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Taxes hrblock 5. Taxes hrblock   Wages, Salaries, and Other Earnings Table of Contents Reminder Introduction Useful Items - You may want to see: Employee CompensationBabysitting. Taxes hrblock Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Reminder Foreign income. Taxes hrblock   If you are a U. Taxes hrblock S. Taxes hrblock citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U. Taxes hrblock S. Taxes hrblock law. Taxes hrblock This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. Taxes hrblock This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). Taxes hrblock If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. Taxes hrblock For details, see Publication 54, Tax Guide for U. Taxes hrblock S. Taxes hrblock Citizens and Resident Aliens Abroad. Taxes hrblock Introduction This chapter discusses compensation received for services as an employee, such as wages, salaries, and fringe benefits. Taxes hrblock The following topics are included. Taxes hrblock Bonuses and awards. Taxes hrblock Special rules for certain employees. Taxes hrblock Sickness and injury benefits. Taxes hrblock The chapter explains what income is included in the employee's gross income and what is not included. Taxes hrblock Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income Employee Compensation This section discusses various types of employee compensation including fringe benefits, retirement plan contributions, stock options, and restricted property. Taxes hrblock Form W-2. Taxes hrblock    If you are an employee, you should receive Form W-2 from your employer showing the pay you received for your services. Taxes hrblock Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you do not receive a Form W-2. Taxes hrblock   If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. Taxes hrblock These wages must be included on line 7 of Form 1040. Taxes hrblock See Form 8919 for more information. Taxes hrblock Childcare providers. Taxes hrblock    If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. Taxes hrblock If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Taxes hrblock You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. Taxes hrblock Babysitting. Taxes hrblock   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Taxes hrblock Miscellaneous Compensation This section discusses different types of employee compensation. Taxes hrblock Advance commissions and other earnings. Taxes hrblock   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. Taxes hrblock    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. Taxes hrblock If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. Taxes hrblock See Repayments in chapter 12. Taxes hrblock Allowances and reimbursements. Taxes hrblock    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463. Taxes hrblock If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. Taxes hrblock Back pay awards. Taxes hrblock    Include in income amounts you are awarded in a settlement or judgment for back pay. Taxes hrblock These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. Taxes hrblock They should be reported to you by your employer on Form W-2. Taxes hrblock Bonuses and awards. Taxes hrblock   Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. Taxes hrblock These include prizes such as vacation trips for meeting sales goals. Taxes hrblock If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. Taxes hrblock However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. Taxes hrblock Employee achievement award. Taxes hrblock   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. Taxes hrblock However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Taxes hrblock Your employer can tell you whether your award is a qualified plan award. Taxes hrblock Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. Taxes hrblock   However, the exclusion does not apply to the following awards: A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. Taxes hrblock A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. Taxes hrblock Example. Taxes hrblock Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Taxes hrblock Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. Taxes hrblock However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 – $1,600) in his income. Taxes hrblock Differential wage payments. Taxes hrblock   This is any payment made to you by an employer for any period during which you are, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages you would have received from the employer during that period. Taxes hrblock These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. Taxes hrblock The payments are reported as wages on Form W-2. Taxes hrblock Government cost-of-living allowances. Taxes hrblock   Most payments received by U. Taxes hrblock S. Taxes hrblock Government civilian employees for working abroad are taxable. Taxes hrblock However, certain cost-of-living allowances are tax free. Taxes hrblock Publication 516, U. Taxes hrblock S. Taxes hrblock Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. Taxes hrblock Nonqualified deferred compensation plans. Taxes hrblock   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. Taxes hrblock This amount is shown on Form W-2, box 12, using code Y. Taxes hrblock This amount is not included in your income. Taxes hrblock   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. Taxes hrblock This amount is included in your wages shown on Form W-2, box 1. Taxes hrblock It is also shown on Form W-2, box 12, using code Z. Taxes hrblock Note received for services. Taxes hrblock    If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. Taxes hrblock When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Taxes hrblock Do not include that part again in your income. Taxes hrblock Include the rest of the payment in your income in the year of payment. Taxes hrblock   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. Taxes hrblock Severance pay. Taxes hrblock   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. Taxes hrblock Accrued leave payment. Taxes hrblock    If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. Taxes hrblock   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. Taxes hrblock You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Taxes hrblock Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on the return and the wages on your Forms W-2. Taxes hrblock Outplacement services. Taxes hrblock   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. Taxes hrblock    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). Taxes hrblock Sick pay. Taxes hrblock   Pay you receive from your employer while you are sick or injured is part of your salary or wages. Taxes hrblock In addition, you must include in your income sick pay benefits received from any of the following payers: A welfare fund. Taxes hrblock A state sickness or disability fund. Taxes hrblock An association of employers or employees. Taxes hrblock An insurance company, if your employer paid for the plan. Taxes hrblock However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. Taxes hrblock For more information, see Publication 525. Taxes hrblock Social security and Medicare taxes paid by employer. Taxes hrblock   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. Taxes hrblock The payment also is treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. Taxes hrblock However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. Taxes hrblock Stock appreciation rights. Taxes hrblock   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. Taxes hrblock When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. Taxes hrblock You include the cash payment in your income in the year you use the right. Taxes hrblock Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Taxes hrblock Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. Taxes hrblock Accounting period. Taxes hrblock   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Taxes hrblock Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. Taxes hrblock The general rule: benefits are reported for a full calendar year (January 1–December 31). Taxes hrblock The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. Taxes hrblock For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. Taxes hrblock  Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. Taxes hrblock   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). Taxes hrblock Form W-2. Taxes hrblock   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips, and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Taxes hrblock Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). Taxes hrblock However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). Taxes hrblock Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. Taxes hrblock Benefits you receive from the plan may be taxable, as explained later under Sickness and Injury Benefits . Taxes hrblock For information on the items covered in this section, other than Long-term care coverage, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Taxes hrblock Long-term care coverage. Taxes hrblock    Contributions by your employer to provide coverage for long-term care services generally are not included in your income. Taxes hrblock However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. Taxes hrblock This amount will be reported as wages in box 1 of your Form W-2. Taxes hrblock   Contributions you make to the plan are discussed in Publication 502, Medical and Dental Expenses. Taxes hrblock Archer MSA contributions. Taxes hrblock    Contributions by your employer to your Archer MSA generally are not included in your income. Taxes hrblock Their total will be reported in box 12 of Form W-2 with code R. Taxes hrblock You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Taxes hrblock File the form with your return. Taxes hrblock Health flexible spending arrangement (health FSA). Taxes hrblock   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. Taxes hrblock Note. Taxes hrblock Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. Taxes hrblock The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. Taxes hrblock For more information, see Notice 2012-40, 2012-26 I. Taxes hrblock R. Taxes hrblock B. Taxes hrblock 1046, available at www. Taxes hrblock irs. Taxes hrblock gov/irb/2012-26 IRB/ar09. Taxes hrblock html. Taxes hrblock Health reimbursement arrangement (HRA). Taxes hrblock   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. Taxes hrblock Health savings accounts (HSA). Taxes hrblock   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Taxes hrblock Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Taxes hrblock Contributions made by your employer are not included in your income. Taxes hrblock Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. Taxes hrblock Distributions not used for qualified medical expenses are included in your income. Taxes hrblock See Publication 969 for the requirements of an HSA. Taxes hrblock   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. Taxes hrblock The contributions are treated as a distribution of money and are not included in the partner's gross income. Taxes hrblock Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. Taxes hrblock In both situations, the partner can deduct the contribution made to the partner's HSA. Taxes hrblock   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. Taxes hrblock The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Taxes hrblock Qualified HSA funding distribution. Taxes hrblock   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. Taxes hrblock See Publication 590 for the requirements for these qualified HSA funding distributions. Taxes hrblock Failure to maintain eligibility. Taxes hrblock   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. Taxes hrblock If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. Taxes hrblock This income is also subject to an additional 10% tax. Taxes hrblock Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. Taxes hrblock See the Instructions for Form 8839, Qualified Adoption Expenses, for more information. Taxes hrblock Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. Taxes hrblock They also are included as social security and Medicare wages in boxes 3 and 5. Taxes hrblock However, they are not included as wages in box 1. Taxes hrblock To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. Taxes hrblock File the form with your return. Taxes hrblock De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. Taxes hrblock In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. Taxes hrblock Holiday gifts. Taxes hrblock   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. Taxes hrblock However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. Taxes hrblock Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. Taxes hrblock For more information, see Publication 970, Tax Benefits for Education. Taxes hrblock Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. Taxes hrblock However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. Taxes hrblock For exceptions, see Entire cost excluded , and Entire cost taxed , later. Taxes hrblock If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Taxes hrblock Also, it is shown separately in box 12 with code C. Taxes hrblock Group-term life insurance. Taxes hrblock   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. Taxes hrblock Permanent benefits. Taxes hrblock   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Taxes hrblock Your employer should be able to tell you the amount to include in your income. Taxes hrblock Accidental death benefits. Taxes hrblock   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. Taxes hrblock Former employer. Taxes hrblock   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Taxes hrblock Also, it is shown separately in box 12 with code C. Taxes hrblock Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. Taxes hrblock You must pay these taxes with your income tax return. Taxes hrblock Include them on line 60, Form 1040, and follow the instructions for line 60. Taxes hrblock For more information, see the Instructions for Form 1040. Taxes hrblock Two or more employers. Taxes hrblock   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. Taxes hrblock If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. Taxes hrblock You must figure how much to include in your income. Taxes hrblock Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. Taxes hrblock Figuring the taxable cost. Taxes hrblock   Use the following worksheet to figure the amount to include in your income. Taxes hrblock     Worksheet 5-1. Taxes hrblock Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Taxes hrblock Enter the total amount of your insurance coverage from your employer(s) 1. Taxes hrblock   2. Taxes hrblock Limit on exclusion for employer-provided group-term life insurance coverage 2. Taxes hrblock 50,000 3. Taxes hrblock Subtract line 2 from line 1 3. Taxes hrblock   4. Taxes hrblock Divide line 3 by $1,000. Taxes hrblock Figure to the nearest tenth 4. Taxes hrblock   5. Taxes hrblock Go to Table 5-1. Taxes hrblock Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Taxes hrblock   6. Taxes hrblock Multiply line 4 by line 5 6. Taxes hrblock   7. Taxes hrblock Enter the number of full months of coverage at this cost. Taxes hrblock 7. Taxes hrblock   8. Taxes hrblock Multiply line 6 by line 7 8. Taxes hrblock   9. Taxes hrblock Enter the premiums you paid per month 9. Taxes hrblock       10. Taxes hrblock Enter the number of months you paid the premiums 10. Taxes hrblock       11. Taxes hrblock Multiply line 9 by line 10. Taxes hrblock 11. Taxes hrblock   12. Taxes hrblock Subtract line 11 from line 8. Taxes hrblock Include this amount in your income as wages 12. Taxes hrblock      Table 5-1. Taxes hrblock Cost of $1,000 of Group-Term Life Insurance for One Month Age Cost Under 25 $. Taxes hrblock 05 25 through 29 . Taxes hrblock 06 30 through 34 . Taxes hrblock 08 35 through 39 . Taxes hrblock 09 40 through 44 . Taxes hrblock 10 45 through 49 . Taxes hrblock 15 50 through 54 . Taxes hrblock 23 55 through 59 . Taxes hrblock 43 60 through 64 . Taxes hrblock 66 65 through 69 1. Taxes hrblock 27 70 and older 2. Taxes hrblock 06 Example. Taxes hrblock You are 51 years old and work for employers A and B. Taxes hrblock Both employers provide group-term life insurance coverage for you for the entire year. Taxes hrblock Your coverage is $35,000 with employer A and $45,000 with employer B. Taxes hrblock You pay premiums of $4. Taxes hrblock 15 a month under the employer B group plan. Taxes hrblock You figure the amount to include in your income as shown in Worksheet 5-1. Taxes hrblock Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated, later. Taxes hrblock Worksheet 5-1. Taxes hrblock Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated 1. Taxes hrblock Enter the total amount of your insurance coverage from your employer(s) 1. Taxes hrblock 80,000 2. Taxes hrblock Limit on exclusion for employer-provided group-term life insurance coverage 2. Taxes hrblock 50,000 3. Taxes hrblock Subtract line 2 from line 1 3. Taxes hrblock 30,000 4. Taxes hrblock Divide line 3 by $1,000. Taxes hrblock Figure to the nearest tenth 4. Taxes hrblock 30. Taxes hrblock 0 5. Taxes hrblock Go to Table 5-1. Taxes hrblock Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Taxes hrblock . Taxes hrblock 23 6. Taxes hrblock Multiply line 4 by line 5 6. Taxes hrblock 6. Taxes hrblock 90 7. Taxes hrblock Enter the number of full months of coverage at this cost. Taxes hrblock 7. Taxes hrblock 12 8. Taxes hrblock Multiply line 6 by line 7 8. Taxes hrblock 82. Taxes hrblock 80 9. Taxes hrblock Enter the premiums you paid per month 9. Taxes hrblock 4. Taxes hrblock 15     10. Taxes hrblock Enter the number of months you paid the premiums 10. Taxes hrblock 12     11. Taxes hrblock Multiply line 9 by line 10. Taxes hrblock 11. Taxes hrblock 49. Taxes hrblock 80 12. Taxes hrblock Subtract line 11 from line 8. Taxes hrblock Include this amount in your income as wages 12. Taxes hrblock 33. Taxes hrblock 00 Entire cost excluded. Taxes hrblock   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. Taxes hrblock You are permanently and totally disabled and have ended your employment. Taxes hrblock Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. Taxes hrblock A charitable organization (defined in chapter 24) to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. Taxes hrblock (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. Taxes hrblock ) The plan existed on January 1, 1984, and You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. Taxes hrblock Entire cost taxed. Taxes hrblock   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply: The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. Taxes hrblock You are a key employee and your employer's plan discriminates in favor of key employees. Taxes hrblock Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Taxes hrblock Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. Taxes hrblock You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Taxes hrblock Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. Taxes hrblock A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. Taxes hrblock Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. Taxes hrblock However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. Taxes hrblock Exclusion limit. Taxes hrblock   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. Taxes hrblock   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. Taxes hrblock   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. Taxes hrblock   If the benefits have a value that is more than these limits, the excess must be included in your income. Taxes hrblock You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. Taxes hrblock Commuter highway vehicle. Taxes hrblock   This is a highway vehicle that seats at least six adults (not including the driver). Taxes hrblock At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). Taxes hrblock Transit pass. Taxes hrblock   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. Taxes hrblock Qualified parking. Taxes hrblock   This is parking provided to an employee at or near the employer's place of business. Taxes hrblock It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. Taxes hrblock It does not include parking at or near the employee's home. Taxes hrblock Qualified bicycle commuting. Taxes hrblock   This is reimbursement based on the number of qualified bicycle commuting months for the year. Taxes hrblock A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. Taxes hrblock The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. Taxes hrblock Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. Taxes hrblock (Your employer can tell you whether your retirement plan is qualified. Taxes hrblock ) However, the cost of life insurance coverage included in the plan may have to be included. Taxes hrblock See Group-Term Life Insurance , earlier, under Fringe Benefits. Taxes hrblock If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. Taxes hrblock However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. Taxes hrblock For information on distributions from retirement plans, see Publication 575, Pension and Annuity Income (or Publication 721, Tax Guide to U. Taxes hrblock S. Taxes hrblock Civil Service Retirement Benefits, if you are a federal employee or retiree). Taxes hrblock Elective deferrals. Taxes hrblock   If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. Taxes hrblock The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. Taxes hrblock An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. Taxes hrblock However, it is included in wages subject to social security and Medicare taxes. Taxes hrblock   Elective deferrals include elective contributions to the following retirement plans. Taxes hrblock Cash or deferred arrangements (section 401(k) plans). Taxes hrblock The Thrift Savings Plan for federal employees. Taxes hrblock Salary reduction simplified employee pension plans (SARSEP). Taxes hrblock Savings incentive match plans for employees (SIMPLE plans). Taxes hrblock Tax-sheltered annuity plans (403(b) plans). Taxes hrblock Section 501(c)(18)(D) plans. Taxes hrblock Section 457 plans. Taxes hrblock Qualified automatic contribution arrangements. Taxes hrblock   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. Taxes hrblock You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. Taxes hrblock The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. Taxes hrblock   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. Taxes hrblock Overall limit on deferrals. Taxes hrblock   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3) and (5) above. Taxes hrblock The limit for SIMPLE plans is $12,000. Taxes hrblock The limit for section 501(c)(18)(D) plans is the lesser of $7,000 or 25% of your compensation. Taxes hrblock The limit for section 457 plans is the lesser of your includible compensation or $17,500. Taxes hrblock Amounts deferred under specific plan limits are part of the overall limit on deferrals. Taxes hrblock Designated Roth contributions. Taxes hrblock   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Taxes hrblock Designated Roth contributions are treated as elective deferrals, except that they are included in income. Taxes hrblock Excess deferrals. Taxes hrblock   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. Taxes hrblock However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Taxes hrblock   If you set aside more than the limit, the excess generally must be included in your income for that year, unless you have an excess deferral of a designated Roth contribution. Taxes hrblock See Publication 525 for a discussion of the tax treatment of excess deferrals. Taxes hrblock Catch-up contributions. Taxes hrblock   You may be allowed catch-up contributions (additional elective deferral) if you are age 50 or older by the end of your tax year. Taxes hrblock Stock Options If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you usually will have income when you receive the option, when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option. Taxes hrblock However, if your option is a statutory stock option, you will not have any income until you sell or exchange your stock. Taxes hrblock Your employer can tell you which kind of option you hold. Taxes hrblock For more information, see Publication 525. Taxes hrblock Restricted Property In most cases, if you receive property for your services, you must include its fair market value in your income in the year you receive the property. Taxes hrblock However, if you receive stock or other property that has certain restrictions that affect its value, you do not include the value of the property in your income until it has substantially vested. Taxes hrblock (You can choose to include the value of the property in your income in the year it is transferred to you. Taxes hrblock ) For more information, see Restricted Property in Publication 525. Taxes hrblock Dividends received on restricted stock. Taxes hrblock   Dividends you receive on restricted stock are treated as compensation and not as dividend income. Taxes hrblock Your employer should include these payments on your Form W-2. Taxes hrblock Stock you chose to include in income. Taxes hrblock   Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends. Taxes hrblock Report them on your return as dividends. Taxes hrblock For a discussion of dividends, see chapter 8. Taxes hrblock    For information on how to treat dividends reported on both your Form W-2 and Form 1099-DIV, see Dividends received on restricted stock in Publication 525. Taxes hrblock Special Rules for Certain Employees This section deals with special rules for people in certain types of employment: members of the clergy, members of religious orders, people working for foreign employers, military personnel, and volunteers. Taxes hrblock Clergy Generally, if you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Taxes hrblock , in addition to your salary. Taxes hrblock If the offering is made to the religious institution, it is not taxable to you. Taxes hrblock If you are a member of a religious organization and you give your outside earnings to the religious organization, you still must include the earnings in your income. Taxes hrblock However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Taxes hrblock See chapter 24. Taxes hrblock Pension. Taxes hrblock    A pension or retirement pay for a member of the clergy usually is treated as any other pension or annuity. Taxes hrblock It must be reported on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. Taxes hrblock Housing. Taxes hrblock    Special rules for housing apply to members of the clergy. Taxes hrblock Under these rules, you do not include in your income the rental value of a home (including utilities) or a designated housing allowance provided to you as part of your pay. Taxes hrblock However, the exclusion cannot be more than the reasonable pay for your service. Taxes hrblock If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost. Taxes hrblock The home or allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. Taxes hrblock However, you must include the rental value of the home or the housing allowance as earnings from self-employment on Schedule SE (Form 1040) if you are subject to the self-employment tax. Taxes hrblock For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Taxes hrblock Members of Religious Orders If you are a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order depends on whether your services are performed for the order. Taxes hrblock Services performed for the order. Taxes hrblock   If you are performing the services as an agent of the order in the exercise of duties required by the order, do not include in your income the amounts turned over to the order. Taxes hrblock   If your order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to be performing the services as an agent of the order. Taxes hrblock Any wages you earn as an agent of an order that you turn over to the order are not included in your income. Taxes hrblock Example. Taxes hrblock You are a member of a church order and have taken a vow of poverty. Taxes hrblock You renounce any claims to your earnings and turn over to the order any salaries or wages you earn. Taxes hrblock You are a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the church. Taxes hrblock However, you remain under the general direction and control of the order. Taxes hrblock You are considered to be an agent of the order and any wages you earn at the hospital that you turn over to your order are not included in your income. Taxes hrblock Services performed outside the order. Taxes hrblock   If you are directed to work outside the order, your services are not an exercise of duties required by the order unless they meet both of the following requirements: They are the kind of services that are ordinarily the duties of members of the order. Taxes hrblock They are part of the duties that you must exercise for, or on behalf of, the religious order as its agent. Taxes hrblock If you are an employee of a third party, the services you perform for the third party will not be considered directed or required of you by the order. Taxes hrblock Amounts you receive for these services are included in your income, even if you have taken a vow of poverty. Taxes hrblock Example. Taxes hrblock Mark Brown is a member of a religious order and has taken a vow of poverty. Taxes hrblock He renounces all claims to his earnings and turns over his earnings to the order. Taxes hrblock Mark is a schoolteacher. Taxes hrblock He was instructed by the superiors of the order to get a job with a private tax-exempt school. Taxes hrblock Mark became an employee of the school, and, at his request, the school made the salary payments directly to the order. Taxes hrblock Because Mark is an employee of the school, he is performing services for the school rather than as an agent of the order. Taxes hrblock The wages Mark earns working for the school are included in his income. Taxes hrblock Foreign Employer Special rules apply if you work for a foreign employer. Taxes hrblock U. Taxes hrblock S. Taxes hrblock citizen. Taxes hrblock   If you are a U. Taxes hrblock S. Taxes hrblock citizen who works in the United States for a foreign government, an international organization, a foreign embassy, or any foreign employer, you must include your salary in your income. Taxes hrblock Social security and Medicare taxes. Taxes hrblock   You are exempt from social security and Medicare employee taxes if you are employed in the United States by an international organization or a foreign government. Taxes hrblock However, you must pay self-employment tax on your earnings from services performed in the United States, even though you are not self-employed. Taxes hrblock This rule also applies if you are an employee of a qualifying wholly owned instrumentality of a foreign government. Taxes hrblock Employees of international organizations or foreign governments. Taxes hrblock   Your compensation for official services to an international organization is exempt from federal income tax if you are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States). Taxes hrblock   Your compensation for official services to a foreign government is exempt from federal income tax if all of the following are true. Taxes hrblock You are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States). Taxes hrblock Your work is like the work done by employees of the United States in foreign countries. Taxes hrblock The foreign government gives an equal exemption to employees of the United States in its country. Taxes hrblock Waiver of alien status. Taxes hrblock   If you are an alien who works for a foreign government or international organization and you file a waiver under section 247(b) of the Immigration and Nationality Act to keep your immigrant status, different rules may apply. Taxes hrblock See Foreign Employer in Publication 525. Taxes hrblock Employment abroad. Taxes hrblock   For information on the tax treatment of income earned abroad, see Publication 54. Taxes hrblock Military Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. Taxes hrblock Allowances generally are not taxed. Taxes hrblock For more information on the tax treatment of military allowances and benefits, see Publication 3, Armed Forces' Tax Guide. Taxes hrblock Differential wage payments. Taxes hrblock   Any payments made to you by an employer during the time you are performing service in the uniformed services are treated as compensation. Taxes hrblock These wages are subject to income tax withholding and are reported on a Form W-2. Taxes hrblock See the discussion under Miscellaneous Compensation , earlier. Taxes hrblock Military retirement pay. Taxes hrblock   If your retirement pay is based on age or length of service, it is taxable and must be included in your income as a pension on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. Taxes hrblock Do not include in your income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for your spouse or children under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan. Taxes hrblock   For more detailed discussion of survivor annuities, see chapter 10. Taxes hrblock Disability. Taxes hrblock   If you are retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits, later. Taxes hrblock Veterans' benefits. Taxes hrblock   Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). Taxes hrblock The following amounts paid to veterans or their families are not taxable. Taxes hrblock Education, training, and subsistence allowances. Taxes hrblock Disability compensation and pension payments for disabilities paid either to veterans or their families. Taxes hrblock Grants for homes designed for wheelchair living. Taxes hrblock Grants for motor vehicles for veterans who lost their sight or the use of their limbs. Taxes hrblock Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death. Taxes hrblock Interest on insurance dividends you leave on deposit with the VA. Taxes hrblock Benefits under a dependent-care assistance program. Taxes hrblock The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001. Taxes hrblock Payments made under the compensated work therapy program. Taxes hrblock Any bonus payment by a state or political subdivision because of service in a combat zone. Taxes hrblock Volunteers The tax treatment of amounts you receive as a volunteer worker for the Peace Corps or similar agency is covered in the following discussions. Taxes hrblock Peace Corps. Taxes hrblock   Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are exempt from tax. Taxes hrblock Taxable allowances. Taxes hrblock   The following allowances must be included in your income and reported as wages: Allowances paid to your spouse and minor children while you are a volunteer leader training in the United States. Taxes hrblock Living allowances designated by the Director of the Peace Corps as basic compensation. Taxes hrblock These are allowances for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses. Taxes hrblock Leave allowances. Taxes hrblock Readjustment allowances or termination payments. Taxes hrblock These are considered received by you when credited to your account. Taxes hrblock Example. Taxes hrblock Gary Carpenter, a Peace Corps volunteer, gets $175 a month as a readjustment allowance during his period of service, to be paid to him in a lump sum at the end of his tour of duty. Taxes hrblock Although the allowance is not available to him until the end of his service, Gary must include it in his income on a monthly basis as it is credited to his account. Taxes hrblock Volunteers in Service to America (VISTA). Taxes hrblock   If you are a VISTA volunteer, you must include meal and lodging allowances paid to you in your income as wages. Taxes hrblock National Senior Services Corps programs. Taxes hrblock   Do not include in your income amounts you receive for supportive services or reimbursements for out-of-pocket expenses from the following programs. Taxes hrblock Retired Senior Volunteer Program (RSVP). Taxes hrblock Foster Grandparent Program. Taxes hrblock Senior Companion Program. Taxes hrblock Service Corps of Retired Executives (SCORE). Taxes hrblock   If you receive amounts for supportive services or reimbursements for out-of-pocket expenses from SCORE, do not include these amounts in income. Taxes hrblock Volunteer tax counseling. Taxes hrblock   Do not include in your income any reimbursements you receive for transportation, meals, and other expenses you have in training for, or actually providing, volunteer federal income tax counseling for the elderly (TCE). Taxes hrblock   You can deduct as a charitable contribution your unreimbursed out-of-pocket expenses in taking part in the volunteer income tax assistance (VITA) program. Taxes hrblock See chapter 24. Taxes hrblock Sickness and Injury Benefits This section discusses sickness and injury benefits including disability pensions, long-term care insurance contracts, workers' compensation, and other benefits. Taxes hrblock In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. Taxes hrblock If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. Taxes hrblock However, certain payments may not be taxable to you. Taxes hrblock Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. Taxes hrblock In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury. Taxes hrblock Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established. Taxes hrblock Cost paid by you. Taxes hrblock   If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive from the plan for personal injury or sickness as income on your tax return. Taxes hrblock If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. Taxes hrblock See Reimbursement in a later year in chapter 21. Taxes hrblock Cafeteria plans. Taxes hrblock   In most cases, if you are covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums was not included in your income, you are not considered to have paid the premiums and you must include any benefits you receive in your income. Taxes hrblock If the amount of the premiums was included in your income, you are considered to have paid the premiums, and any benefits you receive are not taxable. Taxes hrblock Disability Pensions If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. Taxes hrblock You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age. Taxes hrblock Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Taxes hrblock You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Taxes hrblock For information on this credit and the definition of permanent and total disability, see chapter 33. Taxes hrblock Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Taxes hrblock Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. Taxes hrblock The rules for reporting pensions are explained in How To Report in chapter 10. Taxes hrblock For information on disability payments from a governmental program provided as a substitute for unemployment compensation, see chapter 12. Taxes hrblock Retirement and profit-sharing plans. Taxes hrblock   If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a disability pension. Taxes hrblock The payments must be reported as a pension or annuity. Taxes hrblock For more information on pensions, see chapter 10. Taxes hrblock Accrued leave payment. Taxes hrblock   If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. Taxes hrblock The payment is not a disability payment. Taxes hrblock Include it in your income in the tax year you receive it. Taxes hrblock Military and Government Disability Pensions Certain military and government disability pensions are not taxable. Taxes hrblock Service-connected disability. Taxes hrblock   You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services. Taxes hrblock The armed forces of any country. Taxes hrblock The National Oceanic and Atmospheric Administration. Taxes hrblock The Public Health Service. Taxes hrblock The Foreign Service. Taxes hrblock Conditions for exclusion. Taxes hrblock   Do not include the disability payments in your income if any of the following conditions apply. Taxes hrblock You were entitled to receive a disability payment before September 25, 1975. Taxes hrblock You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975. Taxes hrblock You receive the disability payments for a combat-related injury. Taxes hrblock This is a personal injury or sickness that Results directly from armed conflict, Takes place while you are engaged in extra-hazardous service, Takes place under conditions simulating war, including training exercises such as maneuvers, or Is caused by an instrumentality of war. Taxes hrblock You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Taxes hrblock Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA. Taxes hrblock Pension based on years of service. Taxes hrblock   If you receive a disability pension based on years of service, in most cases you must include it in your income. Taxes hrblock However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), do not include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. Taxes hrblock You must include the rest of your pension in your income. Taxes hrblock Retroactive VA determination. Taxes hrblock   If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. Taxes hrblock You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period. Taxes hrblock You must include with each Form 1040X a copy of the official VA Determination letter granting the retroactive benefit. Taxes hrblock The letter must show the amount withheld and the effective date of the benefit. Taxes hrblock   If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. Taxes hrblock However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you are later given a retroactive disability rating by the VA. Taxes hrblock Special statute of limitations. Taxes hrblock   In most cases, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed. Taxes hrblock However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended by a 1-year period beginning on the date of the determination. Taxes hrblock This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination. Taxes hrblock Example. Taxes hrblock You retired in 2007 and receive a pension based on your years of service. Taxes hrblock On August 1, 2013, you receive a determination of service-connected disability retroactive to 2007. Taxes hrblock Generally, you could claim a refund for the taxes paid on your pension for 2010, 2011, and 2012. Taxes hrblock However, under the special limitation period, you can also file a claim for 2009 as long as you file the claim by August 1, 2014. Taxes hrblock You cannot file a claim for 2007 and 2008 because those tax years began more than 5 years before the determination. Taxes hrblock Terrorist attack or military action. Taxes hrblock   Do not include in your income disability payments you receive for injuries resulting directly from a terrorist or military action. Taxes hrblock Long-Term Care Insurance Contracts Long-term care insurance contracts in most cases are treated as accident and health insurance contracts. Taxes hrblock Amounts you receive from them (other than policyholder dividends or premium refunds) in most cases are excludable from income as amounts received for personal injury or sickness. Taxes hrblock To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return. Taxes hrblock A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. Taxes hrblock The contract must: Be guaranteed renewable, Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits, and In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses. Taxes hrblock Qualified long-term care services. Taxes hrblock   Qualified long-term care services are: Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services, and Required by a chronically ill individual and provided pursuant to a plan of care as prescribed by a licensed health care practitioner. Taxes hrblock Chronically ill individual. Taxes hrblock   A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the following: An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. Taxes hrblock Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. Taxes hrblock An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. Taxes hrblock Limit on exclusion. Taxes hrblock   You generally can exclude from gross income up to $320 a day for 2013. Taxes hrblock See Limit on exclusion, under Long-Term Care Insurance Contracts, under Sickness and Injury Benefits in Publication 525 for more information. Taxes hrblock Workers' Compensation Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. Taxes hrblock The exemption also applies to your survivors. Taxes hrblock The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. Taxes hrblock If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Taxes hrblock For more information, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Taxes hrblock Return to work. Taxes hrblock    If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. Taxes hrblock Other Sickness and Injury Benefits In addition to disability pensions and annuities, you may receive other payments for sickness or injury. Taxes hrblock Railroad sick pay. Taxes hrblock    Payments you receive as sick pay under the Railroad Unemployment Insurance Act are taxable and you must include them in your income. Taxes hrblock However, do not include them in your income if they are for an on-the-job injury. Taxes hrblock   If you received income because of a disability, see Disability Pensions , earlier. Taxes hrblock Federal Employees' Compensation Act (FECA). Taxes hrblock   Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. Taxes hrblock However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Taxes hrblock Report this income on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040-EZ. Taxes hrblock Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages. Taxes hrblock    If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. Taxes hrblock For a discussion of the taxability of these benefits, see Social security and equivalent railroad retirement benefits under Other Income, in Publication 525. Taxes hrblock    You can deduct the amount you spend to buy back sick leave for an earlier year to be eligible for nontaxable FECA benefits for that period. Taxes hrblock It is a miscellaneous deduction subject to the 2%-of-AGI limit on Schedule A (Form 1040). Taxes hrblock If you buy back sick leave in the same year you used it, the amount reduces your taxable sick leave pay. Taxes hrblock Do not deduct it separately. Taxes hrblock Other compensation. Taxes hrblock   Many other amounts you receive as compensation for sickness or injury are not taxable. Taxes hrblock These include the following amounts. Taxes hrblock Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments. Taxes hrblock Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. Taxes hrblock Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. Taxes hrblock Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. Taxes hrblock This compensation must be based only on the injury and not on the period of your absence from work. Taxes hrblock These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. Taxes hrblock Reimbursement for medical care. Taxes hrblock    A reimbursement for medical care is generally not taxable. Taxes hrblock However, it may reduce your medical expense deduction. Taxes hrblock For more information, see chapter 21. 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The Taxes Hrblock

Taxes hrblock 2. Taxes hrblock   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Taxes hrblock How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Taxes hrblock Deferral percentage. Taxes hrblock Employee compensation. Taxes hrblock Compensation of self-employed individuals. Taxes hrblock Choice not to treat deferrals as compensation. Taxes hrblock Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Taxes hrblock Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Taxes hrblock S. Taxes hrblock Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Taxes hrblock Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Taxes hrblock A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Taxes hrblock SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Taxes hrblock A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Taxes hrblock Eligible employee. Taxes hrblock   An eligible employee is an individual who meets all the following requirements. Taxes hrblock Has reached age 21. Taxes hrblock Has worked for you in at least 3 of the last 5 years. Taxes hrblock Has received at least $550 in compensation from you in 2013. Taxes hrblock This amount remains the same in 2014. Taxes hrblock    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Taxes hrblock Excludable employees. Taxes hrblock   The following employees can be excluded from coverage under a SEP. Taxes hrblock Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Taxes hrblock Nonresident alien employees who have received no U. Taxes hrblock S. Taxes hrblock source wages, salaries, or other personal services compensation from you. Taxes hrblock For more information about nonresident aliens, see Publication 519, U. Taxes hrblock S. Taxes hrblock Tax Guide for Aliens. Taxes hrblock Setting Up a SEP There are three basic steps in setting up a SEP. Taxes hrblock You must execute a formal written agreement to provide benefits to all eligible employees. Taxes hrblock You must give each eligible employee certain information about the SEP. Taxes hrblock A SEP-IRA must be set up by or for each eligible employee. Taxes hrblock Many financial institutions will help you set up a SEP. Taxes hrblock Formal written agreement. Taxes hrblock   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Taxes hrblock You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Taxes hrblock However, see When not to use Form 5305-SEP, below. Taxes hrblock   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Taxes hrblock Keep the original form. Taxes hrblock Do not file it with the IRS. Taxes hrblock Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Taxes hrblock See the Form 5305-SEP instructions for details. Taxes hrblock If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Taxes hrblock When not to use Form 5305-SEP. Taxes hrblock   You cannot use Form 5305-SEP if any of the following apply. Taxes hrblock You currently maintain any other qualified retirement plan other than another SEP. Taxes hrblock You have any eligible employees for whom IRAs have not been set up. Taxes hrblock You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Taxes hrblock You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Taxes hrblock An affiliated service group described in section 414(m). Taxes hrblock A controlled group of corporations described in section 414(b). Taxes hrblock Trades or businesses under common control described in section 414(c). Taxes hrblock You do not pay the cost of the SEP contributions. Taxes hrblock Information you must give to employees. Taxes hrblock   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Taxes hrblock An IRS model SEP is not considered adopted until you give each employee this information. Taxes hrblock Setting up the employee's SEP-IRA. Taxes hrblock   A SEP-IRA must be set up by or for each eligible employee. Taxes hrblock SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Taxes hrblock You send SEP contributions to the financial institution where the SEP-IRA is maintained. Taxes hrblock Deadline for setting up a SEP. Taxes hrblock   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Taxes hrblock Credit for startup costs. Taxes hrblock   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Taxes hrblock For more information, see Credit for startup costs under Reminders, earlier. Taxes hrblock How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Taxes hrblock If you are self-employed, you can contribute to your own SEP-IRA. Taxes hrblock Contributions must be in the form of money (cash, check, or money order). Taxes hrblock You cannot contribute property. Taxes hrblock However, participants may be able to transfer or roll over certain property from one retirement plan to another. Taxes hrblock See Publication 590 for more information about rollovers. Taxes hrblock You do not have to make contributions every year. Taxes hrblock But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Taxes hrblock When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Taxes hrblock Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Taxes hrblock A SEP-IRA cannot be a Roth IRA. Taxes hrblock Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Taxes hrblock Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Taxes hrblock If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Taxes hrblock Participants age 70½ or over must take required minimum distributions. Taxes hrblock Time limit for making contributions. Taxes hrblock   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Taxes hrblock Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Taxes hrblock Compensation generally does not include your contributions to the SEP. Taxes hrblock The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Taxes hrblock Example. Taxes hrblock Your employee, Mary Plant, earned $21,000 for 2013. Taxes hrblock The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Taxes hrblock Contributions for yourself. Taxes hrblock   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Taxes hrblock However, special rules apply when figuring your maximum deductible contribution. Taxes hrblock See Deduction Limit for Self-Employed Individuals , later. Taxes hrblock Annual compensation limit. Taxes hrblock   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Taxes hrblock However, $51,000 is the maximum contribution for an eligible employee. Taxes hrblock These limits are $260,000 and $52,000, respectively, in 2014. Taxes hrblock Example. Taxes hrblock Your employee, Susan Green, earned $210,000 for 2013. Taxes hrblock Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Taxes hrblock More than one plan. Taxes hrblock   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Taxes hrblock When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Taxes hrblock Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Taxes hrblock Tax treatment of excess contributions. Taxes hrblock   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Taxes hrblock 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Taxes hrblock $51,000. Taxes hrblock Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Taxes hrblock For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Taxes hrblock Reporting on Form W-2. Taxes hrblock   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Taxes hrblock Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Taxes hrblock If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Taxes hrblock Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Taxes hrblock Your contributions (including any excess contributions carryover). Taxes hrblock 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Taxes hrblock In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Taxes hrblock Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Taxes hrblock When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Taxes hrblock The deduction for the deductible part of your self-employment tax. Taxes hrblock The deduction for contributions to your own SEP-IRA. Taxes hrblock The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Taxes hrblock For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Taxes hrblock To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Taxes hrblock Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Taxes hrblock Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Taxes hrblock However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Taxes hrblock If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Taxes hrblock Excise tax. Taxes hrblock   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Taxes hrblock For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Taxes hrblock When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Taxes hrblock If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Taxes hrblock If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Taxes hrblock Example. Taxes hrblock You are a fiscal year taxpayer whose tax year ends June 30. Taxes hrblock You maintain a SEP on a calendar year basis. Taxes hrblock You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Taxes hrblock Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Taxes hrblock For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Taxes hrblock S. Taxes hrblock Return of Partnership Income; and corporations deduct them on Form 1120, U. Taxes hrblock S. Taxes hrblock Corporation Income Tax Return, or Form 1120S, U. Taxes hrblock S. Taxes hrblock Income Tax Return for an S Corporation. Taxes hrblock Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Taxes hrblock (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Taxes hrblock , you receive from the partnership. Taxes hrblock ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Taxes hrblock Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Taxes hrblock (See the Caution, next. Taxes hrblock ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Taxes hrblock This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Taxes hrblock You are not allowed to set up a SARSEP after 1996. Taxes hrblock However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Taxes hrblock If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Taxes hrblock Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Taxes hrblock At least 50% of your employees eligible to participate choose to make elective deferrals. Taxes hrblock You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Taxes hrblock The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Taxes hrblock SARSEP ADP test. Taxes hrblock   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Taxes hrblock A highly compensated employee is defined in chapter 1. Taxes hrblock Deferral percentage. Taxes hrblock   The deferral percentage for an employee for a year is figured as follows. Taxes hrblock   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Taxes hrblock Employee compensation. Taxes hrblock   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Taxes hrblock Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Taxes hrblock See Compensation in chapter 1. Taxes hrblock Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Taxes hrblock Compensation of self-employed individuals. Taxes hrblock   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Taxes hrblock   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Taxes hrblock Choice not to treat deferrals as compensation. Taxes hrblock   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Taxes hrblock Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Taxes hrblock 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Taxes hrblock $17,500. Taxes hrblock The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Taxes hrblock Cash or deferred arrangement (section 401(k) plan). Taxes hrblock Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Taxes hrblock SIMPLE IRA plan. Taxes hrblock In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Taxes hrblock Catch-up contributions. Taxes hrblock   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Taxes hrblock The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Taxes hrblock Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Taxes hrblock However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Taxes hrblock The catch-up contribution limit. Taxes hrblock The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Taxes hrblock   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Taxes hrblock Overall limit on SEP contributions. Taxes hrblock   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Taxes hrblock The same rule applies to contributions you make to your own SEP-IRA. Taxes hrblock See Contribution Limits , earlier. Taxes hrblock Figuring the elective deferral. Taxes hrblock   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Taxes hrblock Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Taxes hrblock However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Taxes hrblock Excess deferrals. Taxes hrblock   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Taxes hrblock For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Taxes hrblock The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Taxes hrblock See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Taxes hrblock Excess SEP contributions. Taxes hrblock   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Taxes hrblock You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Taxes hrblock If you do not notify them within this time period, you must pay a 10% tax on the excess. Taxes hrblock For an explanation of the notification requirements, see Rev. Taxes hrblock Proc. Taxes hrblock 91-44, 1991-2 C. Taxes hrblock B. Taxes hrblock 733. Taxes hrblock If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Taxes hrblock Reporting on Form W-2. Taxes hrblock   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Taxes hrblock You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Taxes hrblock You must also include them in box 12. Taxes hrblock Mark the “Retirement plan” checkbox in box 13. Taxes hrblock For more information, see the Form W-2 instructions. Taxes hrblock Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Taxes hrblock Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Taxes hrblock Distributions are subject to IRA rules. Taxes hrblock Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Taxes hrblock For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Taxes hrblock Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Taxes hrblock Making excess contributions. Taxes hrblock Making early withdrawals. Taxes hrblock Not making required withdrawals. Taxes hrblock For information about these taxes, see chapter 1 in Publication 590. Taxes hrblock Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Taxes hrblock Prohibited transaction. Taxes hrblock   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Taxes hrblock In that case, the SEP-IRA will no longer qualify as an IRA. Taxes hrblock For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Taxes hrblock Effects on employee. Taxes hrblock   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Taxes hrblock The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Taxes hrblock Also, the employee may have to pay the additional tax for making early withdrawals. Taxes hrblock Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Taxes hrblock See Setting Up a SEP , earlier. Taxes hrblock Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Taxes hrblock You must also give them notice of any excess contributions. Taxes hrblock For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Taxes hrblock Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Taxes hrblock For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Taxes hrblock Prev  Up  Next   Home   More Online Publications