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Free tax act 4. Free tax act   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. Free tax act S. Free tax act Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. Free tax act Useful Items - You may want to see: Publication 519 U. Free tax act S. Free tax act Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. Free tax act S. Free tax act Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. Free tax act S. Free tax act Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. Free tax act Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. Free tax act If you are a U. Free tax act S. Free tax act citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. Free tax act However, you may qualify to exclude from income up to $97,600 of your foreign earnings. Free tax act In addition, you can exclude or deduct certain foreign housing amounts. Free tax act See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. Free tax act You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. Free tax act See Exclusion of Meals and Lodging, later. Free tax act Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. Free tax act Your tax home must be in a foreign country. Free tax act You must have foreign earned income. Free tax act You must be one of the following. Free tax act A U. Free tax act S. Free tax act citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax act A U. Free tax act S. Free tax act resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax act A U. Free tax act S. Free tax act citizen or a U. Free tax act S. Free tax act resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. Free tax act See Publication 519 to find out if you are a U. Free tax act S. Free tax act resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. Free tax act If you are a nonresident alien married to a U. Free tax act S. Free tax act citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. Free tax act For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . Free tax act Waiver of minimum time requirements. Free tax act   The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Free tax act This is fully explained under Waiver of Time Requirements , later. Free tax act   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. Free tax act Tax Home in Foreign Country To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. Free tax act Bona fide residence and physical presence are explained later. Free tax act Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Free tax act Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Free tax act Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. Free tax act If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. Free tax act If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. Free tax act You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. Free tax act However, your abode is not necessarily in the United States while you are temporarily in the United States. Free tax act Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. Free tax act “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Free tax act It does not mean your principal place of business. Free tax act “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. Free tax act ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. Free tax act Example 1. Free tax act You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. Free tax act You return to your family residence in the United States during your off periods. Free tax act You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. Free tax act You cannot claim either of the exclusions or the housing deduction. Free tax act Example 2. Free tax act For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. Free tax act In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Free tax act Before you left, you distributed business cards showing your business and home addresses in London. Free tax act You kept ownership of your home in Toledo but rented it to another family. Free tax act You placed your car in storage. Free tax act In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. Free tax act Shortly after moving, you leased a car and you and your spouse got British driving licenses. Free tax act Your entire family got library cards for the local public library. Free tax act You and your spouse opened bank accounts with a London bank and secured consumer credit. Free tax act You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Free tax act Your abode is in London for the time you live there. Free tax act You satisfy the tax home test in the foreign country. Free tax act Please click here for the text description of the image. Free tax act Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. Free tax act If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. Free tax act If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. Free tax act If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. Free tax act If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. Free tax act If you expect it to last for more than 1 year, it is indefinite. Free tax act If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. Free tax act Once your expectation changes, it is indefinite. Free tax act Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. Free tax act A foreign country includes any territory under the sovereignty of a government other than that of the United States. Free tax act The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. Free tax act It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. Free tax act The term “foreign country” does not include Antarctica or U. Free tax act S. Free tax act possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. Free tax act S. Free tax act Virgin Islands, and Johnston Island. Free tax act For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States and those areas listed or described in the previous sentence. Free tax act American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. Free tax act S. Free tax act possession does not qualify you for the foreign earned income exclusion. Free tax act You may, however, qualify for an exclusion of your possession income on your U. Free tax act S. Free tax act return. Free tax act American Samoa. Free tax act   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. Free tax act Gross income from sources within American Samoa may be eligible for this exclusion. Free tax act Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. Free tax act Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. Free tax act Guam and the Commonwealth of the Northern Mariana Islands. Free tax act   An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions. Free tax act   For more information, see Publication 570. Free tax act Puerto Rico and U. Free tax act S. Free tax act Virgin Islands Residents of Puerto Rico and the U. Free tax act S. Free tax act Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. Free tax act Puerto Rico. Free tax act   Generally, if you are a U. Free tax act S. Free tax act citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. Free tax act S. Free tax act tax on income from Puerto Rican sources. Free tax act This does not include amounts paid for services performed as an employee of the United States. Free tax act However, you are subject to U. Free tax act S. Free tax act tax on your income from sources outside Puerto Rico. Free tax act In figuring your U. Free tax act S. Free tax act tax, you cannot deduct expenses allocable to income not subject to tax. Free tax act Bona Fide Residence Test You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax act You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. Free tax act S. Free tax act citizen, or A U. Free tax act S. Free tax act resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. Free tax act You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. Free tax act If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. Free tax act The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. Free tax act Bona fide residence. Free tax act   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. Free tax act   Your bona fide residence is not necessarily the same as your domicile. Free tax act Your domicile is your permanent home, the place to which you always return or intend to return. Free tax act Example. Free tax act You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. Free tax act The fact that you go to Scotland does not automatically make Scotland your bona fide residence. Free tax act If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. Free tax act But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. Free tax act You are clearly not a resident of Scotland in the first instance. Free tax act However, in the second, you are a resident because your stay in Scotland appears to be permanent. Free tax act If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence. Free tax act Determination. Free tax act   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad. Free tax act   To meet the bona fide residence test, you must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax act The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. Free tax act IRS cannot make this determination until you file Form 2555. Free tax act Statement to foreign authorities. Free tax act   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities: Hold that you are not subject to their income tax laws as a resident, or Have not made a final decision on your status. Free tax act Special agreements and treaties. Free tax act   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. Free tax act Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities. Free tax act Example 1. Free tax act You are a U. Free tax act S. Free tax act citizen employed in the United Kingdom by a U. Free tax act S. Free tax act employer under contract with the U. Free tax act S. Free tax act Armed Forces. Free tax act You are not subject to the North Atlantic Treaty Status of Forces Agreement. Free tax act You may be a bona fide resident of the United Kingdom. Free tax act Example 2. Free tax act You are a U. Free tax act S. Free tax act citizen in the United Kingdom who qualifies as an “employee” of an armed service or as a member of a “civilian component” under the North Atlantic Treaty Status of Forces Agreement. Free tax act You are not a bona fide resident of the United Kingdom. Free tax act Example 3. Free tax act You are a U. Free tax act S. Free tax act citizen employed in Japan by a U. Free tax act S. Free tax act employer under contract with the U. Free tax act S. Free tax act Armed Forces. Free tax act You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. Free tax act Being subject to the agreement does not make you a bona fide resident of Japan. Free tax act Example 4. Free tax act You are a U. Free tax act S. Free tax act citizen employed as an “official” by the United Nations in Switzerland. Free tax act You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. Free tax act This does not prevent you from being a bona fide resident of Switzerland. Free tax act Effect of voting by absentee ballot. Free tax act   If you are a U. Free tax act S. Free tax act citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country. Free tax act   However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive. Free tax act Uninterrupted period including entire tax year. Free tax act   To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax act An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. Free tax act   During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. Free tax act To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country. Free tax act Example 1. Free tax act You arrived with your family in Lisbon, Portugal, on November 1, 2011. Free tax act Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. Free tax act You immediately established residence there. Free tax act You spent April of 2012 at a business conference in the United States. Free tax act Your family stayed in Lisbon. Free tax act Immediately following the conference, you returned to Lisbon and continued living there. Free tax act On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. Free tax act Example 2. Free tax act Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. Free tax act You would not meet the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. Free tax act You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). Free tax act Bona fide resident for part of a year. Free tax act   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. Free tax act Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. Free tax act Example. Free tax act You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. Free tax act On September 15, 2013, you returned to the United States. Free tax act Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. Free tax act Reassignment. Free tax act   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances. Free tax act Example 1. Free tax act You were a resident of Pakistan from October 1, 2012, through November 30, 2013. Free tax act On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. Free tax act Your household goods also were returned to the United States. Free tax act Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. Free tax act Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. Free tax act You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. Free tax act Example 2. Free tax act Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. Free tax act On December 1, 2013, you and your family returned to the United States for a month's vacation. Free tax act On January 2, 2014, you arrived in Turkey for your new assignment. Free tax act Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. Free tax act Physical Presence Test You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. Free tax act The 330 days do not have to be consecutive. Free tax act Any U. Free tax act S. Free tax act citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. Free tax act The physical presence test is based only on how long you stay in a foreign country or countries. Free tax act This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. Free tax act 330 full days. Free tax act   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. Free tax act You can count days you spent abroad for any reason. Free tax act You do not have to be in a foreign country only for employment purposes. Free tax act You can be on vacation. Free tax act   You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. Free tax act Exception. Free tax act   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. Free tax act See Waiver of Time Requirements, later. Free tax act Full day. Free tax act   A full day is a period of 24 consecutive hours, beginning at midnight. Free tax act Travel. Free tax act    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total. Free tax act Example. Free tax act You leave the United States for France by air on June 10. Free tax act You arrive in France at 9:00 a. Free tax act m. Free tax act on June 11. Free tax act Your first full day of physical presence in France is June 12. Free tax act Passing over foreign country. Free tax act   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States. Free tax act Example. Free tax act You leave the United States by air at 9:30 a. Free tax act m. Free tax act on June 10 to travel to Kenya. Free tax act You pass over western Africa at 11:00 p. Free tax act m. Free tax act on June 10 and arrive in Kenya at 12:30 a. Free tax act m. Free tax act on June 11. Free tax act Your first full day in a foreign country is June 11. Free tax act Change of location. Free tax act   You can move about from one place to another in a foreign country or to another foreign country without losing full days. Free tax act If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel. Free tax act Example 1. Free tax act You leave Ireland by air at 11:00 p. Free tax act m. Free tax act on July 6 and arrive in Sweden at 5:00 a. Free tax act m. Free tax act on July 7. Free tax act Your trip takes less than 24 hours and you lose no full days. Free tax act Example 2. Free tax act You leave Norway by ship at 10:00 p. Free tax act m. Free tax act on July 6 and arrive in Portugal at 6:00 a. Free tax act m. Free tax act on July 8. Free tax act Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. Free tax act If you remain in Portugal, your next full day in a foreign country is July 9. Free tax act In United States while in transit. Free tax act   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. Free tax act You are treated as traveling over areas not within any foreign country. Free tax act    Please click here for the text description of the image. Free tax act Figure 4-B How to figure the 12-month period. Free tax act   There are four rules you should know when figuring the 12-month period. Free tax act Your 12-month period can begin with any day of the month. Free tax act It ends the day before the same calendar day, 12 months later. Free tax act Your 12-month period must be made up of consecutive months. Free tax act Any 12-month period can be used if the 330 days in a foreign country fall within that period. Free tax act You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. Free tax act You can choose the 12-month period that gives you the greatest exclusion. Free tax act In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. Free tax act Example 1. Free tax act You are a construction worker who works on and off in a foreign country over a 20-month period. Free tax act You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United States. Free tax act Example 2. Free tax act You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. Free tax act You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. Free tax act By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. Free tax act See Figure 4-B, on the previous page. Free tax act Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. Free tax act The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Free tax act You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. Free tax act To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver. Free tax act Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. Free tax act If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2013 without meeting the minimum time requirement. Free tax act However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country. Free tax act U. Free tax act S. Free tax act Travel Restrictions If you are present in a foreign country in violation of U. Free tax act S. Free tax act law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. Free tax act Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. Free tax act Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount. Free tax act For 2013, the only country to which travel restrictions applied was Cuba. Free tax act The restrictions applied for the entire year. Free tax act However, individuals working at the U. Free tax act S. Free tax act Naval Base at Guantanamo Bay in Cuba are not in violation of U. Free tax act S. Free tax act law. Free tax act Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. Free tax act Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. Free tax act Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. Free tax act Your tax home is in a foreign country. Free tax act You meet either the bona fide residence test or the physical presence test. Free tax act To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. Free tax act To determine whether you meet either the bona fide residence test or the physical presence test, see Bona Fide Residence Test and Physical Presence Test, earlier. Free tax act Foreign earned income does not include the following amounts. Free tax act The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer. Free tax act Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). Free tax act Pay you receive as an employee of the U. Free tax act S. Free tax act Government. Free tax act (See U. Free tax act S. Free tax act Government Employees, later. Free tax act ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. Free tax act Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5. Free tax act Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. Free tax act Earned income. Free tax act   This is pay for personal services performed, such as wages, salaries, or professional fees. Free tax act The list that follows classifies many types of income into three categories. Free tax act The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. Free tax act For more information on earned and unearned income, see Earned and Unearned Income, later. Free tax act Earned Income Unearned Income Variable Income Salaries and wages Dividends Business profits Commissions Interest Royalties Bonuses Capital gains Rents Professional fees Gambling winnings Scholarships and fellowships Tips Alimony     Social security benefits     Pensions     Annuities     In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. Free tax act Noncash income. Free tax act   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income. Free tax act Allowances or reimbursements. Free tax act   Earned income includes allowances or reimbursements you receive, such as the following amounts. Free tax act    Cost-of-living allowances. Free tax act Overseas differential. Free tax act Family allowance. Free tax act Reimbursement for education or education allowance. Free tax act Home leave allowance. Free tax act Quarters allowance. Free tax act Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). Free tax act Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. Free tax act Foreign earned income is income you receive for working in a foreign country. Free tax act Where or how you are paid has no effect on the source of the income. Free tax act For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City. Free tax act Example. Free tax act You are a U. Free tax act S. Free tax act citizen, a bona fide resident of Canada, and working as a mining engineer. Free tax act Your salary is $76,800 per year. Free tax act You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. Free tax act Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. Free tax act Your total income is $88,800. Free tax act You work a 5-day week, Monday through Friday. Free tax act After subtracting your vacation, you have a total of 240 workdays in the year. Free tax act You worked in the United States during the year for 6 weeks (30 workdays). Free tax act The following shows how to figure the part of your income that is for work done in Canada during the year. Free tax act   Number of days worked in Canada during the year (210) × Total income ($88,800) = $77,700     Number of days of work during the year for which payment was made (240)   Your foreign source earned income is $77,700. Free tax act Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. Free tax act Some types of income are not easily identified as earned or unearned income. Free tax act Some of these types of income are further explained here. Free tax act Income from a sole proprietorship or partnership. Free tax act   Income from a business in which capital investment is an important part of producing the income may be unearned income. Free tax act If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income. Free tax act Capital a factor. Free tax act   If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income. Free tax act   If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. Free tax act Because you do not have a net profit, the 30% limit does not apply. Free tax act Example 1. Free tax act You are a U. Free tax act S. Free tax act citizen and meet the bona fide residence test. Free tax act You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. Free tax act You perform no services for the partnership. Free tax act At the end of the tax year, your share of the net profits is $80,000. Free tax act The entire $80,000 is unearned income. Free tax act Example 2. Free tax act Assume that in Example 1 you spend time operating the business. Free tax act Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. Free tax act If the value of your services for the year is $15,000, your earned income is limited to the value of your services, $15,000. Free tax act Capital not a factor. Free tax act   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. Free tax act The entire amount of business income is earned income. Free tax act Example. Free tax act You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. Free tax act Because capital is not an income- producing factor, all the income from the partnership is considered earned income. Free tax act Income from a corporation. Free tax act   The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. Free tax act Any amount over what is considered a reasonable salary is unearned income. Free tax act Example 1. Free tax act You are a U. Free tax act S. Free tax act citizen and an officer and stockholder of a corporation in Honduras. Free tax act You perform no work or service of any kind for the corporation. Free tax act During the tax year you receive a $10,000 “salary” from the corporation. Free tax act The $10,000 clearly is not for personal services and is unearned income. Free tax act Example 2. Free tax act You are a U. Free tax act S. Free tax act citizen and work full time as secretary-treasurer of your corporation. Free tax act During the tax year you receive $100,000 as salary from the corporation. Free tax act If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. Free tax act Stock options. Free tax act   You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan. Free tax act   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. Free tax act   However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. Free tax act It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. Free tax act Any part of the earned income that is due to work you did outside the United States is foreign earned income. Free tax act   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. Free tax act Pensions and annuities. Free tax act    For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, amounts received as pensions or annuities are unearned income. Free tax act Royalties. Free tax act   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. Free tax act   Royalties received by a writer are earned income if they are received: For the transfer of property rights of the writer in the writer's product, or Under a contract to write a book or series of articles. Free tax act Rental income. Free tax act   Generally, rental income is unearned income. Free tax act If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income. Free tax act Example. Free tax act Larry Smith, a U. Free tax act S. Free tax act citizen living in Australia, owns and operates a rooming house in Sydney. Free tax act If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. Free tax act On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. Free tax act It is all unearned income. Free tax act Professional fees. Free tax act   If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned income. Free tax act Income of an artist. Free tax act   Income you receive from the sale of paintings you created is earned income. Free tax act Scholarships and fellowships. Free tax act   Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. Free tax act If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as wages. Free tax act    Certain scholarship and fellowship income may be exempt under other provisions. Free tax act See Publication 970, Tax Benefits for Education, chapter 1. Free tax act Use of employer's property or facilities. Free tax act   If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. Free tax act Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts. Free tax act Example. Free tax act You are privately employed and live in Japan all year. Free tax act You are paid a salary of $6,000 a month. Free tax act You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. Free tax act The house is not provided for your employer's convenience. Free tax act You report on the calendar-year, cash basis. Free tax act You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned income. Free tax act Reimbursement of employee expenses. Free tax act   If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned income. Free tax act   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. Free tax act If expenses and reimbursement are equal, there is nothing to allocate to excluded income. Free tax act If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. Free tax act (See chapter 5. Free tax act ) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned income. Free tax act   These rules do not apply to the following individuals. Free tax act Straight-commission salespersons. Free tax act Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees' expenses. Free tax act Accountable plan. Free tax act   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. Free tax act The expenses covered under the plan must have a business connection. Free tax act The employee must adequately account to the employer for these expenses within a reasonable period of time. Free tax act The employee must return any excess reimbursement or allowance within a reasonable period of time. Free tax act Reimbursement of moving expenses. Free tax act   Reimbursement of moving expenses may be earned income. Free tax act You must include as earned income: Any reimbursements of, or payments for, nondeductible moving expenses, Reimbursements that are more than your deductible expenses and that you do not return to your employer, Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses, and Any reimbursement of moving expenses you deducted in an earlier year. Free tax act This section discusses reimbursements that must be included in earned income. Free tax act Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. Free tax act   The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed. Free tax act   Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. Free tax act You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year. Free tax act Move from U. Free tax act S. Free tax act to foreign country. Free tax act   If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. Free tax act The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year. Free tax act   If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. Free tax act To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. Free tax act The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move. Free tax act   The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. Free tax act The part earned in each year is figured as shown in the following example. Free tax act Example. Free tax act You are a U. Free tax act S. Free tax act citizen working in the United States. Free tax act You were told in October 2012 that you were being transferred to a foreign country. Free tax act You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. Free tax act Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. Free tax act Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. Free tax act You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. Free tax act The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. Free tax act The remaining part of the reimbursement is for services performed in the foreign country in 2013. Free tax act This computation is used only to determine when the reimbursement is considered earned. Free tax act You would include the amount of the reimbursement in income in 2013, the year you received it. Free tax act Move between foreign countries. Free tax act   If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move. Free tax act Move to U. Free tax act S. Free tax act   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. Free tax act S. Free tax act source income. Free tax act   However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. Free tax act The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. Free tax act Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move. Free tax act   See the discussion under Move from U. Free tax act S. Free tax act to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. Free tax act The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move. Free tax act Example. Free tax act You are a U. Free tax act S. Free tax act citizen employed in a foreign country. Free tax act You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. Free tax act A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United States. Free tax act In April 2013, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. Free tax act Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. Free tax act You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. Free tax act The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). Free tax act The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. Free tax act You report the amount of the includible reimbursement in 2013, the year you received it. Free tax act    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. Free tax act Storage expense reimbursements. Free tax act   If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred. Free tax act U. Free tax act S. Free tax act Government Employees For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. Free tax act This includes amounts paid from both appropriated and nonappropriated funds. Free tax act The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United States. Free tax act United States Armed Forces exchanges. Free tax act Commissioned and noncommissioned officers' messes. Free tax act Armed Forces motion picture services. Free tax act Kindergartens on foreign Armed Forces installations. Free tax act Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. Free tax act If you are a U. Free tax act S. Free tax act Government employee paid by a U. Free tax act S. Free tax act agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U. Free tax act S. Free tax act Government and does not qualify for exclusion or deduction. Free tax act If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. Free tax act American Institute in Taiwan. Free tax act   Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. Free tax act If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. Free tax act S. Free tax act tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. Free tax act S. Free tax act Government. Free tax act Allowances. Free tax act   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. Free tax act S. Free tax act civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. Free tax act Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. Free tax act More information. Free tax act   Publication 516, U. Free tax act S. Free tax act Government Civilian Employees Stationed Abroad, has more information for U. Free tax act S. Free tax act Government employees abroad. Free tax act Exclusion of Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Free tax act The meals are furnished: On the business premises of your employer, and For the convenience of your employer. Free tax act The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. Free tax act If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as compensation. Free tax act Amounts you do not include in income because of these rules are not foreign earned income. Free tax act If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. Free tax act Family. Free tax act   Your family, for this purpose, includes only your spouse and your dependents. Free tax act Lodging. Free tax act   The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in. Free tax act Business premises of employer. Free tax act   Generally, the business premises of your employer is wherever you work. Free tax act For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. Free tax act Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer. Free tax act Convenience of employer. Free tax act   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. Free tax act Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay. Free tax act   On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer. Free tax act Condition of employment. Free tax act   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. Free tax act You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished. Free tax act Foreign camps. Free tax act   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. Free tax act The camp must be: Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance, Located as close as reasonably possible in the area where you work, and Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees. Free tax act Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. Free tax act Foreign earned income was defined earlier in this chapter. Free tax act You also can choose to exclude from your income a foreign housing amount. Free tax act This is explained later under Foreign Housing Exclusion. Free tax act If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. Free tax act Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. Free tax act If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. Free tax act This includes any expenses, losses, and other normally deductible items allocable to the excluded income. Free tax act For more information about deductions and credits, see chapter 5 . Free tax act Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. Free tax act You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). Free tax act If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. Free tax act You do not both need to meet the same test. Free tax act Together, you and your spouse can exclude as much as $195,200. Free tax act Paid in year following work. Free tax act   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. Free tax act If you report your income on a cash basis, you report the income on your return for the year you receive it. Free tax act If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. Free tax act For an exception to this general rule, see Year-end payroll period, later. Free tax act Example. Free tax act You were a bona fide resident of Brazil for all of 2012 and 2013. Free tax act You report your income on the cash basis. Free tax act In 2012, you were paid $84,200 for work you did in Brazil during that year. Free tax act You excluded all of the $84,200 from your income in 2012. Free tax act In 2013, you were paid $117,300 for your work in Brazil. Free tax act $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. Free tax act You can exclude $10,900 of the $18,800 from your income in 2013. Free tax act This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. Free tax act You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. Free tax act You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. Free tax act Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). Free tax act You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). Free tax act Year-end payroll period. Free tax act   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. Free tax act If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. Free tax act The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. Free tax act The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). Free tax act The payroll period is not longer than 16 days. Free tax act The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. Free tax act Example. Free tax act You are paid twice a month. Free tax act For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. Free tax act For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. Free tax act Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. Free tax act Income earned over more than 1 year. Free tax act   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. Free tax act For example, a bonus may be based on work you did over several years. Free tax act You determine the amount of the bonus that is considered earned in a particular year in two steps. Free tax act Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. Free tax act Multiply the result of (1) by the number of months you did the work during the year. Free tax act This is the amount that is subject to the exclusion limit for that tax year. Free tax act Income received more than 1 year after it was earned. Free tax act   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. Free tax act Example. Free tax act   You were a bona fide resident of Sweden for 2011, 2012, and 2013. Free tax act You report your income on the cash basis. Free tax act In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. Free tax act You excluded all the income on your 2011 and 2012 returns. Free tax act   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. Free tax act You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. Free tax act You must include the $10,000 in income. Free tax act You can exclude all of the $82,000 received for work you did in 2013. Free tax act Community income. Free tax act   The maximum exclusion applies separately to the earnings of spouses. Free tax act Ignore any community property laws when you figure your limit on the foreign earned income exclusion. Free tax act Part-year exclusion. Free tax act   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. Free tax act The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. Free tax act   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. Free tax act To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. Free tax act Example. Free tax act You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. Free tax act You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. Free tax act If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. Free tax act Physical presence test. Free tax act   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. Free tax act If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. Free tax act Example. Free tax act You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. Free tax act You figure the maximum exclusion for 2012 as follows. Free tax act Beginning with June 1, 2012, count forward 330 full days. Free tax act Do not count the 16 days you spent in the United States. Free tax act The 330th day, May 12, 2013, is the last day of a 12-month period. Free tax act Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. Free tax act This 12-month period runs from May 12, 2012, through May 11, 2013. Free tax act Count the total days during 2012 that fall within this 12-month period. Free tax act This is 234 days (May 12, 2012 – December 31, 2012). Free tax act Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). Free tax act You figure the maximum exclusion for 2013 in the opposite manner. Free tax act Beginning with your last full day, September 30, 2013, count backward 330 full days. Free tax act Do not count the 16 days you spent in the United States. Free tax act That day, October 20, 2012, is the first day of a 12-month period. Free tax act Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. Free tax act This 12-month period runs from October 20, 2012, through October 19, 2013. Free tax act Count the total days during 2013 that fall within this 12-month period. Free tax act This is 292 days (January 1, 2013 – October 19, 2013). Free tax act Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). Free tax act Choosing the Exclusion The foreign earned income exclusion is voluntary. Free tax act You can choose the exclusion by completing the appropriate parts of Form 2555. Free tax act When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. Free tax act A return filed by the due date (including any extensions). Free tax act A return amending a timely-filed return. Free tax act Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. Free tax act A return filed within 1 year from the original due date of the return (determined without regard to any extensions). Free tax act Filing after the above periods. Free tax act   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. Free tax act If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. Free tax act Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. Free tax act 911-7(a)(2)(i)(D). Free tax act ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. Free tax act You must request a private letter ruling under Income Tax Regulation 301. Free tax act 9100-3 and Revenue Procedure 2013-1, 2013-1 I. Free tax act R. Free tax act B. Free tax act 1, available at www. Free tax act irs. Free tax act gov/irb/2013-01_IRB/ar06. Free tax act html. Free tax act Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. Free tax act Foreign tax credit or deduction. Free tax act  
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The Free Tax Act

Free tax act Publication 51 - Main Content Table of Contents 1. Free tax act Taxpayer Identification NumbersWhen you receive your EIN. Free tax act Registering for SSNVS. Free tax act 2. Free tax act Who Are Employees?Crew Leaders Business Owned and Operated by Spouses 3. Free tax act Wages and Other Compensation 4. Free tax act Social Security and Medicare TaxesThe $150 Test or the $2,500 Test Social Security and Medicare Tax Withholding 5. Free tax act Federal Income Tax WithholdingImplementation of lock-in letter. Free tax act Seasonal employees and employees not currently performing services. Free tax act Termination and re-hire of employees. Free tax act How To Figure Federal Income Tax Withholding 6. Free tax act Required Notice to Employees About Earned Income Credit (EIC) 7. Free tax act Depositing TaxesWhen To Deposit How To Deposit Deposit Penalties Employers of Both Farm and Nonfarm Workers 8. Free tax act Form 943 9. Free tax act Reporting Adjustments on Form 943Current Year Adjustments Prior Year Adjustments 10. Free tax act Federal Unemployment (FUTA) Tax 11. Free tax act Reconciling Wage Reporting Forms 13. Free tax act Federal Income Tax Withholding MethodsWage Bracket Method Percentage Method Alternative Methods of Federal Income Tax Withholding How To Get Tax Help 1. Free tax act Taxpayer Identification Numbers If you are required to withhold any federal income, social security, or Medicare taxes, you will need an employer identification number (EIN) for yourself. Free tax act Also, you will need the SSN of each employee and the name of each employee as shown on the employee's social security card. Free tax act Employer identification number (EIN). Free tax act   An employer identification number (EIN) is a nine-digit number that the IRS issues. Free tax act The digits are arranged as follows: 00-0000000. Free tax act It is used to identify the tax accounts of employers and certain others who have no employees. Free tax act Use your EIN on all of the items that you send to the IRS and SSA. Free tax act   If you do not have an EIN, you may apply for one online. Free tax act Visit IRS. Free tax act gov and click on the Apply for an EIN Online link under Tools. Free tax act 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. Free tax act Do not use a SSN in place of an EIN. Free tax act   If you do not have an EIN by the time a return is due, write “Applied For” and the date you applied for it in the space shown for the number. Free tax act If you took over another employer's business, do not use that employer's EIN. Free tax act   You should have only one EIN. Free tax act If you have more than one, and are not sure which one to use, call the toll-free Business and Specialty Tax Line at 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Free tax act Provide the EINs that you have, the name and address to which each number was assigned, and the address of your principal place of business. Free tax act The IRS will tell you which EIN to use. Free tax act   For more information, see Publication 1635 or Publication 583. Free tax act When you receive your EIN. Free tax act   If you are a new employer that indicated a federal tax obligation when requesting an EIN, you will be pre-enrolled in the Electronic Federal Tax Payment System (EFTPS). Free tax act You will receive information in your Employer Identification Number (EIN) Package about Express Enrollment and an additional mailing containing your EFTPS personal identification number (PIN) and instructions for activating your PIN. Free tax act Call the toll-free number located in your “How to Activate Your Enrollment” brochure to activate your enrollment and begin making your employment tax deposits. Free tax act If you outsource any of your payroll and related tax duties to a third party payer, such as a payroll service provider or reporting agent, be sure to tell them about your EFTPS enrollment. Free tax act Social security number (SSN). Free tax act   An employee's social security number (SSN) consists of nine digits arranged as follows: 000-00-0000. Free tax act You must obtain each employee's name and SSN as shown on the employee's social security card because you must enter them on Form W-2. Free tax act Do not accept a social security card that says “Not valid for employment. Free tax act ” A social security number issued with this legend does not permit employment. Free tax act You may, but are not required to, photocopy the social security card if the employee provides it. Free tax act If you do not show the employee's correct name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. Free tax act See Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs. Free tax act Applying for a social security card. Free tax act   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 to SSA. Free tax act You can get Form SS-5 at SSA offices, by calling 1-800-772-1213 or 1-800-325-0778 (TTY), or from the SSA website at www. Free tax act socialsecurity. Free tax act gov/online/ss-5. Free tax act html. Free tax act The employee must complete and sign Form SS-5; it cannot be filed by the employer. Free tax act 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. Free tax act Applying for a social security number. Free tax act   If you file Form W-2 on paper and your employee has applied for an SSN but does not have one when you must file Form W-2, enter “Applied For” on the form. Free tax act If you are filing electronically, enter all zeros (000-00-0000) in the social security number field. Free tax act 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. Free tax act Furnish Copies B, C, and 2 of Form W-2c to the employee. Free tax act Up to 25 Forms W-2c per Form W-3c, Transmittal of Corrected Wage and Tax Statements, may be filed per session over the Internet, with no limit on the number of sessions. Free tax act For more information, visit SSA's Employer W-2 Filing Instructions & Information webpage at www. Free tax act socialsecurity. Free tax act gov/employer. Free tax act Advise your employee to correct the SSN on his or her original Form W-2. Free tax act Correctly record the employee's name and SSN. Free tax act   Record the name and number of each employee as they are shown on the employee's social security card. Free tax act 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. Free tax act 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. Free tax act   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 on the most recently filed Form W-2. Free tax act It is not necessary to correct other years if the previous name and SSN were used for years before the most recent Form W-2. Free tax act IRS individual taxpayer identification numbers (ITINs) for aliens. Free tax act   Do not accept an ITIN in place of an SSN for employee identification or for work. Free tax act An ITIN is issued for use by resident and nonresident aliens who need identification for tax purposes, but who are not eligible for U. Free tax act S. Free tax act employment. Free tax act The ITIN is a nine-digit number formatted like an SSN (for example, NNN-NN-NNNN). Free tax act However, it begins with the number “9” and has either a “7” or “8” as the fourth digit (for example, 9NN-7N-NNNN or 9NN-8N-NNNN). Free tax act    An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN. Free tax act 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 in this section. Free tax act Do not use an ITIN in place of an SSN on Form W-2. Free tax act Verification of social security numbers. Free tax act   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 employee names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive results the next business day. Free tax act Visit www. Free tax act socialsecurity. Free tax act gov/employer/ssnv. Free tax act htm for more information. Free tax act Registering for SSNVS. Free tax act   You must register online and receive authorization from your employer to use SSNVS. Free tax act To register, visit SSA's website at www. Free tax act socialsecurity. Free tax act gov/employer and click on the Business Services Online link. Free tax act Follow the registration instructions to obtain a user identification (ID) and password. Free tax act You will need to provide the following information about yourself and your company. Free tax act Name. Free tax act SSN. Free tax act Date of birth. Free tax act Type of employer. Free tax act EIN. Free tax act Company name, address, and telephone number. Free tax act Email address. Free tax act When you have completed the online registration process, SSA will mail a one-time activation code to your employer. Free tax act You must enter the activation code online to use SSNVS. Free tax act 2. Free tax act Who Are Employees? Generally, employees are defined either under common law or under statutes for certain situations. Free tax act See Publication 15-A for details on statutory employees and nonemployees. Free tax act Employee status under common law. Free tax act   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. Free tax act This is so even when you give the employee freedom of action. Free tax act What matters is that you have the right to control the details of how the services are performed. Free tax act See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Free tax act If an employer-employee relationship exists, it does not matter what it is called. Free tax act The employee may be called an agent or independent contractor. Free tax act It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. Free tax act You are responsible for withholding and paying employment taxes for your employees. Free tax act You are also required to file employment tax returns. Free tax act These requirements do not apply to amounts that you pay to independent contractors. Free tax act The rules discussed in this publication apply only to workers who are your employees. Free tax act In general, you are an employer of farmworkers if your employees: Raise or harvest agricultural or horticultural products on your farm (including the raising and feeding of livestock); Work in connection with the operation, management, conservation, improvement, or maintenance of your farm and its tools and equipment; Provide services relating to salvaging timber, or clearing land of brush and other debris, left by a hurricane (also known as hurricane labor); Handle, process, or package any agricultural or horticultural commodity if you produced over half of the commodity (for a group of up to 20 unincorporated operators, all of the commodity); or Do work for you related to cotton ginning, turpentine, gum resin products, or the operation and maintenance of irrigation facilities. Free tax act For this purpose, the term “farm” includes stock, dairy, poultry, fruit, fur-bearing animal, and truck farms, as well as plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards. Free tax act Farmwork does not include reselling activities that do not involve any substantial activity of raising agricultural or horticultural commodities, such as a retail store or a greenhouse used primarily for display or storage. Free tax act The table in section 12, How Do Employment Taxes Apply to Farmwork , distinguishes between farm and nonfarm activities, and also addresses rules that apply in special situations. Free tax act Crew Leaders If you are a crew leader, you are an employer of farmworkers. Free tax act A crew leader is a person who furnishes and pays (either on his or her own behalf or on behalf of the farm operator) workers to do farmwork for the farm operator. Free tax act If there is no written agreement between you and the farm operator stating that you are his or her employee and if you pay the workers (either for yourself or for the farm operator), then you are a crew leader. Free tax act For FUTA tax rules, see section 10. Free tax act Business Owned and Operated by Spouses If you and your spouse jointly own and operate a farm or nonfarm business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Free tax act See Publication 541, Partnerships, for more details. Free tax act The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. Free tax act Exception—Qualified joint venture. Free tax act   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. Free tax act 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). Free tax act   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. Free tax act Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable. Free tax act   Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. Free tax act 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. Free tax act Generally, filing as a qualified joint venture will not increase the spouses' total tax owed on the joint income tax return. Free tax act 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. Free tax act    Note. Free tax act If your spouse is your employee, not your partner, you must pay social security and Medicare taxes for him or her. Free tax act   For more information on qualified joint ventures, visit IRS. Free tax act gov and enter “qualified joint venture” in the search box. Free tax act Exception—Community income. Free tax act   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. Free tax act S. Free tax act possession, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. Free tax act You may still make an election to be taxed as a qualified joint venture instead of a partnership. Free tax act See Exception—Qualified joint venture , earlier in this section. Free tax act 3. Free tax act Wages and Other Compensation Cash wages that you pay to employees for farmwork are generally subject to social security tax and Medicare tax. Free tax act You may also be required to withhold, deposit, and report Additional Medicare Tax. Free tax act See section 4 for more information. Free tax act If the wages are subject to social security and Medicare taxes, they are also subject to federal income tax withholding. Free tax act You may also be liable for FUTA tax, which is not withheld by you or paid by the employee. Free tax act FUTA tax is discussed in section 10. Free tax act Cash wages include checks, money orders, etc. Free tax act Do not count as cash wages the value of food, lodging, and other noncash items. Free tax act For more information on what payments are considered taxable wages, see Publication 15 (Circular E). Free tax act Commodity wages. Free tax act   Commodity wages are not cash and are not subject to social security and Medicare taxes or federal income tax withholding. Free tax act However, noncash payments, including commodity wages, are treated as cash wages (see above) if the substance of the transaction is a cash payment. Free tax act These noncash payments are subject to social security and Medicare taxes and federal income tax withholding. Free tax act Other compensation. Free tax act   Publications 15-A and 15-B discuss other forms of compensation that may be taxable. Free tax act Family members. Free tax act   Generally, the wages that you pay to family members who are your employees are subject to social security and Medicare taxes, federal income tax withholding, and FUTA tax. Free tax act However, certain exemptions may apply for your child, spouse, or parent. Free tax act See the table, How Do Employment Taxes Apply to Farmwork , in section 12. Free tax act Household employees. Free tax act   The wages of an employee who performs household services, such as a maid, babysitter, gardener, or cook, in your home are not subject to social security and Medicare taxes if you pay that employee cash wages of less than $1,900 in 2014. Free tax act   Social security and Medicare taxes do not apply to cash wages for housework in your private home if it was done by your spouse or your child under age 21. Free tax act Nor do the taxes apply to housework done by your parent unless: You have a child living in your home who is under age 18 or has a physical or mental condition that requires care by an adult for at least 4 continuous weeks in a calendar quarter, and You are a widow or widower, or divorced and not remarried, or have a spouse in the home who, because of a physical or mental condition, cannot care for your child for at least 4 continuous weeks in the quarter. Free tax act   For more information, see Publication 926, Household Employer's Tax Guide. Free tax act    Wages for household work may not be a deductible farm expense. Free tax act See Publication 225, Farmer's Tax Guide. Free tax act Share farmers. Free tax act   You do not have to withhold or pay social security and Medicare taxes on amounts paid to share farmers under share-farming arrangements. Free tax act Compensation paid to H-2A visa holders. Free tax act   Report compensation of $600 or more paid to foreign agricultural workers who entered the country on H-2A visas in box 1 of Form W-2 but do not report it as social security wages (box 3) or Medicare wages (box 5) on Form W-2 because compensation paid to H-2A workers for agricultural labor performed in connection with this visa is not subject to social security and Medicare taxes. Free tax act On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Free tax act   An employer is not required to withhold federal income tax from compensation it pays an H-2A worker for agricultural labor performed in connection with this visa unless the worker asks for withholding and the employer agrees. Free tax act In that case, the worker must give the employer a completed Form W-4. Free tax act Federal income tax withheld should be reported in box 2 of Form W-2. Free tax act These reporting rules apply when the H-2A worker provides his or her taxpayer identification number (TIN) to the employer. Free tax act For rules relating to backup withholding and reporting when the H-2A worker does not provide a TIN, see the Instructions for Form 1099-MISC and the Instructions for Form 945. Free tax act 4. Free tax act Social Security and Medicare Taxes Generally, you must withhold social security and Medicare taxes on all cash wage payments that you make to your employees. Free tax act You may also be required to withhold Additional Medicare Tax. Free tax act For more information, see Additional Medicare Tax withholding , later. Free tax act The $150 Test or the $2,500 Test All cash wages that you pay to an employee during the year for farmwork are subject to social security and Medicare taxes and federal income tax withholding if either of the two tests below is met. Free tax act You pay cash wages to an employee of $150 or more in a year for farmwork (count all cash wages paid on a time, piecework, or other basis). Free tax act The $150 test applies separately to each farmworker that you employ. Free tax act If you employ a family of workers, each member is treated separately. Free tax act Do not count wages paid by other employers. Free tax act The total that you pay for farmwork (cash and noncash) to all your employees is $2,500 or more during the year. Free tax act Exceptions. Free tax act   The $150 and $2,500 tests do not apply to wages that you pay to a farmworker who receives less than $150 in annual cash wages and the wages are not subject to social security and Medicare taxes, or federal income tax withholding, even if you pay $2,500 or more in that year to all of your farmworkers if the farmworker: Is employed in agriculture as a hand-harvest laborer, Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment, Commutes daily from his or her permanent home to the farm, and Had been employed in agriculture less than 13 weeks in the preceding calendar year. Free tax act   Amounts that you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages that you pay to other farmworkers are subject to social security and Medicare taxes. Free tax act Social Security and Medicare Tax Withholding The social security tax rate is 6. Free tax act 2%, for both the employee and employer, on the first $117,000 paid to each employee. Free tax act You must withhold at this rate from each employee and pay a matching amount. Free tax act The Medicare tax rate is 1. Free tax act 45% each for the employee and employer on all wages. Free tax act You must withhold at this rate from each employee and pay a matching amount. Free tax act There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax. Free tax act Social security and Medicare taxes apply to most payments of sick pay, including payments made by third parties such as insurance companies. Free tax act For details, see Publication 15-A. Free tax act Additional Medicare Tax withholding. Free tax act   In addition to withholding Medicare tax at 1. Free tax act 45%, you must withhold a 0. Free tax act 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Free tax act You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Free tax act Additional Medicare Tax is only imposed on the employee. Free tax act There is no employer share of Additional Medicare Tax. Free tax act All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Free tax act   For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E). Free tax act For more information on Additional Medicare Tax, visit IRS. Free tax act gov and enter “Additional Medicare Tax” in the search box. Free tax act Employee share paid by employer. Free tax act   If you would rather pay a household or agricultural employee's share of the social security and Medicare taxes without withholding them from his or her wages, you may do so. Free tax act If you do not withhold the taxes, however, you must still pay them. Free tax act Any employee social security and Medicare taxes that you pay is additional income to the employee. Free tax act Include it in box 1 of the employee's Form W-2, but do not count it as social security and Medicare wages and do not include it in boxes 3 and 5. Free tax act Also, do not count the additional income as wages for FUTA tax purposes. Free tax act Different rules apply to employer payments of social security and Medicare taxes for non-household and non-agricultural employees. Free tax act See section 7 of Publication 15-A. Free tax act Withholding social security and Medicare taxes on nonresident alien employees. Free tax act   In general, if you pay wages to nonresident alien employees, you must withhold social security and Medicare taxes as you would for a U. Free tax act S. Free tax act citizen or resident alien. Free tax act However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to this general rule. Free tax act Also see Compensation paid to H-2A visa holders in section 3. Free tax act Religious exemption. Free tax act    An exemption from social security and Medicare taxes is available to members of a recognized religious sect opposed to public insurance. Free tax act This exemption is available only if both the employee and the employer are members of the sect. Free tax act   For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Free tax act 5. Free tax act Federal Income Tax Withholding Farmers and crew leaders must withhold federal income tax from the wages of farmworkers if the wages are subject to social security and Medicare taxes. Free tax act The amount to withhold is figured on gross wages before taking out social security and Medicare taxes, union dues, insurance, etc. Free tax act You may use one of several methods to determine the amount of federal income tax withholding. Free tax act They are discussed in section 13. Free tax act Form W-4. Free tax act   To know how much federal income tax to withhold from employees' wages, you should have a Form W-4 on file for each employee. Free tax act 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. Free tax act Advise your employees to use the IRS Withholding Calculator on the IRS website at www. Free tax act irs. Free tax act gov/individuals for help in determining how many withholding allowances to claim on their Form W-4. Free tax act   Ask each new employee to give you a signed Form W-4 when starting work. Free tax act Make the form effective with the first wage payment. Free tax act If a new employee does not give you a completed Form W-4, withhold tax as if he or she is single, with no withholding allowances. Free tax act Forms in Spanish. Free tax act   You can provide Formulario W-4(SP) in place of Form W-4 to your Spanish-speaking employees. Free tax act For more information, see Publicación 17(SP). Free tax act Effective date of Form W-4. Free tax act   A Form W-4 remains in effect until the employee gives you a new one. Free tax act When you receive a new Form W-4, do not adjust withholding for pay periods before the effective date of the new form. Free tax act Do not adjust withholding retroactively. Free tax act If an employee gives you a replacement 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. Free tax act 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. Free tax act A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year. Free tax act Completing Form W-4. Free tax act   The amount of federal income tax withholding is based on marital status and withholding allowances. Free tax act Your employees may not base their withholding amounts on a fixed dollar amount or percentage. Free tax act However, the 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. Free tax act   Employees may claim fewer withholding allowances than they are entitled to claim. Free tax act They may do this to ensure that they have enough withholding or to offset other sources of taxable income that are not subject to withholding. Free tax act   See Publication 505, Tax Withholding and Estimated Tax, for more information about completing Form W-4. Free tax act Along with Form W-4, you may wish to order Publication 505 for use by your employees. Free tax act    Do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. Free tax act If an employee wants additional withholding, he or she 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. Free tax act Exemption from federal income tax withholding. Free tax act   Generally, an employee may claim exemption from federal income tax withholding because he or she had no federal income tax liability last year and expects none this year. Free tax act See the Form W-4 instructions for more information. Free tax act However, the wages are still subject to social security and Medicare taxes. Free tax act   A Form W-4 claiming exemption from withholding is effective when it is filed with the employer and only for that calendar year. Free tax act 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. Free tax act If the employee does not give you a new Form W-4 by February 15, withhold tax based on the last valid Form W-4 you have for the employee that did not claim an exemption from withholding or, if one does not exist, withhold as if he or she is single with zero withholding allowances. Free tax act If the employee provides a new Form W-4 claiming an exemption from withholding on February 16 or later, you may apply the exemption to future wages, but do not refund taxes withheld while the exempt status was not in place. Free tax act Withholding income taxes on the wages of nonresident alien employees. Free tax act   In general, you must withhold federal income taxes on the wages of nonresident alien employees. Free tax act However, see Publication 515 for exceptions to this general rule. Free tax act Also see Compensation paid to H-2A visa workers in section 3. Free tax act Withholding adjustment for nonresident alien employees. Free tax act   A special procedure applies for figuring the amount of income tax to withhold from wages of nonresident alien employees performing services within the United States for wages paid in 2014. Free tax act This procedure requires a special chart to be used with the withholding tables to determine the amount to withhold from the wages of the nonresident alien employee. Free tax act See Withholding adjustment for nonresident alien employees in section 9 of Publication 15 (Circular E). Free tax act Nonresident alien employee's Form W-4. Free tax act   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 Korea, 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. Free tax act   If you maintain an electronic Form W-4 system, you should provide a field for nonresident alien employees to enter nonresident alien status in lieu of writing “Nonresident Alien” or “NRA” above the dotted line on line 6. Free tax act    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. Free tax act Form 8233. Free tax act   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. Free tax act See Publication 515 for details. Free tax act IRS review of requested Forms W-4. Free tax act   When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. Free tax act You may also be directed to send certain Forms W-4 to the IRS. Free tax act 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. Free tax act 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. Free tax act The IRS may also require you to submit copies of Form W-4 to the IRS as directed by a revenue procedure or notice published in the Internal Revenue Bulletin. Free tax act When we refer to Form W-4, the same rules apply to Formulario W-4(SP), its Spanish translation. Free tax act   After submitting a copy of the 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). Free tax act However, if the IRS later notifies you in writing that the employee is not entitled to claim a complete exemption from withholding or more than the maximum number of withholding allowances specified by the IRS in the written notice, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the notice (commonly referred to as a “lock-in letter”). Free tax act Initial lock-in letter. Free tax act   The IRS uses information reported on Form W-2 to identify employees with withholding compliance problems. Free tax act In some cases, where a serious under-withholding problem is found to exist for a particular employee, the IRS may issue a lock-in letter to the employer specifying the maximum number of withholding allowances and marital status permitted for a specific employee. Free tax act You will also receive a copy for the employee that identifies the maximum number of withholding allowances permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding allowances. Free tax act If the employee is employed by you as of the date of the notice, you must furnish the employee copy to the employee within 10 business days of receipt. Free tax act You may follow any reasonable business practice to furnish the employee copy to the employee. Free tax act Implementation of lock-in letter. Free tax act   When you receive the notice specifying the maximum number of withholding allowances and marital status permitted, you may not withhold immediately on the basis of the notice. Free tax act You must begin withholding tax on the basis of the notice for any wages paid after the date specified in the notice. Free tax act The delay between your receipt of the notice and the date to begin the withholding on the basis of the notice permits the employee to contact the IRS. Free tax act Seasonal employees and employees not currently performing services. Free tax act   If you receive a notice for an employee who is not currently performing services for you, you are still required to furnish the employee copy to the employee and withhold based on the notice if any of the following apply. Free tax act You are paying wages for the employee's prior services and the wages are subject to income tax withholding on or after the date specified in the notice. Free tax act You reasonably expect the employee to resume services within 12 months of the date of the notice. Free tax act The employee is on a bona fide leave of absence that does not exceed 12 months or the employee has a right to reemployment after the leave of absence. Free tax act Termination and re-hire of employees. Free tax act   If you are required to furnish and withhold based on the notice and the employment relationship is terminated after the date of the notice, you must continue to withhold based on the notice if you continue to pay any wages subject to income tax withholding. Free tax act You must also withhold based on the notice or modification notice (explained next) if the employee resumes the employment relationship with you within 12 months after the termination of the employment relationship. Free tax act Modification notice. Free tax act   After issuing the notice specifying the maximum number of withholding allowances and marital status permitted, the IRS may issue a subsequent notice (modification notice) that modifies the original notice. Free tax act The modification notice may change the marital status and/or the number of withholding allowances permitted. Free tax act You must withhold federal income tax based on the effective date specified in the modification notice. Free tax act New Form W-4 after IRS notice. Free tax act   After the IRS issues a notice or modification notice, if the employee provides you with a new Form W-4 claiming complete exemption from withholding or claims a marital status, a number of withholding allowances, and any additional withholding that results in less withholding than would result under the IRS notice or modification notice, you must disregard the new Form W-4. Free tax act You are required to withhold on the basis of the notice or modification notice unless the IRS subsequently notifies you to withhold based on the new Form W-4. Free tax act If the employee wants to put a new Form W-4 into effect that results in less withholding than required, the employee must contact the IRS. Free tax act   If, after you receive an IRS notice or modification notice, your employee provides you with a new Form W-4 that does not claim exemption from federal income tax withholding and claims a marital status, a number of withholding allowances, and any additional withholding that results in more withholding than would result under the notice or modification notice, you must withhold tax on the basis of that new Form W-4. Free tax act Otherwise, disregard any subsequent Forms W-4 provided by the employee and withhold based on the IRS notice or modification notice. Free tax act Substitute Forms W-4. Free tax act   You are encouraged to have your employees use the official version of Form W-4 to claim withholding allowances or exemption from withholding. Free tax act Call the IRS at 1-800-TAX-FORM (1-800-829-3676) or visit IRS. Free tax act gov to obtain copies of Form W-4. Free tax act   You may use a substitute version of Form W-4 to meet your business needs. Free tax act However, your substitute Form W-4 must contain language that is identical to the official Form W-4 and your form must meet all current IRS rules for substitute forms. Free tax act At the time that you provide your substitute form to the employee, you must provide him or her with all tables, instructions, and worksheets from the current Form W-4. Free tax act   You cannot accept a substitute Form W-4 developed by an employee, and the employee submitting such form will be treated as failing to furnish a Form W-4. Free tax act However, continue to use any valid Forms W-4 developed by your employees that you accepted before October 11, 2007. Free tax act Invalid Forms W-4. Free tax act   Any unauthorized change or addition to Form W-4 makes it invalid. Free tax act This includes taking out any language by which the employee certifies that the form is correct. Free tax act A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false. Free tax act An employee who submits a false Form W-4 may be subject to a $500 penalty. Free tax act You may treat a Form W-4 as invalid if the employee wrote “exempt” on line 7 and also entered a number on line 5 or an amount on line 6. Free tax act   When you get an invalid Form W-4, do not use it to figure federal income tax withholding. Free tax act Tell the employee that it is invalid and ask for another one. Free tax act If the employee does not give you a valid one, withhold taxes as if the employee was single and claiming no withholding allowances. Free tax act However, if you have an earlier Form W-4 for this worker that is valid, withhold as you did before. Free tax act   For additional information about these rules, see Treasury Decision 9337, 2007-35 I. Free tax act R. Free tax act B. Free tax act 455, available at www. Free tax act irs. Free tax act gov/irb/2007-35_IRB/ar10. Free tax act html. Free tax act Amounts exempt from levy on wages, salary, and other income. Free tax act   If you receive a Notice of Levy on Wages, Salary, and Other Income—Forms 668-W(ACS), 668-W(c)(DO), or 668-W(ICS), you must withhold amounts as described in the instructions for these forms. Free tax act Publication 1494, Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income—Forms 668-W(ACS), 668-W(c)(DO), and 668-W(ICS), shows the exempt amount. Free tax act If a levy issued in a prior year is still in effect and the taxpayer submits a new Statement of Exemptions and Filing Status, use the current year Publication 1494 to compute the exempt amount. Free tax act How To Figure Federal Income Tax Withholding There are several ways to figure federal income tax withholding. Free tax act Wage bracket tables. Free tax act See section 13 for directions on how to use the tables. Free tax act Percentage method. Free tax act See section 13 for directions on how to use the percentage method. Free tax act Alternative formula tables for percentage method withholding. Free tax act See Publication 15-A. Free tax act Wage bracket percentage method withholding tables. Free tax act See Publication 15-A. Free tax act Other alternative methods. Free tax act See Publication 15-A. Free tax act Employers with automated payroll systems will find the two alternative formula tables and the two alternative wage bracket percentage method tables in Publication 15-A useful. Free tax act If an employee wants additional federal tax withheld, have the employee show the extra amount on Form W-4. Free tax act Supplemental wages. Free tax act   Supplemental wages are wage payments to an employee that are not regular wages. Free tax act They include, but are not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards, prizes, back pay and retroactive pay increases for current employees, and payments for nondeductible moving expenses. Free tax act Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. Free tax act   If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total was a single payment for a regular payroll period. Free tax act   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 federal income tax from your employee's regular wages. Free tax act If you withheld federal 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. Free tax act Withhold a flat 25% (no other percentage allowed). Free tax act If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. Free tax act 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. Free tax act Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Free tax act Subtract the tax withheld from the regular wages. Free tax act Withhold the remaining tax from the supplemental wages. Free tax act 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 previous supplemental wage payments, and withhold the remaining tax from the current payment of supplemental wages. Free tax act If you did not withhold federal income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b above. Free tax act This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Free tax act    Separate rules apply to any supplemental wages exceeding $1 million that you pay to an individual during the year. Free tax act See section 7 in Publication 15 (Circular E) for details. Free tax act   Regardless of the method that you use to withhold federal income tax on supplemental wages, they are generally subject to social security, Medicare, and FUTA taxes. Free tax act 6. Free tax act Required Notice to Employees About Earned Income Credit (EIC) You must notify employees who have no federal income tax withheld that they may be able to claim a tax refund because of the EIC. Free tax act Although you do not have to notify employees who claim exemption from withholding on Form W-4 about the EIC, you are encouraged to notify any employees whose wages for 2013 were less than $46,227 ($51,567 if married filing jointly) that they may be eligible to claim the credit for 2013. Free tax act This is because eligible employees may get a refund of the amount of EIC that is more than the tax that they owe. Free tax act You will meet the notification requirement if you issue to the employee Form W-2 with the EIC notice on the back of Copy B, or a substitute Form W-2 with the same statement. Free tax act You may also meet the requirement by providing Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC), or your own statement that contains the same wording. Free tax act If a substitute Form W-2 is given to the employee on time but does not have the required statement, you must notify the employee within 1 week of the date that the substitute Form W-2 is given. Free tax act If Form W-2 is required but is not given on time, you must give the employee Notice 797 or your written statement by the date that Form W-2 is required to be given. Free tax act If Form W-2 is not required, you must notify the employee by February 7, 2014. Free tax act 7. Free tax act Depositing Taxes Generally, you must deposit both the employer and employee shares of social security and Medicare taxes and federal income tax withheld. Free tax act You must use electronic funds transfer to make all federal tax deposits. Free tax act See How To Deposit , later in this section. Free tax act The credit against employment taxes for COBRA premium assistance payments is treated as a deposit of taxes on the first day of your return period. Free tax act For more information, see COBRA premium assistance credit under Introduction. Free tax act Payment with return. Free tax act   You may make payments with Forms 943 or 945 instead of depositing if one of the following applies. Free tax act You report less than a $2,500 tax liability for the year (Form 943, line 11; Form 945, line 3) and you pay in full with a return that is filed on time. Free tax act However, if you are unsure that you will report less than $2,500, deposit under the rules explained in this section so that you will not be subject to failure-to-deposit penalties. Free tax act You are a monthly schedule depositor and make a payment in accordance with the Accuracy of Deposits Rule discussed later in this section. Free tax act This payment may be $2,500 or more. Free tax act Only monthly schedule depositors, defined later, are allowed to make an Accuracy of Deposits Rule payment with the return. Free tax act Semiweekly schedule depositors must timely deposit the amount. Free tax act See Accuracy of Deposits Rule and How To Deposit, later in this section. Free tax act When To Deposit If you employ both farm and nonfarm workers, do not combine the taxes reportable on Forms 941 or 944 with Form 943 to decide whether to make a deposit. Free tax act See Employers of Both Farm and Nonfarm Workers, later in this section. Free tax act The rules for determining when to deposit Form 943 taxes are discussed below. Free tax act See section 10 for the separate rules that apply to FUTA tax. Free tax act Under these rules, you are classified as either a monthly schedule depositor or a semiweekly schedule depositor. Free tax act The terms “monthly schedule depositor” and “semiweekly schedule depositor” do not refer to how often your business pays its employees or how often you are required to make deposits. Free tax act The terms identify which set of rules you must follow when you incur a tax liability (for example, when you have a payday). Free tax act The deposit schedule that you must use for a calendar year is determined from the tax liability reported on your Form 943, line 9, for the lookback period, discussed next. Free tax act If you reported $50,000 or less of Form 943 taxes for the lookback period, you are a monthly schedule depositor. Free tax act If you reported more than $50,000 of Form 943 taxes for the lookback period, you are a semiweekly schedule depositor. Free tax act Lookback period. Free tax act   The lookback period is the second calendar year preceding the current calendar year. Free tax act For example, the lookback period for 2014 is 2012. Free tax act Example of deposit schedule based on lookback period. Free tax act Rose Co. Free tax act reported taxes on Form 943 as follows. Free tax act 2012 — $48,000 2013 — $60,000 Rose Co. Free tax act is a monthly schedule depositor for 2014 because its taxes for the lookback period ($48,000 for calendar year 2012) were not more than $50,000. Free tax act However, for 2015, Rose Co. Free tax act is a semiweekly schedule depositor because the total taxes before adjustment for its lookback period ($60,000 for calendar year 2013) exceeded $50,000. Free tax act Adjustments to lookback period taxes. Free tax act   To determine your taxes for the lookback period, use only the tax that you reported on the original return (Form 943, line 9). Free tax act Do not include adjustments shown on Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund. Free tax act Example of adjustments. Free tax act An employer originally reported total tax of $45,000 for the lookback period in 2012. Free tax act The employer discovered during March 2014 that the tax reported for the lookback period was understated by $10,000 and corrected this error by filing Form 943-X. Free tax act The total tax reported in the lookback period is still $45,000. Free tax act The $10,000 adjustment is also not treated as part of the 2014 taxes. Free tax act Deposit period. Free tax act   The term “deposit period” refers to the period during which tax liabilities are accumulated for each required deposit due date. Free tax act For monthly schedule depositors, the deposit period is a calendar month. Free tax act The deposit periods for semiweekly schedule depositors are Wednesday through Friday and Saturday through Tuesday. Free tax act Monthly Deposit Schedule If the tax liability reported on Form 943, line 9, for the lookback period is $50,000 or less, you are a monthly schedule depositor for the current year. Free tax act You must deposit Form 943 taxes on payments made during a calendar month by the 15th day of the following month. Free tax act Monthly schedule example. Free tax act   Red Co. Free tax act is a seasonal employer and a monthly schedule depositor. Free tax act It pays wages each Friday. Free tax act It paid wages during August 2014, but did not pay any wages during September. Free tax act Red Co. Free tax act must deposit the combined tax liabilities for the August paydays by September 15. Free tax act Red Co. Free tax act does not have a deposit requirement for September (that is, due by October 15, 2014) because no wages were paid in September; therefore, it did not have a tax liability for September. Free tax act New employers. Free tax act   For agricultural employers, your tax liability for any year in the lookback period before the date you started or acquired your business is considered to be zero. Free tax act Therefore, you are a monthly schedule depositor for the first and second calendar years of your agricultural business (but see the $100,000 Next-Day Deposit Rule , later in this section). Free tax act Semiweekly Deposit Schedule You are a semiweekly schedule depositor for a calendar year if the tax liability on Form 943, line 9, during your lookback period was more than $50,000. Free tax act Under the semiweekly deposit schedule, deposit Form 943 taxes for payments made on Wednesday, Thursday, and/or Friday by the following Wednesday. Free tax act Deposit amounts accumulated for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday. Free tax act Semiweekly depositors are not required to deposit twice a week if their payments were in the same semiweekly period unless the $100,000 Next-Day Deposit Rule (discussed later in this section) applies. Free tax act For example, if you made a payment on both Wednesday and Friday and incurred taxes of $10,000 for each pay date, deposit the $20,000 by the following Wednesday. Free tax act If you made no additional payments on Saturday through Tuesday, no deposit is due on Friday. Free tax act Semiweekly schedule depositors must complete Form 943-A, Agricultural Employer's Record of Federal Tax Liability, and submit it with Form 943. Free tax act Semiweekly Deposit Schedule IF the payday falls on a. Free tax act . Free tax act . Free tax act THEN deposit taxes by the following. Free tax act . Free tax act . Free tax act Wednesday, Thursday, and/or Friday Wednesday Saturday, Sunday, Monday, and/or Tuesday Friday Semiweekly schedule example. Free tax act   Green, Inc. Free tax act , is a semiweekly schedule depositor and pays wages once each month on the last Friday of the month. Free tax act Green, Inc. Free tax act , will deposit only once a month, but the deposit will be made under the semiweekly deposit schedule as follows. Free tax act Green, Inc. Free tax act 's tax liability for the April 25, 2014 (Friday), wage payment must be deposited by April 30, 2014 (Wednesday). Free tax act Semiweekly deposit period spanning two quarters. Free tax act   If you have more than one pay date during a semiweekly period and the pay dates fall in different calendar quarters, you will need to make separate deposits for the separate liabilities. Free tax act For example, if you have a pay date on Monday, March 31, 2014 (first quarter), and another pay date on Tuesday, April 1, 2014 (second quarter), two separate deposits will be required even though the pay dates fall within the same semiweekly period. Free tax act Both deposits will be due Friday, April 4, 2014 (3 business days from the end of the semiweekly deposit period). Free tax act Deposits on Business Days Only If a deposit is required to be made on a day that is not a business day, the deposit is considered timely if it is made by the close of the next business day. Free tax act A business day is any day other than a Saturday, Sunday, or legal holiday. Free tax act For example, if a deposit is required to be made on Friday and Friday is a legal holiday, the deposit is considered timely if it is made by the following Monday (if Monday is a business day). Free tax act Semiweekly schedule depositors   will always have 3 business days to make a deposit. Free tax act That is, if any of the 3 weekdays after the end of a semiweekly period is a legal holiday, you will have an additional day for each day that is a legal holiday to make the deposit. Free tax act For example, if a semiweekly schedule depositor accumulated taxes on Friday and the following Monday is a legal holiday, the deposit normally due on Wednesday may be made on Thursday (this allows 3 business days to make the deposit). Free tax act Legal holiday. Free tax act   The term “legal holiday” means any legal holiday in the District of Columbia. Free tax act Legal holidays for 2014 are listed below. Free tax act January 1— New Year's Day January 20— Birthday of Martin Luther King, Jr. Free tax act February 17— Washington's Birthday April 16— District of Columbia Emancipation Day May 26— Memorial Day July 4— Independence Day September 1— Labor Day October 13— Columbus Day November 11— Veterans' Day November 27— Thanksgiving Day December 25— Christmas Day $100,000 Next-Day Deposit Rule If you accumulate $100,000 or more of Form 943 taxes (that is, taxes reported on Form 943, line 11) on any day during a deposit period, you must deposit the tax by the close of the next business day, whether you are a monthly or a semiweekly schedule depositor. Free tax act For purposes of the $100,000 rule, do not continue accumulating a tax liability after the end of a deposit period. Free tax act For example, if a semiweekly schedule depositor has accumulated a liability of $95,000 on a Tuesday (of a Saturday-through-Tuesday deposit period) and accumulated a $10,000 liability on Wednesday, the $100,000 next-day deposit rule does not apply because the $10,000 is accumulated in the next deposit period. Free tax act Thus, $95,000 must be deposited by Friday and $10,000 must be deposited by the following Wednesday. Free tax act However, once you accumulate at least $100,000 in a deposit period, stop accumulating at the end of that day and begin to accumulate anew on the next day. Free tax act For example, Fir Co. Free tax act is a semiweekly schedule depositor. Free tax act On Monday, Fir Co. Free tax act accumulates taxes of $110,000 and must deposit this amount on Tuesday, the next business day. Free tax act On Tuesday, Fir Co. Free tax act accumulates additional taxes of $30,000. Free tax act Because the $30,000 is not added to the previous $110,000 and is less than $100,000, Fir Co. Free tax act does not have to deposit the $30,000 until Friday (following the semiweekly deposit schedule). Free tax act If you are a monthly schedule depositor and you accumulate a $100,000 tax liability on any day, you become a semiweekly schedule depositor on the next day and remain so for at least the rest of the calendar year and for the following calendar year. Free tax act Example of the $100,000 next-day deposit rule. Free tax act   Elm, Inc. Free tax act , started its business on May 1, 2014. Free tax act Because Elm, Inc. Free tax act , is a new employer, the taxes for its lookback period are considered to be zero; therefore, Elm, Inc. Free tax act , is a monthly schedule depositor. Free tax act On May 8, Elm, Inc. Free tax act , paid wages for the first time and accumulated taxes of $50,000. Free tax act On May 9 (Friday), Elm, Inc. Free tax act , paid wages and accumulated taxes of $60,000, for a total of $110,000. Free tax act Because Elm, Inc. Free tax act , accumulated $110,000 on May 9, it must deposit $110,000 by May 12 (Monday), the next business day. Free tax act Elm, Inc. Free tax act , became a semiweekly schedule depositor on May 10. Free tax act It will be a semiweekly schedule depositor for the remainder of 2014 and for 2015. Free tax act Accuracy of Deposits Rule You are required to deposit 100% of your tax liability on or before the deposit due date. Free tax act However, penalties will not be applied for depositing less than 100% if both of the following conditions are met. Free tax act Any deposit shortfall does not exceed the greater of $100 or 2% of the amount of taxes otherwise required to be deposited. Free tax act The deposit shortfall is paid or deposited by the shortfall makeup date as described below. Free tax act Makeup Date for Deposit Shortfall:    Monthly Schedule Depositor—Deposit the shortfall or pay it with your return by the due date of your Form 943. Free tax act You may pay the shortfall with your Form 943 even if the amount is $2,500 or more. Free tax act Semiweekly Schedule Depositor—Deposit by the earlier of (a) the first Wednesday or Friday (whichever comes first) that falls on or after the 15th of the month following the month in which the shortfall occurred, or (b) the due date for Form 943. Free tax act For example, if a semiweekly schedule depositor has a deposit shortfall during February 2014, the shortfall makeup date is March 19, 2014 (Wednesday). Free tax act How To Deposit You must deposit employment taxes by electronic funds transfer. Free tax act See Payment with return , earlier in this section, for exceptions explaining when taxes may be paid with the tax return instead of being deposited. Free tax act Electronic deposit requirement. Free tax act   You must use electronic funds transfer to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). Free tax act Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). Free tax act If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Free tax act   EFTPS is a free service provided by the Department of Treasury. Free tax act To get more information or to enroll in EFTPS, call 1-800-555-4477 (business), 1-800-316-6541 (individual), or 1-800-733-4829 (TDD). Free tax act You can also visit the EFTPS website at www. Free tax act eftps. Free tax act gov. Free tax act Additional information about EFTPS is also available in Publication 966. Free tax act New employers that have a federal tax obligation will be pre-enrolled in EFTPS. Free tax act Call the toll-free number located in your Employer Identification Number (EIN) Package to activate your enrollment and begin making your tax deposit payments. Free tax act See When you receive your EIN in section 1 for more information. Free tax act Deposit record. Free tax act   For your records, an Electronic Funds Transfer (EFT) Trace Number will be provided with each successful payment. Free tax act The number can be used as a receipt or to trace the payment. Free tax act Depositing on time. Free tax act   For deposits made by EFTPS to be on time, you must initiate the deposit by 8 p. Free tax act m. Free tax act Eastern time the day before the date a deposit is due. Free tax act If you use a third party to make a deposit on your behalf, they may have different cutoff times. Free tax act Same-day payment option. Free tax act   If you fail to initiate a deposit transaction on EFTPS by 8 p. Free tax act m. Free tax act Eastern time the day before the date a deposit is due, you can still make your deposit on time by using the Federal Tax Application (FTA). Free tax act To use the same-day payment method, you will need to make arrangements with your financial institution ahead of time. Free tax act Please check with your financial institution regarding availability, deadlines, and costs. Free tax act Your financial institution may charge you a fee for payments made this way. Free tax act To learn more about the information you will need to provide to your financial institution to make a same-day wire payment, visit www. Free tax act eftps. Free tax act gov to download the Same-Day Payment Worksheet. Free tax act Deposit Penalties Penalties may apply if you do not make required deposits on time or if you make deposits for less than the required amount. Free tax act The penalties do not apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect. Free tax act IRS may also waive deposit penalties if you inadvertently fail to deposit in the first quarter that a deposit is due, or the first quarter during which your frequency of deposits changed, if you timely filed your employment tax return. Free tax act For amounts not properly deposited or not deposited on time, the penalty rates are shown next. Free tax act Penalty Charged for. Free tax act . Free tax act . Free tax act 2% Deposits made 1 to 5 days late. Free tax act 5% Deposits made 6 to 15 days late. Free tax act 10% Deposits made 16 or more days late. Free tax act Also applies to amounts paid within 10 days of the date of the first notice the IRS sent asking for the tax due. Free tax act 10% Amounts (that should have been deposited) paid directly to the IRS or paid with your tax return. Free tax act See Payment with return , earlier in this section, for exceptions. Free tax act 15% Amounts still unpaid more than 10 days after the date of the first notice that the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier. Free tax act Late deposit penalty amounts are determined using calendar days, starting from the due date of the liability. Free tax act Order in which deposits are applied. Free tax act   Deposits generally are applied to the most recent tax liability within the year. Free tax act If you receive a failure-to-deposit penalty notice, you may designate how your deposits are to be applied in order to minimize the amount of the penalty, if you do so within 90 days of the date of the notice. Free tax act Follow the instructions on the penalty notice that you received. Free tax act For examples on how the IRS will apply deposits and more information on designating deposits, see Revenue Procedure 2001-58. Free tax act You can find Revenue Procedure 2001-58 on page 579 of Internal Revenue Bulletin 2001-50 at www. Free tax act irs. Free tax act gov/pub/irs-irbs/irb01-50. Free tax act pdf. Free tax act Example. Free tax act Cedar, Inc. Free tax act , is required to make a deposit of $1,000 on July 15 and $1,500 on August 15. Free tax act It does not make the deposit on July 15. Free tax act On August 15, Cedar, Inc. Free tax act , deposits $2,000. Free tax act Under the deposits rule, which applies deposits to the most recent tax liability, $1,500 of the deposit is applied to the August 15 deposit and the remaining $500 is applied to the July deposit. Free tax act Accordingly, $500 of the July 15 liability remains undeposited. Free tax act The penalty on this underdeposit will apply as explained above. Free tax act Trust fund recovery penalty. Free tax act   If federal income, social security, or Medicare taxes that must be withheld are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. Free tax act The penalty is the full amount of the unpaid trust fund tax. Free tax act This penalty may apply to you if these unpaid taxes cannot be immediately collected from the employer or business. Free tax act   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. Free tax act   A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant, a volunteer director/trustee, or an employee of a sole proprietorship. Free tax act A responsible person also may include one who signs checks for the business or otherwise has authority to cause the spending of business funds. Free tax act    Willfully means voluntarily, consciously, and intentionally. Free tax act A responsible person acts willfully if the person knows that the required actions of collecting, accounting for or paying over trust fund taxes are not taking place, or recklessly disregards obvious and known risks to the government's right to receive trust fund taxes. Free tax act “Average” failure-to-deposit penalty. Free tax act   IRS may assess an “averaged” failure-to-deposit penalty of 2% to 10% if you are a monthly schedule depositor and did not properly complete Form 943, line 17, when your tax liability shown on Form 943, line 11, was $2,500 or more. Free tax act IRS may also assess this penalty of 2% to 10% if you are a semiweekly schedule depositor and your tax liability shown on Form 943, line 11, was $2,500 or more and you did any of the following. Free tax act Completed Form 943, line 17, instead of Form 943-A. Free tax act Failed to attach a properly completed Form 943-A. Free tax act Completed Form 943-A incorrectly, for example, by entering tax deposits instead of tax liabilities in the numbered spaces. Free tax act   IRS figures the penalty by allocating your tax liability on Form 943, line 11, equally throughout the tax period. Free tax act Your deposits and payments may not be counted as timely because IRS does not know the actual dates of your tax liabilities. Free tax act   You can avoid the penalty by reviewing your return before filing it. Free tax act Follow these steps before filing your Form 943. Free tax act If you are a monthly schedule depositor, report your tax liabilities (not your deposits) in the monthly entry spaces on Form 943, line 17. Free tax act If you are a semiweekly schedule depositor, report your tax liabilities (not your deposits) on Form 943-A in the lines that represent the dates you paid your employees. Free tax act Verify that your total liability shown on Form 943, line 17, or Form 943-A, line M, equals your tax liability shown on Form 943, line 11. Free tax act Do not show negative amounts on Form 943, line 17, or Form 943-A. Free tax act For prior period errors discovered after December 31, 2008, do not adjust your tax liabilities reported on Form 943, line 17, or on Form 943-A. Free tax act Employers of Both Farm and Nonfarm Workers If you employ both farm and nonfarm workers, you must treat employment taxes for the farmworkers (Form 943 taxes) separately from employment taxes for the nonfarm workers (Form 941 and 944 taxes). Free tax act Form 943 taxes and Form 941/944 taxes are not combined for purposes of applying any of the deposit schedule rules. Free tax act If a deposit is due, deposi