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Free federal and free state tax filing Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if: Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked, and Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes. Free federal and free state tax filing Direct sellers. Free federal and free state tax filing   Direct sellers include persons falling within any of the following three groups. Free federal and free state tax filing Persons engaged in selling (or soliciting the sale of) consumer products in the home or place of business other than in a permanent retail establishment. Free federal and free state tax filing Persons engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment. Free federal and free state tax filing Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution). Free federal and free state tax filing   Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. Free federal and free state tax filing Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. Free federal and free state tax filing Licensed real estate agents. Free federal and free state tax filing   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. Free federal and free state tax filing Companion sitters. Free federal and free state tax filing   Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. Free federal and free state tax filing A person engaged in the trade or business of putting the sitters in touch with individuals who wish to employ them (that is, a companion sitting placement service) will not be treated as the employer of the sitters if that person does not receive or pay the salary or wages of the sitters and is compensated by the sitters or the persons who employ them on a fee basis. Free federal and free state tax filing Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. Free federal and free state tax filing Misclassification of Employees Consequences of treating an employee as an independent contractor. Free federal and free state tax filing   If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you are liable for employment taxes for that worker and the relief provision, discussed next, will not apply. Free federal and free state tax filing See section 2 in Publication 15 (Circular E) for more information. Free federal and free state tax filing Relief provision. Free federal and free state tax filing   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. Free federal and free state tax filing To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. Free federal and free state tax filing You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. Free federal and free state tax filing Technical service specialists. Free federal and free state tax filing   This relief provision does not apply for a technical services specialist you provide to another business under an arrangement between you and the other business. Free federal and free state tax filing A technical service specialist is an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. Free federal and free state tax filing   This limit on the application of the rule does not affect the determination of whether such workers are employees under the common-law rules. Free federal and free state tax filing The common-law rules control whether the specialist is treated as an employee or an independent contractor. Free federal and free state tax filing However, if you directly contract with a technical service specialist to provide services for your business and not for another business, you may still be entitled to the relief provision. Free federal and free state tax filing Test proctors and room supervisors. Free federal and free state tax filing   The consistent treatment requirement does not apply to services performed after December 31, 2006, by an individual as a test proctor or room supervisor assisting in the administration of college entrance or placement examinations if the individual: Is performing the services for a section 501(c) organization exempt from tax under section 501(a) of the code, and Is not otherwise treated as an employee of the organization for employment taxes. Free federal and free state tax filing Voluntary Classification Settlement Program (VCSP). Free federal and free state tax filing   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. Free federal and free state tax filing To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Free federal and free state tax filing For more information, visit IRS. Free federal and free state tax filing gov and enter “VCSP” in the search box. Free federal and free state tax filing 2. Free federal and free state tax filing Employee or Independent Contractor? An employer must generally withhold federal income taxes, withhold and pay over social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Free federal and free state tax filing An employer does not generally have to withhold or pay over any federal taxes on payments to independent contractors. Free federal and free state tax filing Common-Law Rules To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. Free federal and free state tax filing In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Free federal and free state tax filing Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. Free federal and free state tax filing These facts are discussed next. Free federal and free state tax filing Behavioral control. Free federal and free state tax filing   Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of: Instructions that the business gives to the worker. Free federal and free state tax filing   An employee is generally subject to the business' instructions about when, where, and how to work. Free federal and free state tax filing All of the following are examples of types of instructions about how to do work. Free federal and free state tax filing When and where to do the work. Free federal and free state tax filing What tools or equipment to use. Free federal and free state tax filing What workers to hire or to assist with the work. Free federal and free state tax filing Where to purchase supplies and services. Free federal and free state tax filing What work must be performed by a specified  individual. Free federal and free state tax filing What order or sequence to follow. Free federal and free state tax filing   The amount of instruction needed varies among different jobs. Free federal and free state tax filing Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. Free federal and free state tax filing A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. Free federal and free state tax filing The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right. Free federal and free state tax filing Training that the business gives to the worker. Free federal and free state tax filing   An employee may be trained to perform services in a particular manner. Free federal and free state tax filing Independent contractors ordinarily use their own methods. Free federal and free state tax filing Financial control. Free federal and free state tax filing   Facts that show whether the business has a right to control the business aspects of the worker's job include: The extent to which the worker has unreimbursed business expenses. Free federal and free state tax filing   Independent contractors are more likely to have unreimbursed expenses than are employees. Free federal and free state tax filing Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. Free federal and free state tax filing However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer. Free federal and free state tax filing The extent of the worker's investment. Free federal and free state tax filing   An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. Free federal and free state tax filing However, a significant investment is not necessary for independent contractor status. Free federal and free state tax filing The extent to which the worker makes his or her services available to the relevant market. Free federal and free state tax filing   An independent contractor is generally free to seek out business opportunities. Free federal and free state tax filing Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. Free federal and free state tax filing How the business pays the worker. Free federal and free state tax filing   An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. Free federal and free state tax filing This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. Free federal and free state tax filing An independent contractor is often paid a flat fee or on a time and materials basis for the job. Free federal and free state tax filing However, it is common in some professions, such as law, to pay independent contractors hourly. Free federal and free state tax filing The extent to which the worker can realize a profit or loss. Free federal and free state tax filing   An independent contractor can make a profit or loss. Free federal and free state tax filing Type of relationship. Free federal and free state tax filing   Facts that show the parties' type of relationship include: Written contracts describing the relationship the parties intended to create. Free federal and free state tax filing Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. Free federal and free state tax filing The permanency of the relationship. Free federal and free state tax filing If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship. Free federal and free state tax filing The extent to which services performed by the worker are a key aspect of the regular business of the company. Free federal and free state tax filing If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. Free federal and free state tax filing For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. Free federal and free state tax filing This would indicate an employer-employee relationship. Free federal and free state tax filing IRS help. Free federal and free state tax filing   If you want the IRS to determine whether or not a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. Free federal and free state tax filing Industry Examples The following examples may help you properly classify your workers. Free federal and free state tax filing Building and Construction Industry Example 1. Free federal and free state tax filing Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. Free federal and free state tax filing She did not advance funds to help him carry on the work. Free federal and free state tax filing She makes direct payments to the suppliers for all necessary materials. Free federal and free state tax filing She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. Free federal and free state tax filing She pays them an hourly rate and exercises almost constant supervision over the work. Free federal and free state tax filing Jerry is not free to transfer his assistants to other jobs. Free federal and free state tax filing He may not work on other jobs while working for Wilma. Free federal and free state tax filing He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. Free federal and free state tax filing He and his assistants perform personal services for hourly wages. Free federal and free state tax filing Jerry Jones and his assistants are employees of Wilma White. Free federal and free state tax filing Example 2. Free federal and free state tax filing Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. Free federal and free state tax filing He uses his own tools and performs services in the order designated by the corporation and according to its specifications. Free federal and free state tax filing The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. Free federal and free state tax filing He does not have a place of business or hold himself out to perform similar services for others. Free federal and free state tax filing Either party can end the services at any time. Free federal and free state tax filing Milton Manning is an employee of the corporation. Free federal and free state tax filing Example 3. Free federal and free state tax filing Wallace Black agreed with the Sawdust Co. Free federal and free state tax filing to supply the construction labor for a group of houses. Free federal and free state tax filing The company agreed to pay all construction costs. Free federal and free state tax filing However, he supplies all the tools and equipment. Free federal and free state tax filing He performs personal services as a carpenter and mechanic for an hourly wage. Free federal and free state tax filing He also acts as superintendent and foreman and engages other individuals to assist him. Free federal and free state tax filing The company has the right to select, approve, or discharge any helper. Free federal and free state tax filing A company representative makes frequent inspections of the construction site. Free federal and free state tax filing When a house is finished, Wallace is paid a certain percentage of its costs. Free federal and free state tax filing He is not responsible for faults, defects of construction, or wasteful operation. Free federal and free state tax filing At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. Free federal and free state tax filing The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages. Free federal and free state tax filing Wallace Black and his assistants are employees of the Sawdust Co. Free federal and free state tax filing Example 4. Free federal and free state tax filing Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. Free federal and free state tax filing A signed contract established a flat amount for the services rendered by Bill Plum. Free federal and free state tax filing Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. Free federal and free state tax filing He hires his own roofers who are treated as employees for federal employment tax purposes. Free federal and free state tax filing If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. Free federal and free state tax filing Bill Plum, doing business as Plum Roofing, is an independent contractor. Free federal and free state tax filing Example 5. Free federal and free state tax filing Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. Free federal and free state tax filing She is to receive $1,280 every 2 weeks for the next 10 weeks. Free federal and free state tax filing This is not considered payment by the hour. Free federal and free state tax filing Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. Free federal and free state tax filing She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. Free federal and free state tax filing Vera is an independent contractor. Free federal and free state tax filing Trucking Industry Example. Free federal and free state tax filing Rose Trucking contracts to deliver material for Forest, Inc. Free federal and free state tax filing , at $140 per ton. Free federal and free state tax filing Rose Trucking is not paid for any articles that are not delivered. Free federal and free state tax filing At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. Free federal and free state tax filing All operating expenses, including insurance coverage, are paid by Jan Rose. Free federal and free state tax filing All equipment is owned or rented by Jan and she is responsible for all maintenance. Free federal and free state tax filing None of the drivers are provided by Forest, Inc. Free federal and free state tax filing Jan Rose, operating as Rose Trucking, is an independent contractor. Free federal and free state tax filing Computer Industry Example. Free federal and free state tax filing Steve Smith, a computer programmer, is laid off when Megabyte, Inc. Free federal and free state tax filing , downsizes. Free federal and free state tax filing Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. Free federal and free state tax filing It is not clear how long that it will take to complete the project, and Steve is not guaranteed any minimum payment for the hours spent on the program. Free federal and free state tax filing Megabyte provides Steve with no instructions beyond the specifications for the product itself. Free federal and free state tax filing Steve and Megabyte have a written contract, which provides that Steve is considered to be an independent contractor, is required to pay federal and state taxes, and receives no benefits from Megabyte. Free federal and free state tax filing Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. Free federal and free state tax filing Steve works at home and is not expected or allowed to attend meetings of the software development group. Free federal and free state tax filing Steve is an independent contractor. Free federal and free state tax filing Automobile Industry Example 1. Free federal and free state tax filing Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. Free federal and free state tax filing She works six days a week and is on duty in Bob's showroom on certain assigned days and times. Free federal and free state tax filing She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Free federal and free state tax filing Lists of prospective customers belong to the dealer. Free federal and free state tax filing She is required to develop leads and report results to the sales manager. Free federal and free state tax filing Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. Free federal and free state tax filing She is paid a commission and is eligible for prizes and bonuses offered by Bob. Free federal and free state tax filing Bob also pays the cost of health insurance and group-term life insurance for Donna. Free federal and free state tax filing Donna is an employee of Bob Blue. Free federal and free state tax filing Example 2. Free federal and free state tax filing Sam Sparks performs auto repair services in the repair department of an auto sales company. Free federal and free state tax filing He works regular hours and is paid on a percentage basis. Free federal and free state tax filing He has no investment in the repair department. Free federal and free state tax filing The sales company supplies all facilities, repair parts, and supplies; issues instructions on the amounts to be charged, parts to be used, and the time for completion of each job; and checks all estimates and repair orders. Free federal and free state tax filing Sam is an employee of the sales company. Free federal and free state tax filing Example 3. Free federal and free state tax filing An auto sales agency furnishes space for Helen Bach to perform auto repair services. Free federal and free state tax filing She provides her own tools, equipment, and supplies. Free federal and free state tax filing She seeks out business from insurance adjusters and other individuals and does all of the body and paint work that comes to the agency. Free federal and free state tax filing She hires and discharges her own helpers, determines her own and her helpers' working hours, quotes prices for repair work, makes all necessary adjustments, assumes all losses from uncollectible accounts, and receives, as compensation for her services, a large percentage of the gross collections from the auto repair shop. Free federal and free state tax filing Helen is an independent contractor and the helpers are her employees. Free federal and free state tax filing Attorney Example. Free federal and free state tax filing Donna Yuma is a sole practitioner who rents office space and pays for the following items: telephone, computer, on-line legal research linkup, fax machine, and photocopier. Free federal and free state tax filing Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. Free federal and free state tax filing Donna has a part-time receptionist who also does the bookkeeping. Free federal and free state tax filing She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. Free federal and free state tax filing For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. Free federal and free state tax filing Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. Free federal and free state tax filing The bills include charges for long distance calls, on-line research time, fax charges, photocopies, postage, and travel, costs for which the corporations have agreed to reimburse her. Free federal and free state tax filing Donna is an independent contractor. Free federal and free state tax filing Taxicab Driver Example. Free federal and free state tax filing Tom Spruce rents a cab from Taft Cab Co. Free federal and free state tax filing for $150 per day. Free federal and free state tax filing He pays the costs of maintaining and operating the cab. Free federal and free state tax filing Tom Spruce keeps all fares that he receives from customers. Free federal and free state tax filing Although he receives the benefit of Taft's two-way radio communication equipment, dispatcher, and advertising, these items benefit both Taft and Tom Spruce. Free federal and free state tax filing Tom Spruce is an independent contractor. Free federal and free state tax filing Salesperson To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. Free federal and free state tax filing If a salesperson who works for you does not meet the tests for a common-law employee, discussed earlier in this section, you do not have to withhold federal income tax from his or her pay (see Statutory Employees in section 1). Free federal and free state tax filing However, even if a salesperson is not an employee under the usual common-law rules for income tax withholding, his or her pay may still be subject to social security, Medicare, and FUTA taxes as a statutory employee. Free federal and free state tax filing To determine whether a salesperson is an employee for social security, Medicare, and FUTA tax purposes, the salesperson must meet all eight elements of the statutory employee test. Free federal and free state tax filing A salesperson is a statutory employee for social security, Medicare, and FUTA tax purposes if he or she: Works full time for one person or company except, possibly, for sideline sales activities on behalf of some other person, Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works, Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments, Sells merchandise for resale, or supplies for use in the customer's business, Agrees to do substantially all of this work personally, Has no substantial investment in the facilities used to do the work, other than in facilities for transportation, Maintains a continuing relationship with the person or company for which he or she works, and Is not an employee under common-law rules. Free federal and free state tax filing 3. Free federal and free state tax filing Employees of Exempt Organizations Many nonprofit organizations are exempt from federal income tax. Free federal and free state tax filing Although they do not have to pay federal income tax themselves, they must still withhold federal income tax from the pay of their employees. Free federal and free state tax filing However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees. Free federal and free state tax filing Section 501(c)(3) organizations. Free federal and free state tax filing   Nonprofit organizations that are exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code include any community chest, fund, or foundation organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals. Free federal and free state tax filing These organizations are usually corporations and are exempt from federal income tax under section 501(a). Free federal and free state tax filing Social security and Medicare taxes. Free federal and free state tax filing   Wages paid to employees of section 501(c)(3) organizations are subject to social security and Medicare taxes unless one of the following situations applies. Free federal and free state tax filing The organization pays an employee less than $100 in a calendar year. Free federal and free state tax filing The organization is a church or church-controlled organization opposed for religious reasons to the payment of social security and Medicare taxes and has filed Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption From Employer Social Security and Medicare Taxes, to elect exemption from social security and Medicare taxes. Free federal and free state tax filing The organization must have filed for exemption before the first date on which a quarterly employment tax return (Form 941) or annual employment tax return (Form 944) would otherwise be due. Free federal and free state tax filing   An employee of a church or church-controlled organization that is exempt from social security and Medicare taxes must pay self-employment tax if the employee is paid $108. Free federal and free state tax filing 28 or more in a year. Free federal and free state tax filing However, an employee who is a member of a qualified religious sect can apply for an exemption from the self-employment tax by filing Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits. Free federal and free state tax filing See Members of recognized religious sects opposed to insurance in section 4. Free federal and free state tax filing FUTA tax. Free federal and free state tax filing   An organization that is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from FUTA tax. Free federal and free state tax filing This exemption cannot be waived. Free federal and free state tax filing Do not file Form 940 to report wages paid by these organizations or pay the tax. Free federal and free state tax filing Note. Free federal and free state tax filing An organization wholly owned by a state or its political subdivision should contact the appropriate state official for information about reporting and getting social security and Medicare coverage for its employees. Free federal and free state tax filing Other than section 501(c)(3) organizations. Free federal and free state tax filing   Nonprofit organizations that are not section 501(c)(3) organizations may also be exempt from federal income tax under section 501(a) or section 521. Free federal and free state tax filing However, these organizations are not exempt from withholding federal income, social security, or Medicare tax from their employees' pay, or from paying FUTA tax. Free federal and free state tax filing Two special rules for social security, Medicare, and FUTA taxes apply. Free federal and free state tax filing If an employee is paid less than $100 during a calendar year, his or her wages are not subject to social security and Medicare taxes. Free federal and free state tax filing If an employee is paid less than $50 in a calendar quarter, his or her wages are not subject to FUTA tax for the quarter. Free federal and free state tax filing The above rules do not apply to employees who work for pension plans and other similar organizations described in section 401(a). Free federal and free state tax filing 4. Free federal and free state tax filing Religious Exemptions and Special Rules for Ministers Special rules apply to the treatment of ministers for social security and Medicare tax purposes. Free federal and free state tax filing An exemption from social security and Medicare taxes is available for ministers and certain other religious workers and members of certain recognized religious sects. Free federal and free state tax filing For more information on getting an exemption, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Free federal and free state tax filing Ministers. Free federal and free state tax filing   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Free federal and free state tax filing They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances and sacraments according to the prescribed tenets and practices of that religious organization. Free federal and free state tax filing   Ministers are employees if they perform services in the exercise of ministry and are subject to your will and control. Free federal and free state tax filing The common-law rules discussed in section 1 and section 2 should be applied to determine whether a minister is your employee or is self-employed. Free federal and free state tax filing Whether the minister is an employee or self-employed, the earnings of a minister are not subject to federal income, social security, and Medicare tax withholding. Free federal and free state tax filing However, even if the minister is a common law employee, the earnings as reported on the minister's Form 1040 are subject to self-employment tax and federal income tax. Free federal and free state tax filing You do not withhold these taxes from wages earned by a minister, but if the minister is your employee, you may agree with the minister to voluntarily withhold tax to cover the minister's liability for self-employment tax and federal income tax. Free federal and free state tax filing For more information, see Publication 517. Free federal and free state tax filing Form W-2. Free federal and free state tax filing   If your minister is an employee, report all taxable compensation as wages in box 1 on Form W-2. Free federal and free state tax filing Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Publication 15 (Circular E). Free federal and free state tax filing Do not include a parsonage allowance (excludable housing allowance) in this amount. Free federal and free state tax filing You may report a designated parsonage or rental allowance (housing allowance) and a utilities allowance, or the rental value of housing provided in a separate statement or in box 14 on Form W-2. Free federal and free state tax filing Do not show on Form W-2, Form 941, or Form 944 any amount as social security or Medicare wages, or any withholding for social security or Medicare taxes. Free federal and free state tax filing If you withheld federal income tax from the minister under a voluntary agreement, this amount should be shown in box 2 on Form W-2 as federal income tax withheld. Free federal and free state tax filing For more information on ministers, see Publication 517. Free federal and free state tax filing Exemptions for ministers and others. Free federal and free state tax filing   Certain ordained ministers, Christian Science practitioners, and members of religious orders who have not taken a vow of poverty may apply to exempt their earnings from self-employment tax on religious grounds. Free federal and free state tax filing The application must be based on conscientious opposition because of personal considerations to public insurance that makes payments in the event of death, disability, old age, or retirement, or that makes payments toward the cost of, or provides services for, medical care, including social security and Medicare benefits. Free federal and free state tax filing The exemption applies only to qualified services performed for the religious organization. Free federal and free state tax filing See Revenue Procedure 91-20, 1991-1 C. Free federal and free state tax filing B. Free federal and free state tax filing 524, for guidelines to determine whether an organization is a religious order or whether an individual is a member of a religious order. Free federal and free state tax filing   To apply for the exemption, the employee should file Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners. Free federal and free state tax filing See Publication 517 for more information about claiming an exemption from self-employment tax using Form 4361. Free federal and free state tax filing Members of recognized religious sects opposed to insurance. Free federal and free state tax filing   If you belong to a recognized religious sect or to a division of such sect that is opposed to insurance, you may qualify for an exemption from the self-employment tax. Free federal and free state tax filing To qualify, you must be conscientiously opposed to accepting the benefits of any public or private insurance that makes payments because of death, disability, old age, or retirement, or makes payments toward the cost of, or provides services for, medical care (including social security and Medicare benefits). Free federal and free state tax filing If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. Free federal and free state tax filing Religious opposition based on the teachings of the sect is the only legal basis for the exemption. Free federal and free state tax filing In addition, your religious sect (or division) must have existed since December 31, 1950. Free federal and free state tax filing Self-employed. Free federal and free state tax filing   If you are self-employed and a member of a recognized religious sect opposed to insurance, you can apply for exemption by filing Form 4029 to waive all social security and Medicare benefits. Free federal and free state tax filing Employees. Free federal and free state tax filing   The social security and Medicare tax exemption available to the self-employed who are members of a recognized religious sect opposed to insurance is also available to their employees who are members of such a sect. Free federal and free state tax filing This applies to partnerships only if each partner is a member of the sect. Free federal and free state tax filing This exemption for employees applies only if both the employee and the employer are members of such a sect, and the employer has an exemption. Free federal and free state tax filing To get the exemption, the employee must file Form 4029. Free federal and free state tax filing   An employee of a church or church-controlled organization that is exempt from social security and Medicare taxes can also apply for an exemption on Form 4029. Free federal and free state tax filing 5. Free federal and free state tax filing Wages and Other Compensation Publication 15 (Circular E) provides a general discussion of taxable wages. Free federal and free state tax filing Publication 15-B discusses fringe benefits. Free federal and free state tax filing The following topics supplement those discussions. Free federal and free state tax filing Relocating for Temporary Work Assignments If an employee is given a temporary work assignment away from his or her regular place of work, certain travel expenses reimbursed or paid directly by the employer in accordance with an accountable plan (see section 5 in Publication 15 (Circular E)) may be excludable from the employee's wages. Free federal and free state tax filing Generally, a temporary work assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. Free federal and free state tax filing If the employee's new work assignment is indefinite, any living expenses reimbursed or paid by the employer (other than qualified moving expenses) must be included in the employee's wages as compensation. Free federal and free state tax filing For the travel expenses to be excludable: The new work location must be outside of the city or general area of the employee's regular work place or post of duty, The travel expenses must otherwise qualify as deductible by the employee, and The expenses must be for the period during which the employee is at the temporary work location. Free federal and free state tax filing If you reimburse or pay any personal expenses of an employee during his or her temporary work assignment, such as expenses for home leave for family members or for vacations, these amounts must be included in the employee's wages. Free federal and free state tax filing See chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Publication 15 (Circular E), for more information. Free federal and free state tax filing These rules generally apply to temporary work assignments both inside and outside the U. Free federal and free state tax filing S. Free federal and free state tax filing Employee Achievement Awards Do not withhold federal income, social security, or Medicare taxes on the fair market value of an employee achievement award if it is excludable from your employee's gross income. Free federal and free state tax filing To be excludable from your employee's gross income, the award must be tangible personal property (not cash, gift certificates, or securities) given to an employee for length of service or safety achievement, awarded as part of a meaningful presentation, and awarded under circumstances that do not indicate that the payment is disguised compensation. Free federal and free state tax filing Excludable employee achievement awards also are not subject to FUTA tax. Free federal and free state tax filing Limits. Free federal and free state tax filing   The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. Free federal and free state tax filing A higher limit of $1,600 applies to qualified plan awards. Free federal and free state tax filing Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. Free federal and free state tax filing An award cannot be treated as a qualified plan award if the average cost per recipient of all awards under all of your qualified plans is more than $400. Free federal and free state tax filing   If during the year an employee receives awards not made under a qualified plan and also receives awards under a qualified plan, the exclusion for the total cost of all awards to that employee cannot be more than $1,600. Free federal and free state tax filing The $400 and $1,600 limits cannot be added together to exclude more than $1,600 for the cost of awards to any one employee during the year. Free federal and free state tax filing Scholarship and Fellowship Payments Only amounts that you pay as a qualified scholarship to a candidate for a degree may be excluded from the recipient's gross income. Free federal and free state tax filing A qualified scholarship is any amount granted as a scholarship or fellowship that is used for: Tuition and fees required to enroll in, or to attend, an educational institution, or Fees, books, supplies, and equipment that are required for courses at the educational institution. Free federal and free state tax filing The exclusion from income does not apply to the portion of any amount received that represents payment for teaching, research, or other services required as a condition of receiving the scholarship or tuition reduction. Free federal and free state tax filing These amounts are reportable on Form W-2. Free federal and free state tax filing However, the exclusion will still apply for any amount received under two specific programs—the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program—despite any service condition attached to those amounts. Free federal and free state tax filing Any amounts that you pay for room and board are not excludable from the recipient's gross income. Free federal and free state tax filing A qualified scholarship is not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Free federal and free state tax filing For more information, see Publication 970, Tax Benefits for Education. Free federal and free state tax filing Outplacement Services If you provide outplacement services to your employees to help them find new employment (such as career counseling, resume assistance, or skills assessment), the value of these benefits may be income to them and subject to all withholding taxes. Free federal and free state tax filing However, the value of these services will not be subject to any employment taxes if: You derive a substantial business benefit from providing the services (such as improved employee morale or business image) separate from the benefit that you would receive from the mere payment of additional compensation, and The employee would be able to deduct the cost of the services as employee business expenses if he or she had paid for them. Free federal and free state tax filing However, if you receive no additional benefit from providing the services, or if the services are not provided on the basis of employee need, then the value of the services is treated as wages and is subject to federal income tax withholding and social security and Medicare taxes. Free federal and free state tax filing Similarly, if an employee receives the outplacement services in exchange for reduced severance pay (or other taxable compensation), then the amount the severance pay is reduced is treated as wages for employment tax purposes. Free federal and free state tax filing Withholding for Idle Time Payments made under a voluntary guarantee to employees for idle time (any time during which an employee performs no services) are wages for the purposes of social security, Medicare, and FUTA taxes, and federal income tax withholding. Free federal and free state tax filing Back Pay Treat back pay as wages in the year paid and withhold and pay employment taxes as required. Free federal and free state tax filing If back pay was awarded by a court or government agency to enforce a federal or state statute protecting an employee's right to employment or wages, special rules apply for reporting those wages to the Social Security Administration. Free federal and free state tax filing These rules also apply to litigation actions and settlement agreements or agency directives that are resolved out of court and not under a court decree or order. Free federal and free state tax filing Examples of pertinent statutes include, but are not limited to, the National Labor Relations Act, Fair Labor Standards Act, Equal Pay Act, and Age Discrimination in Employment Act. Free federal and free state tax filing See Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, and Form SSA-131, Employer Report of Special Wage Payments, for details. Free federal and free state tax filing Supplemental Unemployment Benefits If you pay, under a plan, supplemental unemployment benefits to a former employee, all or part of the payments may be taxable and subject to federal income tax withholding, depending on how the plan is funded. Free federal and free state tax filing Amounts that represent a return to the employee of amounts previously subject to tax are not taxable and are not subject to withholding. Free federal and free state tax filing You should withhold federal income tax on the taxable part of the payments made, under a plan, to an employee who is involuntarily separated because of a reduction in force, discontinuance of a plant or operation, or other similar condition. Free federal and free state tax filing It does not matter whether the separation is temporary or permanent. Free federal and free state tax filing There are special rules that apply in determining whether benefits qualify as supplemental unemployment benefits that are excluded from wages for social security, Medicare, and FUTA tax purposes. Free federal and free state tax filing To qualify as supplemental unemployment benefits for these purposes, the benefits must meet the following requirements. Free federal and free state tax filing Benefits are paid only to unemployed former employees who are laid off by the employer. Free federal and free state tax filing Eligibility for benefits depends on meeting prescribed conditions after termination. Free federal and free state tax filing The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state law, and the amount of regular weekly pay. Free federal and free state tax filing The right to benefits does not accrue until a prescribed period after termination. Free federal and free state tax filing Benefits are not attributable to the performance of particular services. Free federal and free state tax filing No employee has any right to the benefits until qualified and eligible to receive benefits. Free federal and free state tax filing Benefits may not be paid in a lump sum. Free federal and free state tax filing Withholding on taxable supplemental unemployment benefits must be based on the withholding certificate (Form W-4) that the employee gave to you. Free federal and free state tax filing Golden Parachute Payments A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. Free federal and free state tax filing Under the agreement, the corporation agrees to pay certain amounts to its key personnel in the event of a change in ownership or control of the corporation. Free federal and free state tax filing Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. Free federal and free state tax filing See Regulations section 1. Free federal and free state tax filing 280G-1 for more information. Free federal and free state tax filing No deduction is allowed to the corporation for any excess parachute payment. Free federal and free state tax filing To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. Free federal and free state tax filing A parachute payment for purposes of section 280G is any payment that meets all of the following. Free federal and free state tax filing The payment is in the nature of compensation. Free federal and free state tax filing The payment is to, or for the benefit of, a disqualified individual. Free federal and free state tax filing A disqualified individual is anyone who at any time during the 12-month period prior to and ending on the date of the change in ownership or control of the corporation (the disqualified individual determination period) was an employee or independent contractor and was, in regard to that corporation, a shareholder, an officer, or highly compensated individual. Free federal and free state tax filing The payment is contingent on a change in ownership of the corporation, the effective control of the corporation, or the ownership of a substantial portion of the assets of the corporation. Free federal and free state tax filing The payment has an aggregate present value of at least three times the individual's base amount. Free federal and free state tax filing The base amount is the average annual compensation for service includible in the individual's gross income over the most recent 5 taxable years. Free federal and free state tax filing An excess parachute payment amount is the excess of any parachute payment over the base amount. Free federal and free state tax filing For more information, see Regulations section 1. Free federal and free state tax filing 280G-1. Free federal and free state tax filing The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. Free federal and free state tax filing If the recipient is an employee, the 20% excise tax is to be withheld by the corporation. Free federal and free state tax filing Example. Free federal and free state tax filing An officer of a corporation receives a golden parachute payment of $400,000. Free federal and free state tax filing This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. Free federal and free state tax filing The excess parachute payment is $300,000 ($400,000 minus $100,000). Free federal and free state tax filing The corporation cannot deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). Free federal and free state tax filing Reporting golden parachute payments. Free federal and free state tax filing   Golden parachute payments to employees must be reported on Form W-2. Free federal and free state tax filing See the General Instructions for Forms W-2 and W-3 for details. Free federal and free state tax filing For nonemployee reporting of these payments, see Box 7. Free federal and free state tax filing Nonemployee Compensation in the Instructions for Form 1099-MISC. Free federal and free state tax filing Exempt payments. Free federal and free state tax filing   Payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules. Free federal and free state tax filing See section 280G(b)(5) and (6) for more information. Free federal and free state tax filing Interest-Free and Below-Market-Interest-Rate Loans In general, if an employer lends an employee more than $10,000 at an interest rate less than the current applicable federal rate (AFR), the difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee. Free federal and free state tax filing This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. Free federal and free state tax filing This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. Free federal and free state tax filing Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). Free federal and free state tax filing The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. Free federal and free state tax filing You can get these rates by calling 1-800-829-4933 or by visiting IRS. Free federal and free state tax filing gov. Free federal and free state tax filing For more information, see section 7872 and its related regulations. Free federal and free state tax filing Leave Sharing Plans If you establish a leave sharing plan for your employees that allows them to transfer leave to other employees for medical emergencies, the amounts paid to the recipients of the leave are considered wages. Free federal and free state tax filing These amounts are includible in the gross income of the recipients and are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. Free federal and free state tax filing Do not include these amounts in the income of the transferors. Free federal and free state tax filing These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies. Free federal and free state tax filing Nonqualified Deferred Compensation Plans Income Tax and Reporting Section 409A provides that all amounts deferred under a nonqualified deferred compensation (NQDC) plan for all tax years are currently includible in gross income (to the extent not subject to a substantial risk of forfeiture and not previously included in gross income) and subject to additional taxes, unless certain requirements are met pertaining to, among other things, elections to defer compensation and distributions under a NQDC plan. Free federal and free state tax filing Section 409A also includes rules that apply to certain trusts or similar arrangements associated with NQDC plans if the trusts or arrangements are located outside of the United States, are restricted to the provision of benefits in connection with a decline in the financial health of the plan sponsor, or contributions are made to the trust during certain periods such as when a qualified plan of the service recipient is underfunded. Free federal and free state tax filing Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. Free federal and free state tax filing Other changes to the Internal Revenue Code provide that the deferrals under a NQDC plan must be reported separately on Form W-2 or Form 1099-MISC, whichever applies. Free federal and free state tax filing Specific rules for reporting are provided in the instructions to the forms. Free federal and free state tax filing The provisions do not affect the application or reporting of social security, Medicare, or FUTA taxes. Free federal and free state tax filing The provisions do not prevent the inclusion of amounts in income or wages under other provisions of the Internal Revenue Code or common law principles, such as when amounts are actually or constructively received or irrevocably contributed to a separate fund. Free federal and free state tax filing For more information about nonqualified deferred compensation plans, see Regulations sections 1. Free federal and free state tax filing 409A-1 through 1. Free federal and free state tax filing 409A-6. Free federal and free state tax filing Notice 2008-113 provides guidance on the correction of certain operation failures of a NQDC plan. Free federal and free state tax filing Notice 2008-113, 2008-51 I. Free federal and free state tax filing R. Free federal and free state tax filing B. Free federal and free state tax filing 1305, is available at www. Free federal and free state tax filing irs. Free federal and free state tax filing gov/irb/2008-51_IRB/ar12. Free federal and free state tax filing html. Free federal and free state tax filing Also see Notice 2010-6, 2010-3 I. Free federal and free state tax filing R. Free federal and free state tax filing B. Free federal and free state tax filing 275, available at www. Free federal and free state tax filing irs. Free federal and free state tax filing gov/irb/2010-03_IRB/ar08. Free federal and free state tax filing html and Notice 2010-80, 2010-51 I. Free federal and free state tax filing R. Free federal and free state tax filing B. Free federal and free state tax filing 853, available at www. Free federal and free state tax filing irs. Free federal and free state tax filing gov/irb/2010-51_IRB/ar08. Free federal and free state tax filing html. Free federal and free state tax filing Social security, Medicare, and FUTA taxes. Free federal and free state tax filing   Employer contributions to nonqualified deferred compensation (NQDC) plans, as defined in the applicable regulations, are treated as wages subject to social security, Medicare, and FUTA taxes when the services are performed or the employee no longer has a substantial risk of forfeiting the right to the deferred compensation, whichever is later. Free federal and free state tax filing   Amounts deferred are subject to social security, Medicare, and FUTA taxes at that time unless the amount that is deferred cannot be reasonably ascertained; for example, if benefits are based on final pay. Free federal and free state tax filing If the value of the future benefit is based on any factors that are not yet reasonably ascertainable, you may choose to estimate the value of the future benefit and withhold and pay social security, Medicare, and FUTA taxes on that amount. Free federal and free state tax filing You will have to determine later, when the amount is reasonably ascertainable, whether any additional taxes are required. Free federal and free state tax filing If taxes are not paid before the amounts become reasonably ascertainable, when the amounts become reasonably ascertainable they are subject to social security, Medicare, and FUTA taxes on the amounts deferred plus the income attributable to those amounts deferred. Free federal and free state tax filing For more information, see Regulations sections 31. Free federal and free state tax filing 3121(v)(2)-1 and 31. Free federal and free state tax filing 3306(r)(2)-1. Free federal and free state tax filing Tax-Sheltered Annuities Employer payments made by a public educational institution or a tax-exempt organization to purchase a tax-sheltered annuity for an employee (annual deferrals) are included in the employee's social security and Medicare wages, if the payments are made because of a salary reduction agreement. Free federal and free state tax filing However, they are not included in box 1 on Form W-2 in the year the deferrals are made and are not subject to federal income tax withholding. Free federal and free state tax filing See Regulations section 31. Free federal and free state tax filing 3121(a)(5)-2 for the definition of a salary reduction agreement. Free federal and free state tax filing Contributions to a Simplified Employee Pension (SEP) An employer's SEP contributions to an employee's individual retirement arrangement (IRA) are excluded from the employee's gross income. Free federal and free state tax filing These excluded amounts are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. Free federal and free state tax filing However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. Free federal and free state tax filing See Publication 560 for more information about SEPs. Free federal and free state tax filing Salary reduction simplified employee pensions (SARSEP) repealed. Free federal and free state tax filing   You may not establish a SARSEP after 1996. Free federal and free state tax filing However, SARSEPs established before January 1, 1997, may continue to receive contributions. Free federal and free state tax filing SIMPLE Retirement Plans Employer and employee contributions to a savings incentive match plan for employees (SIMPLE) retirement account (subject to limitations) are excludable from the employee's income and are exempt from federal income tax withholding. Free federal and free state tax filing An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. Free federal and free state tax filing However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. Free federal and free state tax filing For more information about SIMPLE retirement plans, see Publication 560. Free federal and free state tax filing 6. Free federal and free state tax filing Sick Pay Reporting The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014. Free federal and free state tax filing Information about this change will be included in the revision of Publication 15-A that is expected to post to IRS. Free federal and free state tax filing gov in December 2014. Free federal and free state tax filing Special rules apply to the reporting of sick pay payments to employees. Free federal and free state tax filing How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company. Free federal and free state tax filing Sick pay is usually subject to social security, Medicare, and FUTA taxes. Free federal and free state tax filing For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. Free federal and free state tax filing Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. Free federal and free state tax filing Sick Pay Sick pay generally means any amount paid under a plan because of an employee's temporary absence from work due to injury, sickness, or disability. Free federal and free state tax filing It may be paid by either the employer or a third party, such as an insurance company. Free federal and free state tax filing Sick pay includes both short- and long-term benefits. Free federal and free state tax filing It is often expressed as a percentage of the employee's regular wages. Free federal and free state tax filing Payments That Are Not Sick Pay Sick pay does not include the following payments. Free federal and free state tax filing Disability retirement payments. Free federal and free state tax filing Disability retirement payments are not sick pay and are not discussed in this section. Free federal and free state tax filing Those payments are subject to the rules for federal income tax withholding from pensions and annuities. Free federal and free state tax filing See section 8. Free federal and free state tax filing Workers' compensation. Free federal and free state tax filing Payments because of a work-related injury or sickness that are made under a workers' compensation law are not sick pay and are not subject to employment taxes. Free federal and free state tax filing But see Payments in the nature of workers' compensation—public employees next. Free federal and free state tax filing Payments in the nature of workers' compensation—public employees. Free federal and free state tax filing State and local government employees, such as police officers and firefighters, sometimes receive payments due to an injury in the line of duty under a statute that is not the general workers' compensation law of a state. Free federal and free state tax filing If the statute limits benefits to work-related injuries or sickness and does not base payments on the employee's age, length of service, or prior contributions, the statute is “in the nature of” a workers' compensation law. Free federal and free state tax filing Payments under a statute in the nature of a workers' compensation law are not sick pay and are not subject to employment taxes. Free federal and free state tax filing For more information, see Regulations section 31. Free federal and free state tax filing 3121(a)(2)-1. Free federal and free state tax filing Medical expense payments. Free federal and free state tax filing Payments under a definite plan or system for medical and hospitalization expenses, or for insurance covering these expenses, are not sick pay and are not subject to employment taxes. Free federal and free state tax filing Payments unrelated to absence from work. Free federal and free state tax filing Accident or health insurance payments unrelated to absence from work are not sick pay and are not subject to employment taxes. Free federal and free state tax filing These include payments for: Permanent loss of a member or function of the body, Permanent loss of the use of a member or function of the body, or Permanent disfigurement of the body. Free federal and free state tax filing Example. Free federal and free state tax filing Donald was injured in a car accident and lost an eye. Free federal and free state tax filing Under a policy paid for by Donald's employer, Delta Insurance Co. Free federal and free state tax filing paid Donald $20,000 as compensation for the loss of his eye. Free federal and free state tax filing Because the payment was determined by the type of injury and was unrelated to Donald's absence from work, it is not sick pay and is not subject to federal employment taxes. Free federal and free state tax filing Sick Pay Plan A sick pay plan is a plan or system established by an employer under which sick pay is available to employees generally or to a class or classes of employees. Free federal and free state tax filing This does not include a situation in which benefits are provided on a discretionary or occasional basis with merely an intention to aid particular employees in time of need. Free federal and free state tax filing You have a sick pay plan or system if the plan is in writing or is otherwise made known to employees, such as by a bulletin board notice or your long and established practice. Free federal and free state tax filing Some indications that you have a sick pay plan or system include references to the plan or system in the contract of employment, employer contributions to a plan, or segregated accounts for the payment of benefits. Free federal and free state tax filing Definition of employer. Free federal and free state tax filing   The employer for whom the employee normally works, a term used in the following discussion, is either the employer for whom the employee was working at the time that the employee became sick or disabled or the last employer for whom the employee worked before becoming sick or disabled, if that employer made contributions to the sick pay plan on behalf of the sick or disabled employee. Free federal and free state tax filing Note. Free federal and free state tax filing Contributions to a sick pay plan through a cafeteria plan (by direct employer contributions or salary reduction) are employer contributions unless they are after-tax employee contributions (that is, included in taxable wages). Free federal and free state tax filing Third-Party Payers of Sick Pay Employer's agent. Free federal and free state tax filing   An employer's agent is a third party that bears no insurance risk and is reimbursed on a cost-plus-fee basis for payment of sick pay and similar amounts. Free federal and free state tax filing A third party may be your agent even if the third party is responsible for determining which employees are eligible to receive payments. Free federal and free state tax filing For example, if a third party provides administrative services only, the third party is your agent. Free federal and free state tax filing If the third party is paid an insurance premium and is not reimbursed on a cost-plus-fee basis, the third party is not your agent. Free federal and free state tax filing Whether an insurance company or other third party is your agent depends on the terms of their agreement with you. Free federal and free state tax filing   A third party that makes payments of sick pay as your agent is not considered the employer and generally has no responsibility for employment taxes. Free federal and free state tax filing This responsibility remains with you. Free federal and free state tax filing However, under an exception to this rule, the parties may enter into an agreement that makes the third-party agent responsible for employment taxes. Free federal and free state tax filing In this situation, the third-party agent should use its own name and EIN (rather than your name and EIN) for the responsibilities that it has assumed. Free federal and free state tax filing Third party not employer's agent. Free federal and free state tax filing   A third party that makes payments of sick pay other than as an agent of the employer is liable for federal income tax withholding (if requested by the employee) and the employee part of the social security and Medicare taxes. Free federal and free state tax filing   The third party is also liable for the employer part of the social security and Medicare taxes, and the FUTA tax, unless the third party transfers this liability to the employer for whom the employee normally works. Free federal and free state tax filing This liability is transferred if the third party takes the following steps. Free federal and free state tax filing Withholds the employee social security and Medicare taxes from the sick pay payments. Free federal and free state tax filing Makes timely deposits of the employee social security and Medicare taxes. Free federal and free state tax filing Notifies the employer for whom the employee normally works of the payments on which employee taxes were withheld and deposited. Free federal and free state tax filing The third party must notify the employer within the time required for the third party's deposit of the employee part of the social security and Medicare taxes. Free federal and free state tax filing For instance, if the third party is a monthly schedule depositor, it must notify the employer by the 15th day of the month following the month in which the sick pay payment is made because that is the day by which the deposit is required to be made. Free federal and free state tax filing The third party should notify the employer as soon as information on payments is available so that an employer required to make electronic deposits can make them timely. Free federal and free state tax filing For multi-employer plans, see the special rule discussed next. Free federal and free state tax filing Multi-employer plan timing rule. Free federal and free state tax filing   A special rule applies to sick pay payments made to employees by a third-party insurer under an insurance contract with a multi-employer plan established under a collectively bargained agreement. Free federal and free state tax filing If the third-party insurer making the payments complies wi
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Understanding Your CP279 Notice

CP279 is the notice of acceptance to the parent corporation of a Qualified Subchapter S Subsidiary (QSub) from Form 8869, Qualified Subchapter S Subsidiary Election.


What you need to do

  • Retain this notice in your permanent records.
  • Notify IRS of necessary changes via Form 8822-B, Change of Address or Responsible Party – Business.

You may want to

Supply your subsidiary corporation with a copy of this notice.


Answers to Common Questions

Q. How do I report the activity of my subsidiary?

A. Subsidiary information should be reported on Form 851, Affiliations Schedule, and other necessary schedules.

 

Page Last Reviewed or Updated: 12-Feb-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Free Federal And Free State Tax Filing

Free federal and free state tax filing Index Symbols 1099-C, Persons who each receive a Form 1099-C showing the full amount of debt. Free federal and free state tax filing 501(c)(3) organizations, Section 501(c)(3) organization. Free federal and free state tax filing A Abandonments, Abandonments Canceled debt, Canceled debt. Free federal and free state tax filing Assistance (see Tax help) B Bankruptcy, Bankruptcy Reduction of tax attributes, Bankruptcy and Insolvency Business Real property indebtedness, Qualified Real Property Business Indebtedness C Canceled debt, Canceled Debts, Persons who each receive a Form 1099-C showing the full amount of debt. Free federal and free state tax filing Exceptions Deductible debt, Deductible Debt Gifts, Gifts, Bequests, Devises, and Inheritances Price reduced after purchase, Price Reduced After Purchase Student loans, Student Loans Exclusions Bankruptcy, Bankruptcy Insolvency, Insolvency Qualified farm indebtedness, Qualified Farm Indebtedness Qualified principal residence indebtedness, Qualified Principal Residence Indebtedness Qualified real property business indebtedness, Qualified Real Property Business Indebtedness Co-owners, Persons who each receive a Form 1099-C showing the full amount of debt. Free federal and free state tax filing D Debts Stockholder's, Stockholder debt Definitions Adjusted tax attributes, Adjusted tax attributes. Free federal and free state tax filing Main home, Main home. Free federal and free state tax filing Qualified acquisition indebtedness, Definition of qualified acquisition indebtedness. Free federal and free state tax filing Qualified farm indebtedness, Qualified Farm Indebtedness Qualified principal residence indebtedness, Qualified Principal Residence Indebtedness Qualified real property business indebtedness, Qualified Real Property Business Indebtedness E Educational loans, Student Loans Exceptions Home Affordable Modification Program, Home Affordable Modification Program F Farm indebtedness, Qualified Farm Indebtedness Reduction of tax attributes, Qualified Farm Indebtedness Foreclosures, Foreclosures and Repossessions Form 1099-A, Forms 1099-A and 1099-C. Free federal and free state tax filing , Forms 1099-A and 1099-C. Free federal and free state tax filing 1099-C, Forms 1099-A and 1099-C. Free federal and free state tax filing , Forms 1099-A and 1099-C. Free federal and free state tax filing Free tax services, Free help with your tax return. Free federal and free state tax filing G Gifts, Gifts, Bequests, Devises, and Inheritances H Help (see Tax help) Home Affordable Modification Program, Home Affordable Modification Program I Income from, Canceled Debts Income from canceled debt, Canceled Debts Insolvency, Insolvency Reduction of tax attributes, Bankruptcy and Insolvency L Limits Excluded farm debt, Exclusion limit. Free federal and free state tax filing Excluded principal residence indebtedness, Exclusion limit. Free federal and free state tax filing Qualified real property business indebtedness, Exclusion limit. Free federal and free state tax filing Loans Student, Student Loans M Missing children, photographs of, Reminder Mortgage Debt Relief Act (see Qualified Principal Residence Indebtedness) P Principal residence indebtedness, Qualified Principal Residence Indebtedness Publications (see Tax help) Q Qualified farm indebtedness, Qualified Farm Indebtedness Reduction of tax attributes, Qualified Farm Indebtedness Qualified principal residence indebtedness, Qualified Principal Residence Indebtedness Reduction of tax attributes, Qualified Principal Residence Indebtedness Qualified real property business indebtedness, Qualified Real Property Business Indebtedness Reduction of tax attributes, Qualified Real Property Business Indebtedness R Real property business indebtedness, Qualified Real Property Business Indebtedness Recapture Basis reductions, Recapture of basis reductions. Free federal and free state tax filing Repossessions, Foreclosures and Repossessions S Stockholder debts, Stockholder debt Student loans, Student Loans Suggestions for publication, Comments and suggestions. Free federal and free state tax filing T Tax attributes, reduction of Bankruptcy, Bankruptcy and Insolvency Insolvency, Bankruptcy and Insolvency Qualified farm indebtedness, Qualified Farm Indebtedness Qualified principal residence indebtedness, Qualified Principal Residence Indebtedness Qualified real property business indebtedness, Qualified Real Property Business Indebtedness Tax help, How To Get Tax Help TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications