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Free File Taxes 2011

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Free File Taxes 2011

Free file taxes 2011 9. Free file taxes 2011   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Free file taxes 2011 Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. Free file taxes 2011 Amount to report as ordinary income. Free file taxes 2011 Applicable percentage. Free file taxes 2011 Amount to report as ordinary income. Free file taxes 2011 Applicable percentage. Free file taxes 2011 Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. Free file taxes 2011 When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Free file taxes 2011 Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. Free file taxes 2011 Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. Free file taxes 2011 Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. Free file taxes 2011 Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Free file taxes 2011 Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). Free file taxes 2011 Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. Free file taxes 2011 Table 9-1. Free file taxes 2011 Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. Free file taxes 2011 Held 24 mos. Free file taxes 2011  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. Free file taxes 2011 Held 12 mos. Free file taxes 2011   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Free file taxes 2011 Do not take that gain into account as section 1231 gain. Free file taxes 2011 Section 1231 transactions. Free file taxes 2011   Gain or loss on the following transactions is subject to section 1231 treatment. Free file taxes 2011 Sale or exchange of cattle and horses. Free file taxes 2011 The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. Free file taxes 2011 Sale or exchange of other livestock. Free file taxes 2011 This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. Free file taxes 2011 Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. Free file taxes 2011 Other livestock does not include poultry. Free file taxes 2011 Sale or exchange of depreciable personal property. Free file taxes 2011 This property must be used in your business and held longer than 1 year. Free file taxes 2011 Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Free file taxes 2011 Examples of depreciable personal property include farm machinery and trucks. Free file taxes 2011 It also includes amortizable section 197 intangibles. Free file taxes 2011 Sale or exchange of real estate. Free file taxes 2011 This property must be used in your business and held longer than 1 year. Free file taxes 2011 Examples are your farm or ranch (including barns and sheds). Free file taxes 2011 Sale or exchange of unharvested crops. Free file taxes 2011 The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. Free file taxes 2011 You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). Free file taxes 2011 Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. Free file taxes 2011 Distributive share of partnership gains and losses. Free file taxes 2011 Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). Free file taxes 2011 Cutting or disposal of timber. Free file taxes 2011 Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . Free file taxes 2011 Condemnation. Free file taxes 2011 The condemned property (defined in chapter 11) must have been held longer than 1 year. Free file taxes 2011 It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Free file taxes 2011 It cannot be property held for personal use. Free file taxes 2011 Casualty or theft. Free file taxes 2011 The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). Free file taxes 2011 You must have held the property longer than 1 year. Free file taxes 2011 However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Free file taxes 2011 Section 1231 does not apply to personal casualty gains and losses. Free file taxes 2011 See chapter 11 for information on how to treat those gains and losses. Free file taxes 2011 If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. Free file taxes 2011 See Table 9-1. Free file taxes 2011 Property for sale to customers. Free file taxes 2011   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Free file taxes 2011 If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Free file taxes 2011 Treatment as ordinary or capital. Free file taxes 2011   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. Free file taxes 2011 If you have a net section 1231 loss, it is an ordinary loss. Free file taxes 2011 If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. Free file taxes 2011 The rest, if any, is long-term capital gain. Free file taxes 2011 Nonrecaptured section 1231 losses. Free file taxes 2011   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. Free file taxes 2011 These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Free file taxes 2011 Example. Free file taxes 2011 In 2013, Ben has a $2,000 net section 1231 gain. Free file taxes 2011 To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Free file taxes 2011 From 2008 through 2012 he had the following section 1231 gains and losses. Free file taxes 2011 Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Free file taxes 2011 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. Free file taxes 2011 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. Free file taxes 2011 To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Free file taxes 2011 For more information, see chapter 3 of Publication 544. Free file taxes 2011 Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. Free file taxes 2011 Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. Free file taxes 2011 See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. Free file taxes 2011 Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Free file taxes 2011 Personal property (either tangible or intangible). Free file taxes 2011 Other tangible property (except buildings and their structural components) used as any of the following. Free file taxes 2011 See Buildings and structural components below. Free file taxes 2011 An integral part of manufacturing, production, or extraction, or of furnishing certain services. Free file taxes 2011 A research facility in any of the activities in (a). Free file taxes 2011 A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). Free file taxes 2011 That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Free file taxes 2011 Amortization of certified pollution control facilities. Free file taxes 2011 The section 179 expense deduction. Free file taxes 2011 Deduction for clean-fuel vehicles and certain refueling property. Free file taxes 2011 Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Free file taxes 2011 Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. Free file taxes 2011 Single purpose agricultural (livestock) or horticultural structures. Free file taxes 2011 Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Free file taxes 2011 Buildings and structural components. Free file taxes 2011   Section 1245 property does not include buildings and structural components. Free file taxes 2011 The term building includes a house, barn, warehouse, or garage. Free file taxes 2011 The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Free file taxes 2011   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Free file taxes 2011 Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Free file taxes 2011   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Free file taxes 2011 Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. Free file taxes 2011 Facility for bulk storage of fungible commodities. Free file taxes 2011   This is a facility used mainly for the bulk storage of fungible commodities. Free file taxes 2011 Bulk storage means storage of a commodity in a large mass before it is used. Free file taxes 2011 For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Free file taxes 2011 To be fungible, a commodity must be such that one part may be used in place of another. Free file taxes 2011 Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Free file taxes 2011 The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. Free file taxes 2011 The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Free file taxes 2011 For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. Free file taxes 2011 For details, see chapter 3 of Publication 544. Free file taxes 2011 Use Part III of Form 4797 to figure the ordinary income part of the gain. Free file taxes 2011 Depreciation claimed on other property or claimed by other taxpayers. Free file taxes 2011   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Free file taxes 2011 Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Free file taxes 2011 For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. Free file taxes 2011 Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). Free file taxes 2011 Example. Free file taxes 2011 Jeff Free paid $120,000 for a tractor in 2012. Free file taxes 2011 On February 23, 2013, he traded it for a chopper and paid an additional $30,000. Free file taxes 2011 To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. Free file taxes 2011 Jeff can also depreciate the additional $30,000 for the chopper. Free file taxes 2011 Depreciation and amortization. Free file taxes 2011   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. Free file taxes 2011 See Depreciation Recapture in chapter 3 of Publication 544 for more details. Free file taxes 2011 Ordinary depreciation deductions. Free file taxes 2011 Section 179 deduction (see chapter 7). Free file taxes 2011 Any special depreciation allowance. Free file taxes 2011 Amortization deductions for all the following costs. Free file taxes 2011 Acquiring a lease. Free file taxes 2011 Lessee improvements. Free file taxes 2011 Pollution control facilities. Free file taxes 2011 Reforestation expenses. Free file taxes 2011 Section 197 intangibles. Free file taxes 2011 Qualified disaster expenses. Free file taxes 2011 Franchises, trademarks, and trade names acquired before August 11, 1993. Free file taxes 2011 Example. Free file taxes 2011 You file your returns on a calendar year basis. Free file taxes 2011 In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. Free file taxes 2011 You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. Free file taxes 2011 You did not claim the section 179 expense deduction for the truck. Free file taxes 2011 You sold it in May 2013 for $7,000. Free file taxes 2011 The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). Free file taxes 2011 Figure the gain treated as ordinary income as follows. Free file taxes 2011 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. Free file taxes 2011   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. Free file taxes 2011 If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Free file taxes 2011 If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Free file taxes 2011 This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Free file taxes 2011 Disposition of plants and animals. Free file taxes 2011   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. Free file taxes 2011 If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. Free file taxes 2011 For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. Free file taxes 2011 For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. Free file taxes 2011 You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. Free file taxes 2011 Example. Free file taxes 2011 Janet Maple sold her apple orchard in 2013 for $80,000. Free file taxes 2011 Her adjusted basis at the time of sale was $60,000. Free file taxes 2011 She bought the orchard in 2006, but the trees did not produce a crop until 2009. Free file taxes 2011 Her pre-productive expenses were $6,000. Free file taxes 2011 She elected not to use the uniform capitalization rules. Free file taxes 2011 Janet must treat $6,000 of the gain as ordinary income. Free file taxes 2011 Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. Free file taxes 2011 It includes buildings and structural components that are not section 1245 property (discussed earlier). Free file taxes 2011 It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Free file taxes 2011 A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. Free file taxes 2011 Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. Free file taxes 2011 To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. Free file taxes 2011 You will not have additional depreciation if any of the following apply to the property disposed of. Free file taxes 2011 You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. Free file taxes 2011 You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Free file taxes 2011 The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. Free file taxes 2011 These properties are depreciated using the straight line method. Free file taxes 2011 Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Free file taxes 2011 This applies even if no payments are received in that year. Free file taxes 2011 If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Free file taxes 2011 For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Free file taxes 2011 If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. Free file taxes 2011 To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Free file taxes 2011 Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Free file taxes 2011 For more information on installment sales, see chapter 10. Free file taxes 2011 Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. Free file taxes 2011 By gift. Free file taxes 2011 At death. Free file taxes 2011 In like-kind exchanges. Free file taxes 2011 In involuntary conversions. Free file taxes 2011 Publication 544 also explains how to handle a single transaction involving multiple properties. Free file taxes 2011 Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. Free file taxes 2011 Deductions for soil and water conservation expenditures (section 1252 property). Free file taxes 2011 Exclusions from income for certain cost sharing payments (section 1255 property). Free file taxes 2011 Section 1252 property. Free file taxes 2011   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. Free file taxes 2011 Exceptions. Free file taxes 2011   Do not treat gain on the following transactions as gain on section 1252 property. Free file taxes 2011 Disposition of farmland by gift. Free file taxes 2011 Transfer of farm property at death (except for income in respect of a decedent). Free file taxes 2011 For more information, see Regulations section 1. Free file taxes 2011 1252-2. Free file taxes 2011 Amount to report as ordinary income. Free file taxes 2011   You report as ordinary income the lesser of the following amounts. Free file taxes 2011 Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). Free file taxes 2011 The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. Free file taxes 2011 Applicable percentage. Free file taxes 2011   The applicable percentage is based on the length of time you held the land. Free file taxes 2011 If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. Free file taxes 2011 If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. Free file taxes 2011 If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. Free file taxes 2011 Example. Free file taxes 2011 You acquired farmland on January 19, 2005. Free file taxes 2011 On October 3, 2013, you sold the land at a $30,000 gain. Free file taxes 2011 Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. Free file taxes 2011 The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. Free file taxes 2011 You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. Free file taxes 2011 Section 1255 property. Free file taxes 2011   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. Free file taxes 2011 If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. Free file taxes 2011 Amount to report as ordinary income. Free file taxes 2011   You report as ordinary income the lesser of the following amounts. Free file taxes 2011 The applicable percentage of the total excluded cost-sharing payments. Free file taxes 2011 The gain on the disposition of the property. Free file taxes 2011 You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. Free file taxes 2011 However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. Free file taxes 2011 Applicable percentage. Free file taxes 2011   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. Free file taxes 2011 If the property is held less than 10 years after you receive the payments, the percentage is 100%. Free file taxes 2011 After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. Free file taxes 2011 Form 4797, Part III. Free file taxes 2011   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. Free file taxes 2011 Prev  Up  Next   Home   More Online Publications
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The Free File Taxes 2011

Free file taxes 2011 Publication 15-A - Main Content Table of Contents 1. Free file taxes 2011 Who Are Employees?Independent Contractors Common-Law Employees Statutory Employees Statutory Nonemployees Misclassification of Employees 2. Free file taxes 2011 Employee or Independent Contractor?Common-Law Rules Industry Examples 3. Free file taxes 2011 Employees of Exempt OrganizationsSocial security and Medicare taxes. Free file taxes 2011 FUTA tax. Free file taxes 2011 4. Free file taxes 2011 Religious Exemptions and Special Rules for MinistersForm W-2. Free file taxes 2011 Self-employed. Free file taxes 2011 Employees. Free file taxes 2011 5. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 Special Rules for Paying TaxesCommon Paymaster Agents Reporting Agents Employee's Portion of Taxes Paid by Employer International Social Security Agreements 8. Free file taxes 2011 Pensions and AnnuitiesFederal Income Tax Withholding 9. Free file taxes 2011 Alternative Methods for Figuring WithholdingTerm of continuous employment. Free file taxes 2011 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 file taxes 2011 Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersWithholding Tables How To Get Tax Help 1. Free file taxes 2011 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 file taxes 2011 The person performing the services may be: An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee. Free file taxes 2011 This discussion explains these four categories. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 However, in some cases you may be required to withhold under the backup withholding requirements on these payments. Free file taxes 2011 See Publication 15 (Circular E) for information on backup withholding. Free file taxes 2011 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 file taxes 2011 However, whether such people are employees or independent contractors depends on the facts in each case. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 This is so even when you give the employee freedom of action. Free file taxes 2011 What matters is that you have the right to control the details of how the services are performed. Free file taxes 2011 For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2. Free file taxes 2011 If you have an employer-employee relationship, it makes no difference how it is labeled. Free file taxes 2011 The substance of the relationship, not the label, governs the worker's status. Free file taxes 2011 It does not matter whether the individual is employed full time or part time. Free file taxes 2011 For employment tax purposes, no distinction is made between classes of employees. Free file taxes 2011 Superintendents, managers, and other supervisory personnel are all employees. Free file taxes 2011 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 file taxes 2011 A director of a corporation is not an employee with respect to services performed as a director. Free file taxes 2011 You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. Free file taxes 2011 However, the wages of certain employees may be exempt from one or more of these taxes. Free file taxes 2011 See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4). Free file taxes 2011 Leased employees. Free file taxes 2011   Under certain circumstances, a firm that furnishes workers to other firms is the employer of those workers for employment tax purposes. Free file taxes 2011 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 file taxes 2011   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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 Additional information. Free file taxes 2011   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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. Free file taxes 2011 The work performed for you must be the salesperson's principal business activity. Free file taxes 2011 See Salesperson in section 2. Free file taxes 2011 Social security and Medicare taxes. Free file taxes 2011   You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. Free file taxes 2011 The service contract states or implies that substantially all the services are to be performed personally by them. Free file taxes 2011 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 file taxes 2011 The services are performed on a continuing basis for the same payer. Free file taxes 2011 Federal unemployment (FUTA) tax. Free file taxes 2011   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 file taxes 2011 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 file taxes 2011 Income tax. Free file taxes 2011   Do not withhold federal income tax from the wages of statutory employees. Free file taxes 2011 Reporting payments to statutory employees. Free file taxes 2011   Furnish Form W-2 to a statutory employee, and check “Statutory employee” in box 13. Free file taxes 2011 Show your payments to the employee as “other compensation” in box 1. Free file taxes 2011 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 file taxes 2011 The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 H-2A agricultural workers. Free file taxes 2011   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Free file taxes 2011 Statutory Nonemployees There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Free file taxes 2011 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 file taxes 2011 Direct sellers. Free file taxes 2011   Direct sellers include persons falling within any of the following three groups. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011   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 file taxes 2011 Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. Free file taxes 2011 Licensed real estate agents. Free file taxes 2011   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. Free file taxes 2011 Companion sitters. Free file taxes 2011   Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. Free file taxes 2011 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 file taxes 2011 Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. Free file taxes 2011 Misclassification of Employees Consequences of treating an employee as an independent contractor. Free file taxes 2011   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 file taxes 2011 See section 2 in Publication 15 (Circular E) for more information. Free file taxes 2011 Relief provision. Free file taxes 2011   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 file taxes 2011 To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. Free file taxes 2011 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 file taxes 2011 Technical service specialists. Free file taxes 2011   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 file taxes 2011 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 file taxes 2011   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 file taxes 2011 The common-law rules control whether the specialist is treated as an employee or an independent contractor. Free file taxes 2011 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 file taxes 2011 Test proctors and room supervisors. Free file taxes 2011   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 file taxes 2011 Voluntary Classification Settlement Program (VCSP). Free file taxes 2011   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 file taxes 2011 To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Free file taxes 2011 For more information, visit IRS. Free file taxes 2011 gov and enter “VCSP” in the search box. Free file taxes 2011 2. Free file taxes 2011 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 file taxes 2011 An employer does not generally have to withhold or pay over any federal taxes on payments to independent contractors. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 These facts are discussed next. Free file taxes 2011 Behavioral control. Free file taxes 2011   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 file taxes 2011   An employee is generally subject to the business' instructions about when, where, and how to work. Free file taxes 2011 All of the following are examples of types of instructions about how to do work. Free file taxes 2011 When and where to do the work. Free file taxes 2011 What tools or equipment to use. Free file taxes 2011 What workers to hire or to assist with the work. Free file taxes 2011 Where to purchase supplies and services. Free file taxes 2011 What work must be performed by a specified  individual. Free file taxes 2011 What order or sequence to follow. Free file taxes 2011   The amount of instruction needed varies among different jobs. Free file taxes 2011 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 file taxes 2011 A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. Free file taxes 2011 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 file taxes 2011 Training that the business gives to the worker. Free file taxes 2011   An employee may be trained to perform services in a particular manner. Free file taxes 2011 Independent contractors ordinarily use their own methods. Free file taxes 2011 Financial control. Free file taxes 2011   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 file taxes 2011   Independent contractors are more likely to have unreimbursed expenses than are employees. Free file taxes 2011 Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. Free file taxes 2011 However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer. Free file taxes 2011 The extent of the worker's investment. Free file taxes 2011   An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. Free file taxes 2011 However, a significant investment is not necessary for independent contractor status. Free file taxes 2011 The extent to which the worker makes his or her services available to the relevant market. Free file taxes 2011   An independent contractor is generally free to seek out business opportunities. Free file taxes 2011 Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. Free file taxes 2011 How the business pays the worker. Free file taxes 2011   An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. Free file taxes 2011 This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. Free file taxes 2011 An independent contractor is often paid a flat fee or on a time and materials basis for the job. Free file taxes 2011 However, it is common in some professions, such as law, to pay independent contractors hourly. Free file taxes 2011 The extent to which the worker can realize a profit or loss. Free file taxes 2011   An independent contractor can make a profit or loss. Free file taxes 2011 Type of relationship. Free file taxes 2011   Facts that show the parties' type of relationship include: Written contracts describing the relationship the parties intended to create. Free file taxes 2011 Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. Free file taxes 2011 The permanency of the relationship. Free file taxes 2011 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 file taxes 2011 The extent to which services performed by the worker are a key aspect of the regular business of the company. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 This would indicate an employer-employee relationship. Free file taxes 2011 IRS help. Free file taxes 2011   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 file taxes 2011 Industry Examples The following examples may help you properly classify your workers. Free file taxes 2011 Building and Construction Industry Example 1. Free file taxes 2011 Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. Free file taxes 2011 She did not advance funds to help him carry on the work. Free file taxes 2011 She makes direct payments to the suppliers for all necessary materials. Free file taxes 2011 She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. Free file taxes 2011 She pays them an hourly rate and exercises almost constant supervision over the work. Free file taxes 2011 Jerry is not free to transfer his assistants to other jobs. Free file taxes 2011 He may not work on other jobs while working for Wilma. Free file taxes 2011 He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. Free file taxes 2011 He and his assistants perform personal services for hourly wages. Free file taxes 2011 Jerry Jones and his assistants are employees of Wilma White. Free file taxes 2011 Example 2. Free file taxes 2011 Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. Free file taxes 2011 He uses his own tools and performs services in the order designated by the corporation and according to its specifications. Free file taxes 2011 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 file taxes 2011 He does not have a place of business or hold himself out to perform similar services for others. Free file taxes 2011 Either party can end the services at any time. Free file taxes 2011 Milton Manning is an employee of the corporation. Free file taxes 2011 Example 3. Free file taxes 2011 Wallace Black agreed with the Sawdust Co. Free file taxes 2011 to supply the construction labor for a group of houses. Free file taxes 2011 The company agreed to pay all construction costs. Free file taxes 2011 However, he supplies all the tools and equipment. Free file taxes 2011 He performs personal services as a carpenter and mechanic for an hourly wage. Free file taxes 2011 He also acts as superintendent and foreman and engages other individuals to assist him. Free file taxes 2011 The company has the right to select, approve, or discharge any helper. Free file taxes 2011 A company representative makes frequent inspections of the construction site. Free file taxes 2011 When a house is finished, Wallace is paid a certain percentage of its costs. Free file taxes 2011 He is not responsible for faults, defects of construction, or wasteful operation. Free file taxes 2011 At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. Free file taxes 2011 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 file taxes 2011 Wallace Black and his assistants are employees of the Sawdust Co. Free file taxes 2011 Example 4. Free file taxes 2011 Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. Free file taxes 2011 A signed contract established a flat amount for the services rendered by Bill Plum. Free file taxes 2011 Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. Free file taxes 2011 He hires his own roofers who are treated as employees for federal employment tax purposes. Free file taxes 2011 If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. Free file taxes 2011 Bill Plum, doing business as Plum Roofing, is an independent contractor. Free file taxes 2011 Example 5. Free file taxes 2011 Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. Free file taxes 2011 She is to receive $1,280 every 2 weeks for the next 10 weeks. Free file taxes 2011 This is not considered payment by the hour. Free file taxes 2011 Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. Free file taxes 2011 She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. Free file taxes 2011 Vera is an independent contractor. Free file taxes 2011 Trucking Industry Example. Free file taxes 2011 Rose Trucking contracts to deliver material for Forest, Inc. Free file taxes 2011 , at $140 per ton. Free file taxes 2011 Rose Trucking is not paid for any articles that are not delivered. Free file taxes 2011 At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. Free file taxes 2011 All operating expenses, including insurance coverage, are paid by Jan Rose. Free file taxes 2011 All equipment is owned or rented by Jan and she is responsible for all maintenance. Free file taxes 2011 None of the drivers are provided by Forest, Inc. Free file taxes 2011 Jan Rose, operating as Rose Trucking, is an independent contractor. Free file taxes 2011 Computer Industry Example. Free file taxes 2011 Steve Smith, a computer programmer, is laid off when Megabyte, Inc. Free file taxes 2011 , downsizes. Free file taxes 2011 Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. Free file taxes 2011 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 file taxes 2011 Megabyte provides Steve with no instructions beyond the specifications for the product itself. Free file taxes 2011 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 file taxes 2011 Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. Free file taxes 2011 Steve works at home and is not expected or allowed to attend meetings of the software development group. Free file taxes 2011 Steve is an independent contractor. Free file taxes 2011 Automobile Industry Example 1. Free file taxes 2011 Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. Free file taxes 2011 She works six days a week and is on duty in Bob's showroom on certain assigned days and times. Free file taxes 2011 She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Free file taxes 2011 Lists of prospective customers belong to the dealer. Free file taxes 2011 She is required to develop leads and report results to the sales manager. Free file taxes 2011 Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. Free file taxes 2011 She is paid a commission and is eligible for prizes and bonuses offered by Bob. Free file taxes 2011 Bob also pays the cost of health insurance and group-term life insurance for Donna. Free file taxes 2011 Donna is an employee of Bob Blue. Free file taxes 2011 Example 2. Free file taxes 2011 Sam Sparks performs auto repair services in the repair department of an auto sales company. Free file taxes 2011 He works regular hours and is paid on a percentage basis. Free file taxes 2011 He has no investment in the repair department. Free file taxes 2011 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 file taxes 2011 Sam is an employee of the sales company. Free file taxes 2011 Example 3. Free file taxes 2011 An auto sales agency furnishes space for Helen Bach to perform auto repair services. Free file taxes 2011 She provides her own tools, equipment, and supplies. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 Helen is an independent contractor and the helpers are her employees. Free file taxes 2011 Attorney Example. Free file taxes 2011 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 file taxes 2011 Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. Free file taxes 2011 Donna has a part-time receptionist who also does the bookkeeping. Free file taxes 2011 She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. Free file taxes 2011 For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. Free file taxes 2011 Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. Free file taxes 2011 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 file taxes 2011 Donna is an independent contractor. Free file taxes 2011 Taxicab Driver Example. Free file taxes 2011 Tom Spruce rents a cab from Taft Cab Co. Free file taxes 2011 for $150 per day. Free file taxes 2011 He pays the costs of maintaining and operating the cab. Free file taxes 2011 Tom Spruce keeps all fares that he receives from customers. Free file taxes 2011 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 file taxes 2011 Tom Spruce is an independent contractor. Free file taxes 2011 Salesperson To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 3. Free file taxes 2011 Employees of Exempt Organizations Many nonprofit organizations are exempt from federal income tax. Free file taxes 2011 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 file taxes 2011 However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees. Free file taxes 2011 Section 501(c)(3) organizations. Free file taxes 2011   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 file taxes 2011 These organizations are usually corporations and are exempt from federal income tax under section 501(a). Free file taxes 2011 Social security and Medicare taxes. Free file taxes 2011   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 file taxes 2011 The organization pays an employee less than $100 in a calendar year. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011   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 file taxes 2011 28 or more in a year. Free file taxes 2011 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 file taxes 2011 See Members of recognized religious sects opposed to insurance in section 4. Free file taxes 2011 FUTA tax. Free file taxes 2011   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 file taxes 2011 This exemption cannot be waived. Free file taxes 2011 Do not file Form 940 to report wages paid by these organizations or pay the tax. Free file taxes 2011 Note. Free file taxes 2011 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 file taxes 2011 Other than section 501(c)(3) organizations. Free file taxes 2011   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 file taxes 2011 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 file taxes 2011 Two special rules for social security, Medicare, and FUTA taxes apply. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 The above rules do not apply to employees who work for pension plans and other similar organizations described in section 401(a). Free file taxes 2011 4. Free file taxes 2011 Religious Exemptions and Special Rules for Ministers Special rules apply to the treatment of ministers for social security and Medicare tax purposes. Free file taxes 2011 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 file taxes 2011 For more information on getting an exemption, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Free file taxes 2011 Ministers. Free file taxes 2011   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Free file taxes 2011 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 file taxes 2011   Ministers are employees if they perform services in the exercise of ministry and are subject to your will and control. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 For more information, see Publication 517. Free file taxes 2011 Form W-2. Free file taxes 2011   If your minister is an employee, report all taxable compensation as wages in box 1 on Form W-2. Free file taxes 2011 Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Publication 15 (Circular E). Free file taxes 2011 Do not include a parsonage allowance (excludable housing allowance) in this amount. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 For more information on ministers, see Publication 517. Free file taxes 2011 Exemptions for ministers and others. Free file taxes 2011   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 file taxes 2011 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 file taxes 2011 The exemption applies only to qualified services performed for the religious organization. Free file taxes 2011 See Revenue Procedure 91-20, 1991-1 C. Free file taxes 2011 B. Free file taxes 2011 524, for guidelines to determine whether an organization is a religious order or whether an individual is a member of a religious order. Free file taxes 2011   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 file taxes 2011 See Publication 517 for more information about claiming an exemption from self-employment tax using Form 4361. Free file taxes 2011 Members of recognized religious sects opposed to insurance. Free file taxes 2011   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 file taxes 2011 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 file taxes 2011 If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. Free file taxes 2011 Religious opposition based on the teachings of the sect is the only legal basis for the exemption. Free file taxes 2011 In addition, your religious sect (or division) must have existed since December 31, 1950. Free file taxes 2011 Self-employed. Free file taxes 2011   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 file taxes 2011 Employees. Free file taxes 2011   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 file taxes 2011 This applies to partnerships only if each partner is a member of the sect. Free file taxes 2011 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 file taxes 2011 To get the exemption, the employee must file Form 4029. Free file taxes 2011   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 file taxes 2011 5. Free file taxes 2011 Wages and Other Compensation Publication 15 (Circular E) provides a general discussion of taxable wages. Free file taxes 2011 Publication 15-B discusses fringe benefits. Free file taxes 2011 The following topics supplement those discussions. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 See chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Publication 15 (Circular E), for more information. Free file taxes 2011 These rules generally apply to temporary work assignments both inside and outside the U. Free file taxes 2011 S. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 Excludable employee achievement awards also are not subject to FUTA tax. Free file taxes 2011 Limits. Free file taxes 2011   The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. Free file taxes 2011 A higher limit of $1,600 applies to qualified plan awards. Free file taxes 2011 Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. Free file taxes 2011 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 file taxes 2011   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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 These amounts are reportable on Form W-2. Free file taxes 2011 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 file taxes 2011 Any amounts that you pay for room and board are not excludable from the recipient's gross income. Free file taxes 2011 A qualified scholarship is not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Free file taxes 2011 For more information, see Publication 970, Tax Benefits for Education. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 Back Pay Treat back pay as wages in the year paid and withhold and pay employment taxes as required. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 Amounts that represent a return to the employee of amounts previously subject to tax are not taxable and are not subject to withholding. Free file taxes 2011 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 file taxes 2011 It does not matter whether the separation is temporary or permanent. Free file taxes 2011 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 file taxes 2011 To qualify as supplemental unemployment benefits for these purposes, the benefits must meet the following requirements. Free file taxes 2011 Benefits are paid only to unemployed former employees who are laid off by the employer. Free file taxes 2011 Eligibility for benefits depends on meeting prescribed conditions after termination. Free file taxes 2011 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 file taxes 2011 The right to benefits does not accrue until a prescribed period after termination. Free file taxes 2011 Benefits are not attributable to the performance of particular services. Free file taxes 2011 No employee has any right to the benefits until qualified and eligible to receive benefits. Free file taxes 2011 Benefits may not be paid in a lump sum. Free file taxes 2011 Withholding on taxable supplemental unemployment benefits must be based on the withholding certificate (Form W-4) that the employee gave to you. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. Free file taxes 2011 See Regulations section 1. Free file taxes 2011 280G-1 for more information. Free file taxes 2011 No deduction is allowed to the corporation for any excess parachute payment. Free file taxes 2011 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 file taxes 2011 A parachute payment for purposes of section 280G is any payment that meets all of the following. Free file taxes 2011 The payment is in the nature of compensation. Free file taxes 2011 The payment is to, or for the benefit of, a disqualified individual. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 The payment has an aggregate present value of at least three times the individual's base amount. Free file taxes 2011 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 file taxes 2011 An excess parachute payment amount is the excess of any parachute payment over the base amount. Free file taxes 2011 For more information, see Regulations section 1. Free file taxes 2011 280G-1. Free file taxes 2011 The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. Free file taxes 2011 If the recipient is an employee, the 20% excise tax is to be withheld by the corporation. Free file taxes 2011 Example. Free file taxes 2011 An officer of a corporation receives a golden parachute payment of $400,000. Free file taxes 2011 This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. Free file taxes 2011 The excess parachute payment is $300,000 ($400,000 minus $100,000). Free file taxes 2011 The corporation cannot deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). Free file taxes 2011 Reporting golden parachute payments. Free file taxes 2011   Golden parachute payments to employees must be reported on Form W-2. Free file taxes 2011 See the General Instructions for Forms W-2 and W-3 for details. Free file taxes 2011 For nonemployee reporting of these payments, see Box 7. Free file taxes 2011 Nonemployee Compensation in the Instructions for Form 1099-MISC. Free file taxes 2011 Exempt payments. Free file taxes 2011   Payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules. Free file taxes 2011 See section 280G(b)(5) and (6) for more information. Free file taxes 2011 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 file taxes 2011 This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. Free file taxes 2011 This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. Free file taxes 2011 Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). Free file taxes 2011 The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. Free file taxes 2011 You can get these rates by calling 1-800-829-4933 or by visiting IRS. Free file taxes 2011 gov. Free file taxes 2011 For more information, see section 7872 and its related regulations. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 Do not include these amounts in the income of the transferors. Free file taxes 2011 These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. Free file taxes 2011 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 file taxes 2011 Specific rules for reporting are provided in the instructions to the forms. Free file taxes 2011 The provisions do not affect the application or reporting of social security, Medicare, or FUTA taxes. Free file taxes 2011 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 file taxes 2011 For more information about nonqualified deferred compensation plans, see Regulations sections 1. Free file taxes 2011 409A-1 through 1. Free file taxes 2011 409A-6. Free file taxes 2011 Notice 2008-113 provides guidance on the correction of certain operation failures of a NQDC plan. Free file taxes 2011 Notice 2008-113, 2008-51 I. Free file taxes 2011 R. Free file taxes 2011 B. Free file taxes 2011 1305, is available at www. Free file taxes 2011 irs. Free file taxes 2011 gov/irb/2008-51_IRB/ar12. Free file taxes 2011 html. Free file taxes 2011 Also see Notice 2010-6, 2010-3 I. Free file taxes 2011 R. Free file taxes 2011 B. Free file taxes 2011 275, available at www. Free file taxes 2011 irs. Free file taxes 2011 gov/irb/2010-03_IRB/ar08. Free file taxes 2011 html and Notice 2010-80, 2010-51 I. Free file taxes 2011 R. Free file taxes 2011 B. Free file taxes 2011 853, available at www. Free file taxes 2011 irs. Free file taxes 2011 gov/irb/2010-51_IRB/ar08. Free file taxes 2011 html. Free file taxes 2011 Social security, Medicare, and FUTA taxes. Free file taxes 2011   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 file taxes 2011   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 file taxes 2011 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 file taxes 2011 You will have to determine later, when the amount is reasonably ascertainable, whether any additional taxes are required. Free file taxes 2011 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 file taxes 2011 For more information, see Regulations sections 31. Free file taxes 2011 3121(v)(2)-1 and 31. Free file taxes 2011 3306(r)(2)-1. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 See Regulations section 31. Free file taxes 2011 3121(a)(5)-2 for the definition of a salary reduction agreement. Free file taxes 2011 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 file taxes 2011 These excluded amounts are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. Free file taxes 2011 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 file taxes 2011 See Publication 560 for more information about SEPs. Free file taxes 2011 Salary reduction simplified employee pensions (SARSEP) repealed. Free file taxes 2011   You may not establish a SARSEP after 1996. Free file taxes 2011 However, SARSEPs established before January 1, 1997, may continue to receive contributions. Free file taxes 2011 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 file taxes 2011 An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. Free file taxes 2011 However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. Free file taxes 2011 For more information about SIMPLE retirement plans, see Publication 560. Free file taxes 2011 6. Free file taxes 2011 Sick Pay Reporting The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014. Free file taxes 2011 Information about this change will be included in the revision of Publication 15-A that is expected to post to IRS. Free file taxes 2011 gov in December 2014. Free file taxes 2011 Special rules apply to the reporting of sick pay payments to employees. Free file taxes 2011 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 file taxes 2011 Sick pay is usually subject to social security, Medicare, and FUTA taxes. Free file taxes 2011 For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. Free file taxes 2011 Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. Free file taxes 2011 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 file taxes 2011 It may be paid by either the employer or a third party, such as an insurance company. Free file taxes 2011 Sick pay includes both short- and long-term benefits. Free file taxes 2011 It is often expressed as a percentage of the employee's regular wages. Free file taxes 2011 Payments That Are Not Sick Pay Sick pay does not include the following payments. Free file taxes 2011 Disability retirement payments. Free file taxes 2011 Disability retirement payments are not sick pay and are not discussed in this section. Free file taxes 2011 Those payments are subject to the rules for federal income tax withholding from pensions and annuities. Free file taxes 2011 See section 8. Free file taxes 2011 Workers' compensation. Free file taxes 2011 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 file taxes 2011 But see Payments in the nature of workers' compensation—public employees next. Free file taxes 2011 Payments in the nature of workers' compensation—public employees. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 Payments under a statute in the nature of a workers' compensation law are not sick pay and are not subject to employment taxes. Free file taxes 2011 For more information, see Regulations section 31. Free file taxes 2011 3121(a)(2)-1. Free file taxes 2011 Medical expense payments. Free file taxes 2011 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 file taxes 2011 Payments unrelated to absence from work. Free file taxes 2011 Accident or health insurance payments unrelated to absence from work are not sick pay and are not subject to employment taxes. Free file taxes 2011 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 file taxes 2011 Example. Free file taxes 2011 Donald was injured in a car accident and lost an eye. Free file taxes 2011 Under a policy paid for by Donald's employer, Delta Insurance Co. Free file taxes 2011 paid Donald $20,000 as compensation for the loss of his eye. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 Definition of employer. Free file taxes 2011   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 file taxes 2011 Note. Free file taxes 2011 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 file taxes 2011 Third-Party Payers of Sick Pay Employer's agent. Free file taxes 2011   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 file taxes 2011 A third party may be your agent even if the third party is responsible for determining which employees are eligible to receive payments. Free file taxes 2011 For example, if a third party provides administrative services only, the third party is your agent. Free file taxes 2011 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 file taxes 2011 Whether an insurance company or other third party is your agent depends on the terms of their agreement with you. Free file taxes 2011   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 file taxes 2011 This responsibility remains with you. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 Third party not employer's agent. Free file taxes 2011   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 file taxes 2011   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 file taxes 2011 This liability is transferred if the third party takes the following steps. Free file taxes 2011 Withholds the employee social security and Medicare taxes from the sick pay payments. Free file taxes 2011 Makes timely deposits of the employee social security and Medicare taxes. Free file taxes 2011 Notifies the employer for whom the employee normally works of the payments on which employee taxes were withheld and deposited. Free file taxes 2011 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 file taxes 2011 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 file taxes 2011 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 file taxes 2011 For multi-employer plans, see the special rule discussed next. Free file taxes 2011 Multi-employer plan timing rule. Free file taxes 2011   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 file taxes 2011 If the third-party insurer making the payments complies wi