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Taxhow 1040x Publication 15 - Main Content Table of Contents 1. Taxhow 1040x Employer Identification Number (EIN) 2. Taxhow 1040x Who Are Employees?Relief provisions. Taxhow 1040x Business Owned and Operated by Spouses 3. Taxhow 1040x Family Employees 4. Taxhow 1040x Employee's Social Security Number (SSN)Registering for SSNVS. Taxhow 1040x 5. Taxhow 1040x Wages and Other CompensationAccountable plan. Taxhow 1040x Nonaccountable plan. Taxhow 1040x Per diem or other fixed allowance. Taxhow 1040x 50% test. Taxhow 1040x Health Savings Accounts and medical savings accounts. Taxhow 1040x Nontaxable fringe benefits. Taxhow 1040x When fringe benefits are treated as paid. Taxhow 1040x Valuation of fringe benefits. Taxhow 1040x Withholding on fringe benefits. Taxhow 1040x Depositing taxes on fringe benefits. Taxhow 1040x 6. Taxhow 1040x TipsOrdering rule. Taxhow 1040x 7. Taxhow 1040x Supplemental Wages 8. Taxhow 1040x Payroll Period 9. Taxhow 1040x Withholding From Employees' WagesIncome Tax Withholding Social Security and Medicare Taxes Part-Time Workers 10. Taxhow 1040x Required Notice to Employees About the Earned Income Credit (EIC) 11. Taxhow 1040x Depositing TaxesWhen To Deposit How To Deposit Deposit Penalties 12. Taxhow 1040x Filing Form 941 or Form 944 13. Taxhow 1040x Reporting Adjustments to Form 941 or Form 944Current Period Adjustments Prior Period Adjustments Wage Repayments 14. Taxhow 1040x Federal Unemployment (FUTA) TaxSuccessor employer. Taxhow 1040x Household employees. Taxhow 1040x When to deposit. Taxhow 1040x Household employees. Taxhow 1040x Electronic filing by reporting agents. Taxhow 1040x 16. Taxhow 1040x How To Use the Income Tax Withholding TablesWage Bracket Method Percentage Method Alternative Methods of Income Tax Withholding How To Get Tax Help 1. Taxhow 1040x Employer Identification Number (EIN) If you are required to report employment taxes or give tax statements to employees or annuitants, you need an EIN. Taxhow 1040x The EIN is a nine-digit number the IRS issues. Taxhow 1040x The digits are arranged as follows: 00-0000000. Taxhow 1040x It is used to identify the tax accounts of employers and certain others who have no employees. Taxhow 1040x Use your EIN on all of the items you send to the IRS and SSA. Taxhow 1040x For more information, see Publication 1635, Employer Identification Number: Understanding Your EIN. Taxhow 1040x If you do not have an EIN, you may apply for one online. Taxhow 1040x Go to the IRS. Taxhow 1040x gov and click on the Apply for an EIN Online link under Tools. Taxhow 1040x You may also apply for an EIN by calling 1-800-829-4933, or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Taxhow 1040x Do not use an SSN in place of an EIN. Taxhow 1040x You should have only one EIN. Taxhow 1040x If you have more than one and are not sure which one to use, call 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Taxhow 1040x Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Taxhow 1040x The IRS will tell you which number to use. Taxhow 1040x If you took over another employer's business (see Successor employer in section 9), do not use that employer's EIN. Taxhow 1040x If you have applied for an EIN but do not have your EIN by the time a return is due, file a paper return and write “Applied For” and the date you applied for it in the space shown for the number. Taxhow 1040x 2. Taxhow 1040x Who Are Employees? Generally, employees are defined either under common law or under statutes for certain situations. Taxhow 1040x See Publication 15-A for details on statutory employees and nonemployees. Taxhow 1040x Employee status under common law. Taxhow 1040x   Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. Taxhow 1040x This is so even when you give the employee freedom of action. Taxhow 1040x What matters is that you have the right to control the details of how the services are performed. Taxhow 1040x See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Taxhow 1040x   Generally, people in business for themselves are not employees. Taxhow 1040x For example, doctors, lawyers, veterinarians, and others in an independent trade in which they offer their services to the public are usually not employees. Taxhow 1040x However, if the business is incorporated, corporate officers who work in the business are employees of the corporation. Taxhow 1040x   If an employer-employee relationship exists, it does not matter what it is called. Taxhow 1040x The employee may be called an agent or independent contractor. Taxhow 1040x It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. Taxhow 1040x Statutory employees. Taxhow 1040x   If someone who works for you is not an employee under the common law rules discussed earlier, do not withhold federal income tax from his or her pay, unless backup withholding applies. Taxhow 1040x Although the following persons may not be common law employees, they are considered employees by statute for social security, Medicare, and FUTA tax purposes under certain conditions. Taxhow 1040x An agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else. Taxhow 1040x A full-time life insurance salesperson who sells primarily for one company. Taxhow 1040x A homeworker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates. Taxhow 1040x A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. Taxhow 1040x The orders must be for merchandise for resale or supplies for use in the customer's business. Taxhow 1040x The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging. Taxhow 1040x    Statutory nonemployees. Taxhow 1040x   Direct sellers, qualified real estate agents, and certain companion sitters are, by law, considered nonemployees. Taxhow 1040x They are generally treated as self-employed for all federal tax purposes, including income and employment taxes. Taxhow 1040x H-2A agricultural workers. Taxhow 1040x   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Taxhow 1040x Treating employees as nonemployees. Taxhow 1040x   You will generally be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold these taxes because you treated an employee as a nonemployee. Taxhow 1040x You may be able to calculate your liability using special section 3509 rates for the employee share of social security and Medicare taxes and the federal income tax withholding. Taxhow 1040x The applicable rates depend on whether you filed required Forms 1099. Taxhow 1040x You cannot recover the employee share of social security, or Medicare tax, or income tax withholding from the employee if the tax is paid under section 3509. Taxhow 1040x You are liable for the income tax withholding regardless of whether the employee paid income tax on the wages. Taxhow 1040x You continue to owe the full employer share of social security and Medicare taxes. Taxhow 1040x The employee remains liable for the employee share of social security and Medicare taxes. Taxhow 1040x See Internal Revenue Code section 3509 for details. Taxhow 1040x Also see the Instructions for Form 941-X. Taxhow 1040x   Section 3509 rates are not available if you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes. Taxhow 1040x Section 3509 is not available for reclassifying statutory employees. Taxhow 1040x See Statutory employees , earlier in this section. Taxhow 1040x   If the employer issued required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Taxhow 1040x 2% plus 20% of the employee rate (see the Instructions for Form 941-X). Taxhow 1040x For Medicare taxes; employer rate of 1. Taxhow 1040x 45% plus 20% of the employee rate of 1. Taxhow 1040x 45%, for a total rate of 1. Taxhow 1040x 74% of wages. Taxhow 1040x For Additional Medicare Tax; 0. Taxhow 1040x 18% (20% of the employee rate of 0. Taxhow 1040x 9%) of wages subject to Additional Medicare Tax. Taxhow 1040x For income tax withholding, the rate is 1. Taxhow 1040x 5% of wages. Taxhow 1040x   If the employer did not issue required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Taxhow 1040x 2% plus 40% of the employee rate (see the Instructions for Form 941-X). Taxhow 1040x For Medicare taxes; employer rate of 1. Taxhow 1040x 45% plus 40% of the employee rate of 1. Taxhow 1040x 45%, for a total rate of 2. Taxhow 1040x 03% of wages. Taxhow 1040x For Additional Medicare Tax; 0. Taxhow 1040x 36% (40% of the employee rate of 0. Taxhow 1040x 9%) of wages subject to Additional Medicare Tax. Taxhow 1040x For income tax withholding, the rate is 3. Taxhow 1040x 0% of wages. Taxhow 1040x Relief provisions. Taxhow 1040x   If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. Taxhow 1040x To get this relief, you must file all required federal tax returns, including information returns, on a basis consistent with your treatment of the worker. Taxhow 1040x You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. Taxhow 1040x See Publication 1976, Do You Qualify for Relief Under Section 530. Taxhow 1040x IRS help. Taxhow 1040x   If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Taxhow 1040x Voluntary Classification Settlement Program (VCSP). Taxhow 1040x   Employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP if certain requirements are met. Taxhow 1040x To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Taxhow 1040x For more information visit IRS. Taxhow 1040x gov and enter “VCSP” in the search box. Taxhow 1040x Business Owned and Operated by Spouses If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Taxhow 1040x See Publication 541, Partnerships, for more details. Taxhow 1040x The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. Taxhow 1040x Exception—Qualified joint venture. Taxhow 1040x   For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. Taxhow 1040x A qualified joint venture conducts a trade or business where: The only members of the joint venture are spouses who file a joint income tax return, Both spouses materially participate (see Material participation in the Instructions for Schedule C (Form 1040), line G) in the trade or business (mere joint ownership of property is not enough), Both spouses elect to not be treated as a partnership, and The business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or limited liability company (LLC). Taxhow 1040x   To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse's interest in the venture, and reported on separate Schedules C or F as sole proprietors. Taxhow 1040x Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable. Taxhow 1040x   Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. Taxhow 1040x If employment taxes are owed by the qualified joint venture, either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse's sole proprietorship. Taxhow 1040x Generally, filing as a qualified joint venture will not increase the spouses' total tax owed on the joint income tax return. Taxhow 1040x However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return. Taxhow 1040x    Note. Taxhow 1040x If your spouse is your employee, not your partner, see One spouse employed by another in section 3. Taxhow 1040x   For more information on qualified joint ventures, visit IRS. Taxhow 1040x gov and enter “qualified joint venture” in the search box. Taxhow 1040x Exception—Community income. Taxhow 1040x   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Taxhow 1040x S. Taxhow 1040x possession, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. Taxhow 1040x You may still make an election to be taxed as a qualified joint venture instead of a partnership. Taxhow 1040x See Exception—Qualified joint venture , earlier. Taxhow 1040x 3. Taxhow 1040x Family Employees Child employed by parents. Taxhow 1040x   Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Taxhow 1040x If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they are not subject to social security and Medicare taxes until the child reaches age 21. Taxhow 1040x However, see Covered services of a child or spouse , later in this section. Taxhow 1040x Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, are not subject to FUTA tax. Taxhow 1040x Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child is not regularly employed to do such work. Taxhow 1040x One spouse employed by another. Taxhow 1040x   The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax. Taxhow 1040x However, the payments for services of one spouse employed by another in other than a trade or business, such as domestic service in a private home, are not subject to social security, Medicare, and FUTA taxes. Taxhow 1040x Covered services of a child or spouse. Taxhow 1040x   The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for: A corporation, even if it is controlled by the child's parent or the individual's spouse; A partnership, even if the child's parent is a partner, unless each partner is a parent of the child; A partnership, even if the individual's spouse is a partner; or An estate, even if it is the estate of a deceased parent. Taxhow 1040x Parent employed by son or daughter. Taxhow 1040x   When the employer is a son or daughter employing his or her parent the following rules apply. Taxhow 1040x Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes. Taxhow 1040x Payments for the services of a parent not in the son’s or daughter’s (the employer’s) trade or business are generally not subject to social security and Medicare taxes. Taxhow 1040x    Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply: The parent is employed by his or her son or daughter; The son or daughter (the employer) has a child or stepchild living in the home; The son or daughter (the employer) is a widow or widower, divorced, or living with a spouse who, because of a mental or physical condition, cannot care for the child or stepchild for at least 4 continuous weeks in a calendar quarter; and The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition. Taxhow 1040x   Payments made to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided. Taxhow 1040x 4. Taxhow 1040x Employee's Social Security Number (SSN) You are required to get each employee's name and SSN and to enter them on Form W-2. Taxhow 1040x This requirement also applies to resident and nonresident alien employees. Taxhow 1040x You should ask your employee to show you his or her social security card. Taxhow 1040x The employee may show the card if it is available. Taxhow 1040x Do not accept a social security card that says “Not valid for employment. Taxhow 1040x ” A social security number issued with this legend does not permit employment. Taxhow 1040x You may, but are not required to, photocopy the social security card if the employee provides it. Taxhow 1040x If you do not provide the correct employee name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. Taxhow 1040x See Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs, for information on the requirement to solicit the employee's SSN. Taxhow 1040x Applying for a social security card. Taxhow 1040x   Any employee who is legally eligible to work in the United States and does not have a social security card can get one by completing Form SS-5, Application for a Social Security Card, and submitting the necessary documentation. Taxhow 1040x You can get Form SS-5 at SSA offices, by calling 1-800-772-1213, or from the SSA website at www. Taxhow 1040x socialsecurity. Taxhow 1040x gov/online/ss-5. Taxhow 1040x html. Taxhow 1040x The employee must complete and sign Form SS-5; it cannot be filed by the employer. Taxhow 1040x You may be asked to supply a letter to accompany Form SS-5 if the employee has exceeded his or her yearly or lifetime limit for the number of replacement cards allowed. Taxhow 1040x Applying for a social security number. Taxhow 1040x   If you file Form W-2 on paper and your employee applied for an SSN but does not have one when you must file Form W-2, enter “Applied For” on the form. Taxhow 1040x If you are filing electronically, enter all zeros (000-00-000) in the social security number field. Taxhow 1040x When the employee receives the SSN, file Copy A of Form W-2c, Corrected Wage and Tax Statement, with the SSA to show the employee's SSN. Taxhow 1040x Furnish copies B, C, and 2 of Form W-2c to the employee. Taxhow 1040x Up to 25 Forms W-2c for each Form W-3c, Transmittal of Corrected Wage and Tax Statements, may now be filed per session over the Internet, with no limit on the number of sessions. Taxhow 1040x For more information, visit the SSA's Employer W-2 Filing Instructions & Information webpage at www. Taxhow 1040x socialsecurity. Taxhow 1040x gov/employer. Taxhow 1040x Advise your employee to correct the SSN on his or her original Form W-2. Taxhow 1040x Correctly record the employee's name and SSN. Taxhow 1040x   Record the name and number of each employee as they are shown on the employee's social security card. Taxhow 1040x If the employee's name is not correct as shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA. Taxhow 1040x Continue to report the employee's wages under the old name until the employee shows you an updated social security card with the new name. Taxhow 1040x If the SSA issues the employee a replacement card after a name change, or a new card with a different social security number after a change in alien work status, file a Form W-2c to correct the name/SSN reported for the most recently filed Form W-2. Taxhow 1040x It is not necessary to correct other years if the previous name and number were used for years before the most recent Form W-2. Taxhow 1040x IRS individual taxpayer identification numbers (ITINs) for aliens. Taxhow 1040x   Do not accept an ITIN in place of an SSN for employee identification or for work. Taxhow 1040x An ITIN is only available to resident and nonresident aliens who are not eligible for U. Taxhow 1040x S. Taxhow 1040x employment and need identification for other tax purposes. Taxhow 1040x You can identify an ITIN because it is a nine-digit number, beginning with the number “9” with either a “7” or “8” as the fourth digit and is formatted like an SSN (for example, 9NN-7N-NNNN). Taxhow 1040x    An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN. Taxhow 1040x If the individual is currently eligible to work in the United States, instruct the individual to apply for an SSN and follow the instructions under Applying for a social security number, earlier. Taxhow 1040x Do not use an ITIN in place of an SSN on Form W-2. Taxhow 1040x Verification of social security numbers. Taxhow 1040x   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive the results the next business day. Taxhow 1040x Visit www. Taxhow 1040x socialsecurity. Taxhow 1040x gov/employer/ssnv. Taxhow 1040x htm for more information. Taxhow 1040x Registering for SSNVS. Taxhow 1040x   You must register online and receive authorization from your employer to use SSNVS. Taxhow 1040x To register, visit SSA's website at www. Taxhow 1040x ssa. Taxhow 1040x gov/employer and click on the Business Services Online link. Taxhow 1040x Follow the registration instructions to obtain a user identification (ID) and password. Taxhow 1040x You will need to provide the following information about yourself and your company. Taxhow 1040x Name. Taxhow 1040x SSN. Taxhow 1040x Date of birth. Taxhow 1040x Type of employer. Taxhow 1040x EIN. Taxhow 1040x Company name, address, and telephone number. Taxhow 1040x Email address. Taxhow 1040x   When you have completed the online registration process, SSA will mail a one-time activation code to your employer. Taxhow 1040x You must enter the activation code online to use SSNVS. Taxhow 1040x 5. Taxhow 1040x Wages and Other Compensation Wages subject to federal employment taxes generally include all pay you give to an employee for services performed. Taxhow 1040x The pay may be in cash or in other forms. Taxhow 1040x It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. Taxhow 1040x It does not matter how you measure or make the payments. Taxhow 1040x Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and FUTA taxes and income tax withholding. Taxhow 1040x Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes. Taxhow 1040x More information. Taxhow 1040x   See section 6 for a discussion of tips and section 7 for a discussion of supplemental wages. Taxhow 1040x Also, see section 15 for exceptions to the general rules for wages. Taxhow 1040x Publication 15-A provides additional information on wages, including nonqualified deferred compensation, and other compensation. Taxhow 1040x Publication 15-B provides information on other forms of compensation, including: Accident and health benefits, Achievement awards, Adoption assistance, Athletic facilities, De minimis (minimal) benefits, Dependent care assistance, Educational assistance, Employee discounts, Employee stock options, Employer-provided cell phones, Group-term life insurance coverage, Health Savings Accounts, Lodging on your business premises, Meals, Moving expense reimbursements, No-additional-cost services, Retirement planning services, Transportation (commuting) benefits, Tuition reduction, and Working condition benefits. Taxhow 1040x Employee business expense reimbursements. Taxhow 1040x   A reimbursement or allowance arrangement is a system by which you pay the advances, reimbursements, and charges for your employees' business expenses. Taxhow 1040x How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan. Taxhow 1040x If a single payment includes both wages and an expense reimbursement, you must specify the amount of the reimbursement. Taxhow 1040x   These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee. Taxhow 1040x Accountable plan. Taxhow 1040x   To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules. Taxhow 1040x They must have paid or incurred deductible expenses while performing services as your employees. Taxhow 1040x The reimbursement or advance must be paid for the expense and must not be an amount that would have otherwise been paid by the employee. Taxhow 1040x They must substantiate these expenses to you within a reasonable period of time. Taxhow 1040x They must return any amounts in excess of substantiated expenses within a reasonable period of time. Taxhow 1040x   Amounts paid under an accountable plan are not wages and are not subject to income, social security, Medicare, and FUTA taxes. Taxhow 1040x   If the expenses covered by this arrangement are not substantiated (or amounts in excess of substantiated expenses are not returned within a reasonable period of time), the amount paid under the arrangement in excess of the substantiated expenses is treated as paid under a nonaccountable plan. Taxhow 1040x This amount is subject to income, social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period of time. Taxhow 1040x   A reasonable period of time depends on the facts and circumstances. Taxhow 1040x Generally, it is considered reasonable if your employees receive their advance within 30 days of the time they incur the expenses, adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the expenses were paid or incurred. Taxhow 1040x Also, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days. Taxhow 1040x Nonaccountable plan. Taxhow 1040x   Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes. Taxhow 1040x Your payments are treated as paid under a nonaccountable plan if: Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses, You advance or pay an amount to your employee regardless of whether you reasonably expect the employee to have business expenses related to your business, or You pay an amount as a reimbursement you would have otherwise paid as wages. Taxhow 1040x   See section 7 for more information on supplemental wages. Taxhow 1040x Per diem or other fixed allowance. Taxhow 1040x   You may reimburse your employees by travel days, miles, or some other fixed allowance under the applicable revenue procedure. Taxhow 1040x In these cases, your employee is considered to have accounted to you if your reimbursement does not exceed rates established by the Federal Government. Taxhow 1040x The 2013 standard mileage rate for auto expenses was 56. Taxhow 1040x 5 cents per mile. Taxhow 1040x The rate for 2014 is 56 cents per mile. Taxhow 1040x   The government per diem rates for meals and lodging in the continental United States are listed in Publication 1542, Per Diem Rates. Taxhow 1040x Other than the amount of these expenses, your employees' business expenses must be substantiated (for example, the business purpose of the travel or the number of business miles driven). Taxhow 1040x   If the per diem or allowance paid exceeds the amounts substantiated, you must report the excess amount as wages. Taxhow 1040x This excess amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Taxhow 1040x Show the amount equal to the substantiated amount (for example, the nontaxable portion) in box 12 of Form W-2 using code “L. Taxhow 1040x ” Wages not paid in money. Taxhow 1040x   If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument, such as a check, you are said to pay them “in kind. Taxhow 1040x ” Payments in kind may be in the form of goods, lodging, food, clothing, or services. Taxhow 1040x Generally, the fair market value of such payments at the time they are provided is subject to federal income tax withholding and social security, Medicare, and FUTA taxes. Taxhow 1040x   However, noncash payments for household work, agricultural labor, and service not in the employer's trade or business are exempt from social security, Medicare, and FUTA taxes. Taxhow 1040x Withhold income tax on these payments only if you and the employee agree to do so. Taxhow 1040x Nonetheless, noncash payments for agricultural labor, such as commodity wages, are treated as cash payments subject to employment taxes if the substance of the transaction is a cash payment. Taxhow 1040x Moving expenses. Taxhow 1040x   Reimbursed and employer-paid qualified moving expenses (those that would otherwise be deductible by the employee) paid under an accountable plan are not includible in an employee's income unless you have knowledge the employee deducted the expenses in a prior year. Taxhow 1040x Reimbursed and employer-paid nonqualified moving expenses are includible in income and are subject to employment taxes and income tax withholding. Taxhow 1040x For more information on moving expenses, see Publication 521, Moving Expenses. Taxhow 1040x Meals and lodging. Taxhow 1040x   The value of meals is not taxable income and is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the meals are furnished for the employer's convenience and on the employer's premises. Taxhow 1040x The value of lodging is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the lodging is furnished for the employer's convenience, on the employer's premises, and as a condition of employment. Taxhow 1040x    “For the convenience of the employer” means you have a substantial business reason for providing the meals and lodging other than to provide additional compensation to the employee. Taxhow 1040x For example, meals you provide at the place of work so that an employee is available for emergencies during his or her lunch period are generally considered to be for your convenience. Taxhow 1040x   However, whether meals or lodging are provided for the convenience of the employer depends on all of the facts and circumstances. Taxhow 1040x A written statement that the meals or lodging are for your convenience is not sufficient. Taxhow 1040x 50% test. Taxhow 1040x   If over 50% of the employees who are provided meals on an employer's business premises receive these meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Taxhow 1040x If this 50% test is met, the value of the meals is excludable from income for all employees and is not subject to federal income tax withholding or employment taxes. Taxhow 1040x For more information, see Publication 15-B. Taxhow 1040x Health insurance plans. Taxhow 1040x   If you pay the cost of an accident or health insurance plan for your employees, including an employee's spouse and dependents, your payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Taxhow 1040x Generally, this exclusion also applies to qualified long-term care insurance contracts. Taxhow 1040x However, for income tax withholding, the value of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the S corporation (2% shareholders). Taxhow 1040x For social security, Medicare, and FUTA taxes, the health insurance benefits are excluded from the wages only for employees and their dependents or for a class or classes of employees and their dependents. Taxhow 1040x See Announcement 92-16 for more information. Taxhow 1040x You can find Announcement 92-16 on page 53 of Internal Revenue Bulletin 1992-5. Taxhow 1040x Health Savings Accounts and medical savings accounts. Taxhow 1040x   Your contributions to an employee's Health Savings Account (HSA) or Archer medical savings account (MSA) are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they will be excludable from the income of the employee. Taxhow 1040x To the extent it is not reasonable to believe they will be excludable, your contributions are subject to these taxes. Taxhow 1040x Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. Taxhow 1040x However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. Taxhow 1040x For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs). Taxhow 1040x Medical care reimbursements. Taxhow 1040x   Generally, medical care reimbursements paid for an employee under an employer's self-insured medical reimbursement plan are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. Taxhow 1040x See Publication 15-B for an exception for highly compensated employees. Taxhow 1040x Differential wage payments. Taxhow 1040x   Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and represent all or a portion of the wages the individual would have received from the employer if the individual were performing services for the employer. Taxhow 1040x   Differential wage payments are wages for income tax withholding, but are not subject to social security, Medicare, or FUTA taxes. Taxhow 1040x Employers should report differential wage payments in box 1 of Form W-2. Taxhow 1040x For more information about the tax treatment of differential wage payments, visit IRS. Taxhow 1040x gov and enter “employees in a combat zone” in the search box. Taxhow 1040x Fringe benefits. Taxhow 1040x   You generally must include fringe benefits in an employee's gross income (but see Nontaxable fringe benefits next). Taxhow 1040x The benefits are subject to income tax withholding and employment taxes. Taxhow 1040x Fringe benefits include cars you provide, flights on aircraft you provide, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. Taxhow 1040x In general, the amount you must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount the law excludes. Taxhow 1040x There are other special rules you and your employees may use to value certain fringe benefits. Taxhow 1040x See Publication 15-B for more information. Taxhow 1040x Nontaxable fringe benefits. Taxhow 1040x   Some fringe benefits are not taxable (or are minimally taxable) if certain conditions are met. Taxhow 1040x See Publication 15-B for details. Taxhow 1040x The following are some examples of nontaxable fringe benefits. Taxhow 1040x Services provided to your employees at no additional cost to you. Taxhow 1040x Qualified employee discounts. Taxhow 1040x Working condition fringes that are property or services the employee could deduct as a business expense if he or she had paid for it. Taxhow 1040x Examples include a company car for business use and subscriptions to business magazines. Taxhow 1040x Certain minimal value fringes (including an occasional cab ride when an employee must work overtime and meals you provide at eating places you run for your employees if the meals are not furnished at below cost). Taxhow 1040x Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway vehicle, any transit pass, and qualified parking). Taxhow 1040x Qualified moving expense reimbursement. Taxhow 1040x See Moving expenses , earlier in this section, for details. Taxhow 1040x The use of on-premises athletic facilities, if substantially all of the use is by employees, their spouses, and their dependent children. Taxhow 1040x Qualified tuition reduction an educational organization provides to its employees for education. Taxhow 1040x For more information, see Publication 970, Tax Benefits for Education. Taxhow 1040x Employer-provided cell phones provided primarily for a noncompensatory business reason. Taxhow 1040x   However, do not exclude the following fringe benefits from the income of highly compensated employees unless the benefit is available to other employees on a nondiscriminatory basis. Taxhow 1040x No-additional-cost services. Taxhow 1040x Qualified employee discounts. Taxhow 1040x Meals provided at an employer operated eating facility. Taxhow 1040x Reduced tuition for education. Taxhow 1040x  For more information, including the definition of a highly compensated employee, see Publication 15-B. Taxhow 1040x When fringe benefits are treated as paid. Taxhow 1040x   You may choose to treat certain noncash fringe benefits as paid by the pay period, by the quarter, or on any other basis you choose as long as you treat the benefits as paid at least once a year. Taxhow 1040x You do not have to make a formal choice of payment dates or notify the IRS of the dates you choose. Taxhow 1040x You do not have to make this choice for all employees. Taxhow 1040x You may change methods as often as you like, as long as you treat all benefits provided in a calendar year as paid by December 31 of the calendar year. Taxhow 1040x See Publication 15-B for more information, including a discussion of the special accounting rule for fringe benefits provided during November and December. Taxhow 1040x Valuation of fringe benefits. Taxhow 1040x   Generally, you must determine the value of fringe benefits no later than January 31 of the next year. Taxhow 1040x Before January 31, you may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time. Taxhow 1040x Withholding on fringe benefits. Taxhow 1040x   You may add the value of fringe benefits to regular wages for a payroll period and figure withholding taxes on the total, or you may withhold federal income tax on the value of the fringe benefits at the optional flat 25% supplemental wage rate. Taxhow 1040x However, see Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages during the calendar year in section 7. Taxhow 1040x   You may choose not to withhold income tax on the value of an employee's personal use of a vehicle you provide. Taxhow 1040x You must, however, withhold social security and Medicare taxes on the use of the vehicle. Taxhow 1040x See Publication 15-B for more information on this election. Taxhow 1040x Depositing taxes on fringe benefits. Taxhow 1040x   Once you choose when fringe benefits are paid, you must deposit taxes in the same deposit period you treat the fringe benefits as paid. Taxhow 1040x To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period. Taxhow 1040x   If you determine by January 31 you overestimated the value of a fringe benefit at the time you withheld and deposited for it, you may claim a refund for the overpayment or have it applied to your next employment tax return. Taxhow 1040x See Valuation of fringe benefits , earlier. Taxhow 1040x If you underestimated the value and deposited too little, you may be subject to a failure-to-deposit penalty. Taxhow 1040x See section 11 for information on deposit penalties. Taxhow 1040x   If you deposited the required amount of taxes but withheld a lesser amount from the employee, you can recover from the employee the social security, Medicare, or income taxes you deposited on his or her behalf, and included in the employee's Form W-2. Taxhow 1040x However, you must recover the income taxes before April 1 of the following year. Taxhow 1040x Sick pay. Taxhow 1040x   In general, sick pay is any amount you pay under a plan to an employee who is unable to work because of sickness or injury. Taxhow 1040x These amounts are sometimes paid by a third party, such as an insurance company or an employees' trust. Taxhow 1040x In either case, these payments are subject to social security, Medicare, and FUTA taxes. Taxhow 1040x Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the employee last worked for the employer. Taxhow 1040x The payments are always subject to federal income tax. Taxhow 1040x See Publication 15-A for more information. Taxhow 1040x 6. Taxhow 1040x Tips Tips your employee receives from customers are generally subject to withholding. Taxhow 1040x Your employee must report cash tips to you by the 10th of the month after the month the tips are received. Taxhow 1040x The report should include tips you paid over to the employee for charge customers, tips the employee received directly from customers, and tips received from other employees under any tip-sharing arrangement. Taxhow 1040x Both directly and indirectly tipped employees must report tips to you. Taxhow 1040x No report is required for months when tips are less than $20. Taxhow 1040x Your employee reports the tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. Taxhow 1040x The statement must be signed by the employee and must include: The employee's name, address, and SSN, Your name and address, The month or period the report covers, and The total of tips received during the month or period. Taxhow 1040x Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. Taxhow 1040x You are permitted to establish a system for electronic tip reporting by employees. Taxhow 1040x See Regulations section 31. Taxhow 1040x 6053-1(d). Taxhow 1040x Collecting taxes on tips. Taxhow 1040x   You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. Taxhow 1040x The withholding rules for withholding an employee's share of Medicare tax on tips also apply to withholding the Additional Medicare Tax once wages and tips exceed $200,000 in the calendar year. Taxhow 1040x If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax. Taxhow 1040x   You can collect these taxes from the employee's wages or from other funds he or she makes available. Taxhow 1040x See Tips treated as supplemental wages in section 7 for more information. Taxhow 1040x Stop collecting the employee social security tax when his or her wages and tips for tax year 2014 reach $117,000; collect the income and employee Medicare taxes for the whole year on all wages and tips. Taxhow 1040x You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the limit. Taxhow 1040x You are responsible for the employer Medicare tax for the whole year on all wages and tips. Taxhow 1040x File Form 941 or Form 944 to report withholding and employment taxes on tips. Taxhow 1040x Ordering rule. Taxhow 1040x   If, by the 10th of the month after the month for which you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. Taxhow 1040x If there are not enough funds available, withhold taxes in the following order. Taxhow 1040x Withhold on regular wages and other compensation. Taxhow 1040x Withhold social security and Medicare taxes on tips. Taxhow 1040x Withhold income tax on tips. Taxhow 1040x Reporting tips. Taxhow 1040x   Report tips and any collected and uncollected social security and Medicare taxes on Form W-2 and on Form 941, lines 5b, 5c, and 5d (Form 944, lines 4b, 4c, and 4d). Taxhow 1040x Report an adjustment on Form 941, line 9 (Form 944, line 6), for the uncollected social security and Medicare taxes. Taxhow 1040x Enter the amount of uncollected social security tax and Medicare tax on Form W-2, box 12, with codes “A” and “B. Taxhow 1040x ” Do not include any uncollected Additional Medicare Tax in box 12 of Form W-2. Taxhow 1040x See section 13 and the General Instructions for Forms W-2 and W-3. Taxhow 1040x   Revenue Ruling 2012-18 provides guidance for employers regarding social security and Medicare taxes imposed on tips, including information on the reporting of the employer share of social security and Medicare taxes under section 3121(q), the difference between tips and service charges, and the section 45B credit. Taxhow 1040x See Revenue Ruling 2012-18, 2012-26 I. Taxhow 1040x R. Taxhow 1040x B. Taxhow 1040x 1032, available at www. Taxhow 1040x irs. Taxhow 1040x gov/irb/2012-26_IRB/ar07. Taxhow 1040x html. Taxhow 1040x Allocated tips. Taxhow 1040x   If you operate a large food or beverage establishment, you must report allocated tips under certain circumstances. Taxhow 1040x However, do not withhold income, social security, or Medicare taxes on allocated tips. Taxhow 1040x   A large food or beverage establishment is one that provides food or beverages for consumption on the premises, where tipping is customary, and where there were normally more than 10 employees on a typical business day during the preceding year. Taxhow 1040x   The tips may be allocated by one of three methods—hours worked, gross receipts, or good faith agreement. Taxhow 1040x For information about these allocation methods, including the requirement to file Forms 8027 electronically if 250 or more forms are filed, see the Instructions for Form 8027. Taxhow 1040x For information on filing Form 8027 electronically with the IRS, see Publication 1239. Taxhow 1040x Tip Rate Determination and Education Program. Taxhow 1040x   Employers may participate in the Tip Rate Determination and Education Program. Taxhow 1040x The program primarily consists of two voluntary agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. Taxhow 1040x The two agreements are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). Taxhow 1040x A tip agreement, the Gaming Industry Tip Compliance Agreement (GITCA), is available for the gaming (casino) industry. Taxhow 1040x To get more information about TRDA and TRAC agreements, see Publication 3144, Tips on Tips. Taxhow 1040x Additionally, visit IRS. Taxhow 1040x gov and enter “MSU tips” in the search box to get more information about GITCA, TRDA, or TRAC agreements. Taxhow 1040x 7. Taxhow 1040x Supplemental Wages Supplemental wages are wage payments to an employee that are not regular wages. Taxhow 1040x They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Taxhow 1040x Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. Taxhow 1040x How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. Taxhow 1040x See Regulations section 31. Taxhow 1040x 3402(g)-1 for additional guidance for wages paid after January 1, 2007. Taxhow 1040x Also see Revenue Ruling 2008-29, 2008-24 I. Taxhow 1040x R. Taxhow 1040x B. Taxhow 1040x 1149, available at www. Taxhow 1040x irs. Taxhow 1040x gov/irb/2008-24_IRB/ar08. Taxhow 1040x html. Taxhow 1040x Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages from you during the calendar year. Taxhow 1040x   Special rules apply to the extent supplemental wages paid to any one employee during the calendar year exceed $1 million. Taxhow 1040x If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39. Taxhow 1040x 6% (or the highest rate of income tax for the year). Taxhow 1040x Withhold using the 39. Taxhow 1040x 6% rate without regard to the employee's Form W-4. Taxhow 1040x In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. Taxhow 1040x For more information, see Treasury Decision 9276, 2006-37 I. Taxhow 1040x R. Taxhow 1040x B. Taxhow 1040x 423, available at www. Taxhow 1040x irs. Taxhow 1040x gov/irb/2006-37_IRB/ar09. Taxhow 1040x html. Taxhow 1040x Withholding on supplemental wage payments to an employee who does not receive $1 million of supplemental wages during the calendar year. Taxhow 1040x   If the supplemental wages paid to the employee during the calendar year are less than or equal to $1 million, the following rules apply in determining the amount of income tax to be withheld. Taxhow 1040x Supplemental wages combined with regular wages. Taxhow 1040x   If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period. Taxhow 1040x Supplemental wages identified separately from regular wages. Taxhow 1040x   If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. Taxhow 1040x If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages. Taxhow 1040x Withhold a flat 25% (no other percentage allowed). Taxhow 1040x If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. Taxhow 1040x If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Taxhow 1040x Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Taxhow 1040x Subtract the tax withheld from the regular wages. Taxhow 1040x Withhold the remaining tax from the supplemental wages. Taxhow 1040x If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax. Taxhow 1040x If you did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. Taxhow 1040x This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Taxhow 1040x Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes. Taxhow 1040x Example 1. Taxhow 1040x You pay John Peters a base salary on the 1st of each month. Taxhow 1040x He is single and claims one withholding allowance. Taxhow 1040x In January he is paid $1,000. Taxhow 1040x Using the wage bracket tables, you withhold $50 from this amount. Taxhow 1040x In February, he receives salary of $1,000 plus a commission of $2,000, which you combine with regular wages and do not separately identify. Taxhow 1040x You figure the withholding based on the total of $3,000. Taxhow 1040x The correct withholding from the tables is $338. Taxhow 1040x Example 2. Taxhow 1040x You pay Sharon Warren a base salary on the 1st of each month. Taxhow 1040x She is single and claims one allowance. Taxhow 1040x Her May 1 pay is $2,000. Taxhow 1040x Using the wage bracket tables, you withhold $188. Taxhow 1040x On May 14 she receives a bonus of $1,000. Taxhow 1040x Electing to use supplemental wage withholding method 1-b, you: Add the bonus amount to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 = $3,000). Taxhow 1040x Determine the amount of withholding on the combined $3,000 amount to be $338 using the wage bracket tables. Taxhow 1040x Subtract the amount withheld from wages on the most recent base salary pay date (May 1) from the combined withholding amount ($338 – $188 = $150). Taxhow 1040x Withhold $150 from the bonus payment. Taxhow 1040x Example 3. Taxhow 1040x The facts are the same as in Example 2, except you elect to use the flat rate method of withholding on the bonus. Taxhow 1040x You withhold 25% of $1,000, or $250, from Sharon's bonus payment. Taxhow 1040x Example 4. Taxhow 1040x The facts are the same as in Example 2, except you elect to pay Sharon a second bonus of $2,000 on May 28. Taxhow 1040x Using supplemental wage withholding method 1-b, you: Add the first and second bonus amounts to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 + $2,000 = $5,000). Taxhow 1040x Determine the amount of withholding on the combined $5,000 amount to be $781 using the wage bracket tables. Taxhow 1040x Subtract the amounts withheld from wages on the most recent base salary pay date (May 1) and the amounts withheld from the first bonus payment from the combined withholding amount ($781 – $188 – $150 = $443). Taxhow 1040x Withhold $443 from the second bonus payment. Taxhow 1040x Tips treated as supplemental wages. Taxhow 1040x   Withhold income tax on tips from wages earned by the employee or from other funds the employee makes available. Taxhow 1040x If an employee receives regular wages and reports tips, figure income tax withholding as if the tips were supplemental wages. Taxhow 1040x If you have not withheld income tax from the regular wages, add the tips to the regular wages. Taxhow 1040x Then withhold income tax on the total. Taxhow 1040x If you withheld income tax from the regular wages, you can withhold on the tips by method 1-a or 1-b discussed earlier in this section under Supplemental wages identified separately from regular wages. Taxhow 1040x Vacation pay. Taxhow 1040x   Vacation pay is subject to withholding as if it were a regular wage payment. Taxhow 1040x When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. Taxhow 1040x If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. Taxhow 1040x 8. Taxhow 1040x Payroll Period Your payroll period is a period of service for which you usually pay wages. Taxhow 1040x When you have a regular payroll period, withhold income tax for that time period even if your employee does not work the full period. Taxhow 1040x No regular payroll period. Taxhow 1040x   When you do not have a regular payroll period, withhold the tax as if you paid wages for a daily or miscellaneous payroll period. Taxhow 1040x Figure the number of days (including Sundays and holidays) in the period covered by the wage payment. Taxhow 1040x If the wages are unrelated to a specific length of time (for example, commissions paid on completion of a sale), count back the number of days from the payment period to the latest of: The last wage payment made during the same calendar year, The date employment began, if during the same calendar year, or January 1 of the same year. Taxhow 1040x Employee paid for period less than 1 week. Taxhow 1040x   When you pay an employee for a period of less than one week, and the employee signs a statement under penalties of perjury indicating he or she is not working for any other employer during the same week for wages subject to withholding, figure withholding based on a weekly payroll period. Taxhow 1040x If the employee later begins to work for another employer for wages subject to withholding, the employee must notify you within 10 days. Taxhow 1040x You then figure withholding based on the daily or miscellaneous period. Taxhow 1040x 9. Taxhow 1040x Withholding From Employees' Wages Income Tax Withholding Using Form W-4 to figure withholding. Taxhow 1040x   To know how much federal income tax to withhold from employees' wages, you should have a Form W-4 on file for each employee. Taxhow 1040x Encourage your employees to file an updated Form W-4 for 2014, especially if they owed taxes or received a large refund when filing their 2013 tax return. Taxhow 1040x Advise your employees to use the IRS Withholding Calculator on the IRS website at www. Taxhow 1040x irs. Taxhow 1040x gov/individuals for help in determining how many withholding allowances to claim on their Forms W-4. Taxhow 1040x   Ask all new employees to give you a signed Form W-4 when they start work. Taxhow 1040x Make the form effective with the first wage payment. Taxhow 1040x If a new employee does not give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances. Taxhow 1040x Form in Spanish. Taxhow 1040x   You can provide Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, in place of Form W-4, to your Spanish-speaking employees. Taxhow 1040x For more information, see Publicación 17(SP), El Impuesto Federal sobre los Ingresos (Para Personas Físicas). Taxhow 1040x The rules discussed in this section that apply to Form W-4 also apply to Formulario W-4(SP). Taxhow 1040x Electronic system to receive Form W-4. Taxhow 1040x   You may establish a system to electronically receive Forms W-4 from your employees. Taxhow 1040x See Regulations section 31. Taxhow 1040x 3402(f)(5)-1(c) for more information. Taxhow 1040x Effective date of Form W-4. Taxhow 1040x   A Form W-4 remains in effect until the employee gives you a new one. Taxhow 1040x When you receive a new Form W-4 from an employee, do not adjust withholding for pay periods before the effective date of the new form. Taxhow 1040x If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. Taxhow 1040x For exceptions, see Exemption from federal income tax withholding , IRS review of requested Forms W-4 , and Invalid Forms W-4 , later in this section. Taxhow 1040x A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year. Taxhow 1040x Successor employer. Taxhow 1040x   If you are a successor employer (see Successor employer , later in this section), secure new Forms W-4 from the transferred employees unless the “Alternative Procedure” in section 5 of Revenue Procedure 2004-53 applies. Taxhow 1040x See Revenue Procedure 2004-53, 2004-34 I. Taxhow 1040x R. Taxhow 1040x B. Taxhow 1040x 320, available at www. Taxhow 1040x irs. Taxhow 1040x gov/irb/2004-34_IRB/ar13. Taxhow 1040x html. Taxhow 1040x Completing Form W-4. Taxhow 1040x   The amount of any federal income tax withholding must be based on marital status and withholding allowances. Taxhow 1040x Your employees may not base their withholding amounts on a fixed dollar amount or percentage. Taxhow 1040x However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4. Taxhow 1040x Employees may claim fewer withholding allowances than they are entitled to claim. Taxhow 1040x They may wish to claim fewer allowances to ensure they have enough withholding or to offset the tax on other sources of taxable income not subject to withholding. Taxhow 1040x See Publication 505, Tax Withholding and Estimated Tax, for more information about completing Form W-4. Taxhow 1040x Along with Form W-4, you may wish to order Publication 505 for use by your employees. Taxhow 1040x Do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. Taxhow 1040x If they require additional withholding, they should submit a new Form W-4 and, if necessary, pay estimated tax by filing Form 1040-ES, Estimated Tax for Individuals, or by using the Electronic Federal Tax Payment System (EFTPS) to make estimated tax payments. Taxhow 1040x Exemption from federal income tax withholding. Taxhow 1040x   Generally, an employee may claim exemption from federal income tax withholding because he or she had no income tax liability last year and expects none this year. Taxhow 1040x See the Form W-4 instructions for more information. Taxhow 1040x However, the wages are still subject to social security and Medicare taxes. Taxhow 1040x See also Invalid Forms W-4 , later in this section. Taxhow 1040x   A Form W-4 claiming exemption from withholding is effective when it is filed with the employer and only for that calendar year. Taxhow 1040x To continue to be exempt from withholding in the next calendar year, an employee must give you a new Form W-4 by February 15. Taxhow 1040x If the employee does not give you a new Form W-4 by February 15, begin withholding based on the last Form W-4 for the employee that did not claim an exemption from withholding or, if one was not filed, then withhold tax as if he or she is single with zero withholding allowances. Taxhow 1040x If the employee provides a new Form W-4 claiming exemption from withholding on February 16 or later, you may apply it to future wages but do not refund any taxes already withheld. Taxhow 1040x Withholding income taxes on the wages of nonresident alien employees. Taxhow 1040x   In general, you must withhold federal income taxes on the wages of nonresident alien employees. Taxhow 1040x However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to this general rule. Taxhow 1040x Also see section 3 of Publication 51 (Circular A), Agricultural Employer's Tax Guide, for guidance on H-2A visa workers. Taxhow 1040x Withholding adjustment for nonresident alien employees. Taxhow 1040x   For 2014, apply the procedure discussed next to figure the amount of income tax to withhold from the wages of nonresident alien employees performing services within the United States. Taxhow 1040x Nonresident alien students from India and business apprentices from India are not subject to this procedure. Taxhow 1040x Instructions. Taxhow 1040x   To figure how much income tax to withhold from the wages paid to a nonresident alien employee performing services in the United States, use the following steps. Taxhow 1040x Step 1. Taxhow 1040x   Add to the wages paid to the nonresident alien employee for the payroll period the amount shown in the chart below for the applicable payroll period. Taxhow 1040x    Amount to Add to Nonresident Alien Employee's Wages for Calculating Income Tax Withholding Only   Payroll Period Add Additional     Weekly $ 43. Taxhow 1040x 30     Biweekly 86. Taxhow 1040x 50     Semimonthly 93. Taxhow 1040x 80     Monthly 187. Taxhow 1040x 50     Quarterly 562. Taxhow 1040x 50     Semiannually 1,125. Taxhow 1040x 00     Annually 2,250. Taxhow 1040x 00     Daily or Miscellaneous (each day of the payroll period) 8. Taxhow 1040x 70   Step 2. Taxhow 1040x   Use the amount figured in Step 1 and the number of withholding allowances claimed (generally limited to one allowance) to figure income tax withholding. Taxhow 1040x Determine the value of withholding allowances by multiplying the number of withholding allowances claimed by the appropriate amount from Table 5. Taxhow 1040x Percentage Method—2014 Amount for One Withholding Allowance shown on page 41. Taxhow 1040x If you are using the Percentage Method Tables for Income Tax Withholding, provided on pages 43–44, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure the income tax withholding. Taxhow 1040x If you are using the Wage Bracket Method for Income Tax Withholding, provided on pages 45–64, use the amount figured in Step 1 and the number of withholding allowances to figure income tax withholding. Taxhow 1040x The amounts from the chart above are added to wages solely for calculating income tax withholding on the wages of the nonresident alien employee. Taxhow 1040x The amounts from the chart should not be included in any box on the employee's Form W-2 and do not increase the income tax liability of the employee. Taxhow 1040x Also, the amounts from the chart do not increase the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Taxhow 1040x This procedure only applies to nonresident alien employees who have wages subject to income tax withholding. Taxhow 1040x Example. Taxhow 1040x An employer using the percentage method of withholding pays wages of $500 for a biweekly payroll period to a married nonresident alien employee. Taxhow 1040x The nonresident alien has properly completed Form W-4, entering marital status as “single” with one withholding allowance and indicating status as a nonresident alien on Form W-4, line 6 (see Nonresident alien employee's Form W-4 , later in this section). Taxhow 1040x The employer determines the wages to be used in the withholding tables by adding to the $500 amount of wages paid the amount of $86. Taxhow 1040x 50 from the chart under Step 1 ($586. Taxhow 1040x 50 total). Taxhow 1040x The employer then applies the applicable tables to determine the income tax withholding for nonresident aliens (see Step 2 ). Taxhow 1040x Reminder: If you use the Percentage Method Tables for Income Tax Withholding, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure income tax withholding. Taxhow 1040x The $86. Taxhow 1040x 50 added to wages for calculating income tax withholding is not reported on Form W-2, and does not increase the income tax liability of the employee. Taxhow 1040x Also, the $86. Taxhow 1040x 50 added to wages does not affect the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Taxhow 1040x Supplemental wage payment. Taxhow 1040x   This procedure for determining the amount of income tax withholding does not apply to a supplemental wage payment (see section 7) if the 39. Taxhow 1040x 6% mandatory flat rate withholding applies or if the 25% optional flat rate withholding is being used to calculate income tax withholding on the supplemental wage payment. Taxhow 1040x Nonresident alien employee's Form W-4. Taxhow 1040x   When completing Forms W-4, nonresident aliens are required to: Not claim exemption from income tax withholding, Request withholding as if they are single, regardless of their actual marital status, Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or South Korea, or a student or business apprentice from India, he or she may claim more than one allowance), and Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4. Taxhow 1040x   If you maintain an electronic Form W-4 system, you should provide a field for nonresident aliens to enter nonresident alien status in lieu of writing “Nonresident Alien” or “NRA” above the dotted line on line 6. Taxhow 1040x A nonresident alien employee may request additional withholding at his or her option for other purposes, although such additions should not be necessary for withholding to cover federal income tax liability related to employment. Taxhow 1040x Form 8233. Taxhow 1040x   If a nonresident alien employee claims a tax treaty exemption from withholding, the employee must submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to the income exempt under the treaty, instead of Form W-4. Taxhow 1040x See Publication 515 for details. Taxhow 1040x IRS review of requested Forms W-4. Taxhow 1040x   When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. Taxhow 1040x You may also be directed to send certain Forms W-4 to the IRS. Taxhow 1040x You may receive a notice from the IRS requiring you to submit a copy of Form W-4 for one or more of your named employees. Taxhow 1040x Send the requested copy or copies of Form W-4 to the IRS at the address provided and in the manner directed by the notice. Taxhow 1040x The IRS may also require you to submit copies of Form W-4 to the IRS as directed by Treasury Decision 9337, 2007-35 I. Taxhow 1040x R. Taxhow 1040x B. Taxhow 1040x 455, which is available at www. Taxhow 1040x irs. Taxhow 1040x gov/irb/2007-35_IRB/ar10. Taxhow 1040x html. Taxhow 1040x When we refer to Form W-4, the same rules apply to Formulario W-4(SP), its Spanish translation. Taxhow 1040x After submitting a copy of a requested Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if it is valid (see Invalid Forms W-4 , later in this section). Taxhow 1040x However, if the IRS later notifies you in writing the employee is not entitled to claim exemption from withholding or a claimed number of withholding allowances, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the IRS notice (commonly referred to as a "lock-in letter
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The Taxhow 1040x

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