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1044ez 1. 1044ez   Canceled Debts Table of Contents General RulesForm 1099-C Discounts and loan modifications Sales or other dispositions (such as foreclosures and repossessions) Abandonments Stockholder debt This chapter discusses the tax treatment of canceled debts. 1044ez General Rules Generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the debt is considered canceled in whatever amount it remained unpaid. 1044ez There are exceptions to this rule, discussed under Exceptions , later. 1044ez Generally, you must include the canceled debt in your income. 1044ez However, you may be able to exclude the canceled debt. 1044ez See Exclusions , later. 1044ez Example. 1044ez John owed $1,000 to Mary. 1044ez Mary agreed to accept and John paid $400 in satisfaction of the entire debt. 1044ez John has canceled debt of $600. 1044ez Example. 1044ez Margaret owed $1,000 to Henry. 1044ez Henry and Margaret agreed that Margaret would provide Henry with services (instead of money) in full satisfaction of the debt. 1044ez Margaret does not have canceled debt. 1044ez Instead, she has income from services. 1044ez A debt includes any indebtedness: For which you are liable, or Subject to which you hold property. 1044ez Debt for which you are personally liable is recourse debt. 1044ez All other debt is nonrecourse debt. 1044ez If you are not personally liable for the debt, you do not have ordinary income from the cancellation of debt unless you retain the collateral and either: The lender offers a discount for the early payment of the debt, or The lender agrees to a loan modification that results in the reduction of the principal balance of the debt. 1044ez See Discounts and loan modifications , later. 1044ez However, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property. 1044ez As a result, you may realize a gain or loss if the outstanding debt immediately before the disposition is more or less than your adjusted basis in the property. 1044ez For more details on figuring your gain or loss, see chapter 2 of this publication or see Publication 544. 1044ez There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. 1044ez See Exceptions and Exclusions, later. 1044ez You must report any taxable canceled debt as ordinary income on: Form 1040 or Form 1040NR, line 21, if the debt is a nonbusiness debt; Schedule C (Form 1040), line 6 (or Schedule C-EZ (Form 1040), line 1), if the debt is related to a nonfarm sole proprietorship; Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property; Form 4835, line 6, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or Schedule F (Form 1040), line 8, if the debt is farm debt and you are a farmer. 1044ez Form 1099-C If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. 1044ez The identifiable event may be an actual cancellation of the debt or it may be an event the applicable entity is required, solely for purposes of reporting to the IRS, to treat as a cancellation of debt. 1044ez For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes, later. 1044ez Unless you meet one of the exceptions or exclusions discussed later, this canceled debt is ordinary income and must be reported on the appropriate form discussed above. 1044ez An applicable entity includes: A federal government agency, A financial institution, A credit union, and Any organization a significant trade or business of which is lending money. 1044ez Identifiable event codes. 1044ez    Box 6 of Form 1099-C should indicate the reason the creditor filed this form. 1044ez The codes shown in box 6 are explained below. 1044ez Also see the chart after the explanation for a quick reference guide for the codes used in Box 6. 1044ez Note. 1044ez Codes A through G and I identify specific occurrences resulting from an actual discharge of indebtedness. 1044ez However, Code H, Expiration of nonpayment testing period, does not necessarily identify an actual discharge of indebtedness. 1044ez Code A — Bankruptcy. 1044ez Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. 1044ez See Bankruptcy , later. 1044ez Code B — Other judicial debt relief. 1044ez Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy. 1044ez Code C — Statute of limitations or expiration of deficiency period. 1044ez Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. 1044ez In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired. 1044ez Code D — Foreclosure election. 1044ez Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. 1044ez This event applies to a mortgage lender or holder who is barred from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised. 1044ez Code E — Debt relief from probate or similar proceeding. 1044ez Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding. 1044ez Code F — By agreement. 1044ez Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration. 1044ez Code G — Decision or policy to discontinue collection. 1044ez Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. 1044ez For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice. 1044ez Code H — Expiration of nonpayment testing period. 1044ez Code H is used to indicate that the creditor has not received a payment on the debt during a testing period ending on December 31, 2013. 1044ez The testing period is a 36-month period increased by the number of months the creditor was prevented from engaging in collection activity by a stay in bankruptcy or similar bar under state or local law. 1044ez This identifiable event applies only for a creditor that is a financial institution or credit union (and certain of their subsidiaries), the Federal Deposit Insurance Corporation (FDIC), Resolution Trust Corporation (RTC), National Credit Union Administration (NCUA), and other Federal executive agencies. 1044ez Expiration of the nonpayment testing period does not necessarily result from an actual discharge of indebtedness. 1044ez Code I — Other actual discharge before identifiable event. 1044ez Code I is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through H. 1044ez Form 1099-C Reference Guide for Box 6 Identifiable Event Codes A Bankruptcy B Other judicial debt relief C Statute of limitations or expiration of deficiency period D Foreclosure election E Debt relief from probate or similar proceeding F By agreement G Decision or policy to discontinue collection H Expiration of nonpayment testing period I Other actual discharge before identifiable event Even if you did not receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies. 1044ez Amount of canceled debt. 1044ez    The amount in box 2 of Form 1099-C may represent some or all of the debt that has been canceled or treated as canceled. 1044ez The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). 1044ez Unless you meet one of the exceptions or exclusions discussed later, the amount of the debt that has been canceled is ordinary income and must be reported on the appropriate form as discussed earlier. 1044ez Interest included in canceled debt. 1044ez    If any interest is included in the amount of canceled debt in box 2, it will be shown in box 3. 1044ez Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it. 1044ez See Deductible Debt under Exceptions, later. 1044ez Persons who each receive a Form 1099-C showing the full amount of debt. 1044ez    If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. 1044ez However, you may not have to report that entire amount as income. 1044ez The amount, if any, you must report depends on all the facts and circumstances, including: State law, The amount of debt proceeds each person received, How much of any interest deduction from the debt was claimed by each person, How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication. 1044ez See Example 3 under Insolvency, later. 1044ez Discounts and loan modifications If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt. 1044ez However, if the debt is nonrecourse and you did not retain the collateral, you do not have cancellation of the debt income. 1044ez The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. 1044ez For more details, see Exceptions and Exclusions, later. 1044ez Sales or other dispositions (such as foreclosures and repossessions) Recourse debt. 1044ez   If you owned property that was subject to a recourse debt in excess of the FMV of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss. 1044ez The gain or loss on the disposition of the property is measured by the difference between the FMV of the property at the time of the disposition and your adjusted basis (usually your cost) in the property. 1044ez The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. 1044ez If the lender forgives all or part of the amount of the debt in excess of the FMV of the property, the cancellation of the excess debt may result in ordinary income. 1044ez The ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV of the property) must be included in your gross income reported on your tax return unless one of the exceptions or exclusions described later applies. 1044ez For more details, see Exceptions and Exclusions, later. 1044ez Nonrecourse debt. 1044ez   If you owned property that was subject to a nonrecourse debt in excess of the FMV of the property, the lender's foreclosure on the property does not result in ordinary income from the cancellation of debt. 1044ez The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. 1044ez The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. 1044ez The character of the gain or loss is determined by the character of the property. 1044ez More information. 1044ez    See Publications 523, 544, and 551, and chapter 2 of this publication for more details. 1044ez Abandonments Recourse debt. 1044ez   If you abandon property that secures a debt for which you are personally liable (recourse debt) and the debt is canceled, you will realize ordinary income equal to the canceled debt. 1044ez You must report this income on your tax return unless one of the exceptions or exclusions described later applies. 1044ez For more details, see Exceptions and Exclusions, later. 1044ez This income is separate from any amount realized from the abandonment of the property. 1044ez For more details, see chapter 3. 1044ez Nonrecourse debt. 1044ez   If you abandon property that secures a debt for which you are not personally liable (nonrecourse debt), you may realize gain or loss but will not have cancellation of indebtedness income. 1044ez Stockholder debt If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution. 1044ez For more information, see Publication 542, Corporations. 1044ez Prev  Up  Next   Home   More Online Publications
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Where to File Paper Tax Returns - With or Without a Payment

Where to File Tax Returns - Addresses Listed by Return Type
Where to file addresses listed by return type for use during calendar year 2013.

Where to File Certain Elections, Statements, Returns and Other Documents
This page provides up-to-date information on filing addresses for certain elections, statements, returns and other documents required by the Code of Federal Regulations (CFR) Title 26

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Where to file addresses for tax exempt and government entities.

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Page Last Reviewed or Updated: 13-Feb-2014

The 1044ez

1044ez 3. 1044ez   SIMPLE Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: SIMPLE IRA PlanWho Can Set Up a SIMPLE IRA Plan? Who Can Participate in a SIMPLE IRA Plan? How To Set Up a SIMPLE IRA Plan Notification Requirement Contribution Limits When To Deduct Contributions Where To Deduct Contributions Tax Treatment of Contributions Distributions (Withdrawals) More Information on SIMPLE IRA Plans SIMPLE 401(k) Plan Topics - This chapter discusses: SIMPLE IRA plan SIMPLE 401(k) plan Useful Items - You may want to see: Publications 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4284 SIMPLE IRA Plan Checklist 4334 SIMPLE IRA Plans for Small Businesses Forms (and Instructions) W-2 Wage and Tax Statement 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. 1044ez Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. 1044ez In addition, you will contribute matching or nonelective contributions. 1044ez SIMPLE plans can only be maintained on a calendar-year basis. 1044ez A SIMPLE plan can be set up in either of the following ways. 1044ez Using SIMPLE IRAs (SIMPLE IRA plan). 1044ez As part of a 401(k) plan (SIMPLE 401(k) plan). 1044ez Many financial institutions will help you set up a SIMPLE plan. 1044ez SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. 1044ez Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. 1044ez For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later. 1044ez Who Can Set Up a SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the following requirements. 1044ez You meet the employee limit. 1044ez You do not maintain another qualified plan unless the other plan is for collective bargaining employees. 1044ez Employee limit. 1044ez   You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. 1044ez Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. 1044ez Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1). 1044ez   Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. 1044ez Grace period for employers who cease to meet the 100-employee limit. 1044ez   If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. 1044ez   A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. 1044ez Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied. 1044ez Coverage under the plan has not significantly changed during the grace period. 1044ez The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. 1044ez    The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below. 1044ez Other qualified plan. 1044ez   The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. 1044ez Exception. 1044ez   If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees. 1044ez Who Can Participate in a SIMPLE IRA Plan? Eligible employee. 1044ez   Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. 1044ez The term “employee” includes a self-employed individual who received earned income. 1044ez   You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. 1044ez For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. 1044ez However, you cannot impose any other conditions for participating in a SIMPLE IRA plan. 1044ez Excludable employees. 1044ez   The following employees do not need to be covered under a SIMPLE IRA plan. 1044ez Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. 1044ez Nonresident alien employees who have received no U. 1044ez S. 1044ez source wages, salaries, or other personal services compensation from you. 1044ez Compensation. 1044ez   Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. 1044ez Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. 1044ez If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself. 1044ez How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. 1044ez Each form is a model savings incentive match plan for employees (SIMPLE) plan document. 1044ez Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions. 1044ez Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions. 1044ez Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution. 1044ez The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. 1044ez Keep the original form. 1044ez Do not file it with the IRS. 1044ez Other uses of the forms. 1044ez   If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following. 1044ez Meeting employer notification requirements for the SIMPLE IRA plan. 1044ez Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee. 1044ez Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees. 1044ez Deadline for setting up a SIMPLE IRA plan. 1044ez   You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. 1044ez This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. 1044ez If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. 1044ez A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan. 1044ez Setting up a SIMPLE IRA. 1044ez   SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. 1044ez A SIMPLE IRA must be set up for each eligible employee. 1044ez Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. 1044ez   A SIMPLE IRA cannot be a Roth IRA. 1044ez Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. 1044ez Deadline for setting up a SIMPLE IRA. 1044ez   A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. 1044ez See Time limits for contributing funds , later, under Contribution Limits. 1044ez Credit for startup costs. 1044ez   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in 2013. 1044ez For more information, see Credit for startup costs under Reminders, earlier. 1044ez Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period. 1044ez The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan. 1044ez Your decision to make either matching contributions or nonelective contributions (discussed later). 1044ez A summary description provided by the financial institution. 1044ez Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution. 1044ez Election period. 1044ez   The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). 1044ez However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan. 1044ez   A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. 1044ez For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. 1044ez Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year. 1044ez Contribution Limits Contributions are made up of salary reduction contributions and employer contributions. 1044ez You, as the employer, must make either matching contributions or nonelective contributions, defined later. 1044ez No other contributions can be made to the SIMPLE IRA plan. 1044ez These contributions, which you can deduct, must be made timely. 1044ez See Time limits for contributing funds , later. 1044ez Salary reduction contributions. 1044ez   The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $12,000 for 2013 and 2014. 1044ez These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. 1044ez You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,000 limit. 1044ez   If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,500 for 2013 and 2014) on exclusion of salary reduction contributions and other elective deferrals. 1044ez Catch-up contributions. 1044ez   A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 1044ez The catch-up contribution limit for 2013 and 2014 for SIMPLE IRA plans is $2,500. 1044ez Salary reduction contributions are not treated as catch-up contributions for 2013 or 2014 until they exceed $12,000. 1044ez However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 1044ez The catch-up contribution limit. 1044ez The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions. 1044ez Employer matching contributions. 1044ez   You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. 1044ez This requirement does not apply if you make nonelective contributions as discussed later. 1044ez Example. 1044ez In 2013, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. 1044ez Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. 1044ez You make 3% matching contributions. 1044ez The total contribution you make for John is $2,000, figured as follows. 1044ez Salary reduction contributions ($25,000 × . 1044ez 05) $1,250 Employer matching contribution ($25,000 × . 1044ez 03) 750 Total contributions $2,000     The total contribution you make for yourself is $5,200, figured as follows. 1044ez Salary reduction contributions ($40,000 × . 1044ez 10) $4,000 Employer matching contribution ($40,000 × . 1044ez 03) 1,200 Total contributions $5,200 Lower percentage. 1044ez   If you choose a matching contribution less than 3%, the percentage must be at least 1%. 1044ez You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. 1044ez You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective. 1044ez Nonelective contributions. 1044ez   Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. 1044ez If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. 1044ez Only $255,000 of the employee's compensation can be taken into account to figure the contribution limit in 2013 ($260,000 in 2014). 1044ez   If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. 1044ez Example 1. 1044ez In 2013, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. 1044ez Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. 1044ez You make a 2% nonelective contribution. 1044ez Both of you are under age 50. 1044ez The total contribution you make for Jane is $4,320, figured as follows. 1044ez Salary reduction contributions ($36,000 × . 1044ez 10) $3,600 2% nonelective contributions ($36,000 × . 1044ez 02) 720 Total contributions $4,320     The total contribution you make for yourself is $6,000, figured as follows. 1044ez Salary reduction contributions ($50,000 × . 1044ez 10) $5,000 2% nonelective contributions ($50,000 × . 1044ez 02) 1,000 Total contributions $6,000 Example 2. 1044ez Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,500, figured as follows. 1044ez Salary reduction contributions (maximum amount allowed) $12,000 2% nonelective contributions ($75,000 × . 1044ez 02) 1,500 Total contributions $13,500 Time limits for contributing funds. 1044ez   You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. 1044ez You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. 1044ez Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions. 1044ez When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. 1044ez You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year. 1044ez Example 1. 1044ez Your tax year is the fiscal year ending June 30. 1044ez Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2013 before July 1, 2013) are deductible in the tax year ending June 30, 2014. 1044ez Example 2. 1044ez You are a sole proprietor whose tax year is the calendar year. 1044ez Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2014 by April 15, 2014) are deductible in the 2013 tax year. 1044ez Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 1044ez For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S. 1044ez Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 1044ez (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership. 1044ez ) Tax Treatment of Contributions You can deduct your contributions and your employees can exclude these contributions from their gross income. 1044ez SIMPLE IRA plan contributions are not subject to federal income tax withholding. 1044ez However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. 1044ez Matching and nonelective contributions are not subject to these taxes. 1044ez Reporting on Form W-2. 1044ez   Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. 1044ez You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 1044ez You must also include them in box 12. 1044ez Mark the “Retirement plan” checkbox in box 13. 1044ez For more information, see the Form W-2 instructions. 1044ez Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. 1044ez Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. 1044ez However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan. 1044ez Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. 1044ez Early withdrawals generally are subject to a 10% additional tax. 1044ez However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation. 1044ez More information. 1044ez   See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding. 1044ez More Information on SIMPLE IRA Plans If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan. 1044ez SIMPLE 401(k) Plan You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. 1044ez A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. 1044ez However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below. 1044ez Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,000 for 2013 and 2014. 1044ez If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2013 and 2014. 1044ez See Catch-up contributions , earlier under Contribution Limits. 1044ez You must make either: Matching contributions up to 3% of compensation for the year, or Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year. 1044ez No other contributions can be made to the trust. 1044ez No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan. 1044ez The employee's rights to any contributions are nonforfeitable. 1044ez No more than $255,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2013 ($260,000 in 2014). 1044ez Compensation is defined earlier in this chapter. 1044ez Employee notification. 1044ez   The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. 1044ez See Notification Requirement in this chapter. 1044ez Credit for startup costs. 1044ez   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in 2013. 1044ez For more information, see Credit for startup costs under Reminders, earlier. 1044ez Note on Forms. 1044ez   Please note that Forms 5304-SIMPLE and 5305-SIMPLE can not be used to establish a SIMPLE 401(k) plan. 1044ez To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4. 1044ez Prev  Up  Next   Home   More Online Publications