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H&r Tax Cut

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H&r Tax Cut

H&r tax cut 2. H&r tax cut   Taxable and Nontaxable Income Table of Contents Compensation for Services Retirement Plan DistributionsIndividual Retirement Arrangements (IRAs) Pensions and Annuities Social Security and Equivalent Railroad Retirement BenefitsAre Any of Your Benefits Taxable? How Much Is Taxable? How To Report Your Benefits Lump-Sum Election Repayments More Than Gross Benefits Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Life Insurance ProceedsInstallments for life. H&r tax cut Surviving spouse. H&r tax cut Endowment Contract Proceeds Accelerated Death Benefits Sale of HomeMaximum Amount of Exclusion Ownership and Use Tests Married Persons Business Use or Rental of Home Reporting the Sale Reverse Mortgages Other ItemsWelfare benefits. H&r tax cut Payments from a state fund for victims of crime. H&r tax cut Home Affordable Modification Program (HAMP). H&r tax cut Mortgage assistance payments. H&r tax cut Payments to reduce cost of winter energy use. H&r tax cut Nutrition Program for the Elderly. H&r tax cut Reemployment Trade Adjustment Assistance (RTAA). H&r tax cut Generally, income is taxable unless it is specifically exempt (not taxed) by law. H&r tax cut Your taxable income may include compensation for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or exchanges of property, and business income of all kinds. H&r tax cut Under special provisions of the law, certain items are partially or fully exempt from tax. H&r tax cut Provisions that are of special interest to older taxpayers are discussed in this chapter. H&r tax cut Compensation for Services Generally, you must include in gross income everything you receive in payment for personal services. H&r tax cut In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. H&r tax cut You need not receive the compensation in cash for it to be taxable. H&r tax cut Payments you receive in the form of goods or services generally must be included in gross income at their fair market value. H&r tax cut Volunteer work. H&r tax cut   Do not include in your gross income amounts you receive for supportive services or reimbursements for out-of-pocket expenses under any of the following volunteer programs. H&r tax cut Retired Senior Volunteer Program (RSVP). H&r tax cut Foster Grandparent Program. H&r tax cut Senior Companion Program. H&r tax cut Service Corps of Retired Executives (SCORE). H&r tax cut Unemployment compensation. H&r tax cut   You must include in income all unemployment compensation you or your spouse (if married filing jointly) received. H&r tax cut More information. H&r tax cut   See Publication 525, Taxable and Nontaxable Income, for more detailed information on specific types of income. H&r tax cut Retirement Plan Distributions This section summarizes the tax treatment of amounts you receive from traditional individual retirement arrangements (IRA), employee pensions or annuities, and disability pensions or annuities. H&r tax cut A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. H&r tax cut A Roth IRA is an individual retirement plan that can be either an account or an annuity and features nondeductible contributions and tax-free distributions. H&r tax cut A SIMPLE IRA is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. H&r tax cut More detailed information can be found in Publication 590, Individual Retirement Arrangements (IRAs), and Publication 575, Pension and Annuity Income. H&r tax cut Individual Retirement Arrangements (IRAs) In general, distributions from a traditional IRA are taxable in the year you receive them. H&r tax cut Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. H&r tax cut These are discussed in Publication 590. H&r tax cut If you made nondeductible contributions to a traditional IRA, you must file Form 8606, Nondeductible IRAs. H&r tax cut If you do not file Form 8606 with your return, you may have to pay a $50 penalty. H&r tax cut Also, when you receive distributions from your traditional IRA, the amounts will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. H&r tax cut Early distributions. H&r tax cut   Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age  59½. H&r tax cut You must include early distributions of taxable amounts in your gross income. H&r tax cut These taxable amounts are also subject to an additional 10% tax unless the distribution qualifies for an exception. H&r tax cut For purposes of the additional 10% tax, an IRA is a qualified retirement plan. H&r tax cut For more information about this tax, see Tax on Early Distributions under Pensions and Annuities, later. H&r tax cut After age 59½ and before age 70½. H&r tax cut   After you reach age 59½, you can receive distributions from your traditional IRA without having to pay the 10% additional tax. H&r tax cut Even though you can receive distributions after you reach age 59½, distributions are not required until you reach  age 70½. H&r tax cut Required distributions. H&r tax cut   If you are the owner of a traditional IRA, you generally must receive the entire balance in your IRA or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 70½. H&r tax cut See When Must You Withdraw Assets? (Required Minimum Distributions) in Publication 590. H&r tax cut If distributions from your traditional IRA(s) are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. H&r tax cut For purposes of the 50% excise tax, an IRA is a qualified retirement plan. H&r tax cut For more information about this tax, see Tax on Excess Accumulation under Pensions and Annuities, later. H&r tax cut See also Excess Accumulations (Insufficient Distributions) in Publication 590. H&r tax cut Pensions and Annuities Generally, if you did not pay any part of the cost of your employee pension or annuity, and your employer did not withhold part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. H&r tax cut However, see Insurance Premiums for Retired Public Safety Officers , later. H&r tax cut If you paid part of the cost of your pension or annuity plan (see Cost , later), you can exclude part of each annuity payment from income as a recovery of your cost (investment in the contract). H&r tax cut This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. H&r tax cut The rest of each payment is taxable. H&r tax cut However, see Insurance Premiums for Retired Public Safety Officers , later. H&r tax cut You figure the tax-free part of the payment using one of the following methods. H&r tax cut Simplified Method. H&r tax cut You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). H&r tax cut You cannot use this method if your annuity is paid under a nonqualified plan. H&r tax cut General Rule. H&r tax cut You must use this method if your annuity is paid under a nonqualified plan. H&r tax cut You generally cannot use this method if your annuity is paid under a qualified plan. H&r tax cut Contact your employer or plan administrator to find out if your pension or annuity is paid under a qualified or nonqualified plan. H&r tax cut You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. H&r tax cut Exclusion limit. H&r tax cut   If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as a recovery of the cost cannot exceed your total cost. H&r tax cut Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. H&r tax cut This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. H&r tax cut   If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. H&r tax cut If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. H&r tax cut The total exclusion may be more than your cost. H&r tax cut Cost. H&r tax cut   Before you can figure how much, if any, of your pension or annuity benefits are taxable, you must determine your cost in the plan (your investment in the contract). H&r tax cut Your total cost in the plan includes everything that you paid. H&r tax cut It also includes amounts your employer contributed that were taxable to you when paid. H&r tax cut However, see Foreign employment contributions , later. H&r tax cut   From this total cost, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free amounts you received by the later of the annuity starting date or the date on which you received your first payment. H&r tax cut   The annuity starting date is the later of the first day of the first period for which you received a payment from the plan or the date on which the plan's obligations became fixed. H&r tax cut    The amount of your contributions to the plan may be shown in box 9b of any Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. H&r tax cut , that you receive. H&r tax cut Foreign employment contributions. H&r tax cut   If you worked abroad, certain amounts your employer paid into your retirement plan that were not includible in your gross income may be considered part of your cost. H&r tax cut For details, see Foreign employment contributions in Publication 575. H&r tax cut Withholding. H&r tax cut   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable part of amounts paid to you. H&r tax cut However, you can choose not to have tax withheld on the payments you receive, unless they are eligible rollover distributions. H&r tax cut (These are distributions that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA. H&r tax cut ) See Withholding Tax and Estimated Tax and Rollovers in Publication 575 for more information. H&r tax cut   For payments other than eligible rollover distributions, you can tell the payer how much to withhold by filing a Form W-4P, Withholding Certificate for Pension or Annuity Payments. H&r tax cut Simplified Method. H&r tax cut   Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. H&r tax cut For an annuity that is payable over the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. H&r tax cut For any other annuity, this number is the number of monthly annuity payments under the contract. H&r tax cut Who must use the Simplified Method. H&r tax cut   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive your pension or annuity payments from a qualified plan or annuity, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments (defined next). H&r tax cut   In addition, if your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use the Simplified Method for payments from a qualified plan, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments. H&r tax cut If you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. H&r tax cut Guaranteed payments. H&r tax cut   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. H&r tax cut If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. H&r tax cut Who cannot use the Simplified Method. H&r tax cut   You cannot use the Simplified Method and must use the General Rule if you receive pension or annuity payments from: A nonqualified plan, such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan, or A qualified plan if you are age 75 or older on your annuity starting date and you are entitled to at least 5 years of guaranteed payments (defined above). H&r tax cut   In addition, you had to use the General Rule for either circumstance described above if your annuity starting date is after July 1, 1986, and before November 19, 1996. H&r tax cut If you did not have to use the General Rule, you could have chosen to use it. H&r tax cut You also had to use the General Rule for payments from a qualified plan if your annuity starting date is before July 2, 1986, and you did not qualify to use the Three-Year Rule. H&r tax cut   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. H&r tax cut   Unless your annuity starting date was before 1987, once you have recovered all of your non-taxable investment, all of each remaining payment you receive is fully taxable. H&r tax cut Once your remaining payments are fully taxable, there is no longer a concern with the General Rule or Simplified Method. H&r tax cut   Complete information on the General Rule, including the actuarial tables you need, is contained in Publication 939, General Rule for Pensions and Annuities. H&r tax cut How to use the Simplified Method. H&r tax cut   Complete the Simplified Method Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions or in Publication 575 to figure your taxable annuity for 2013. H&r tax cut Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year. H&r tax cut   To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. H&r tax cut How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. H&r tax cut For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25. H&r tax cut    You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. H&r tax cut Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet. H&r tax cut Single-life annuity. H&r tax cut   If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. H&r tax cut Enter on line 3 the number shown for your age on your annuity starting date. H&r tax cut This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. H&r tax cut Multiple-lives annuity. H&r tax cut   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. H&r tax cut Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. H&r tax cut For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. H&r tax cut For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. H&r tax cut Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death. H&r tax cut   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. H&r tax cut Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. H&r tax cut This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996. H&r tax cut Fixed-period annuities. H&r tax cut   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract. H&r tax cut Line 6. H&r tax cut   The amount on line 6 should include all amounts that could have been recovered in prior years. H&r tax cut If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years. H&r tax cut    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity in later years. H&r tax cut Example. H&r tax cut Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. H&r tax cut Bill's annuity starting date is January 1, 2013. H&r tax cut The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. H&r tax cut Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. H&r tax cut Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. H&r tax cut Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. H&r tax cut See the illustrated Worksheet 2-A, Simplified Method Worksheet, later. H&r tax cut You can find a blank version of this worksheet in Publication 575. H&r tax cut (The references in the illustrated worksheet are to sections in Publication 575). H&r tax cut His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages, 130 (65 + 65), and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet and finds the line 3 amount to be 310. H&r tax cut Bill's tax-free monthly amount is $100 ($31,000 ÷ 310 as shown on line 4 of the worksheet). H&r tax cut Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. H&r tax cut The full amount of any annuity payments received after 310 payments are paid must generally be included in gross income. H&r tax cut If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. H&r tax cut This deduction is not subject to the 2%-of-adjusted-gross-income limit. H&r tax cut Worksheet 2-A. H&r tax cut Simplified Method Worksheet—Illustrated 1. H&r tax cut Enter the total pension or annuity payments received this year. H&r tax cut Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. H&r tax cut $ 14,400 2. H&r tax cut Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion* See Cost (Investment in the Contract), earlier 2. H&r tax cut 31,000   Note. H&r tax cut If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). H&r tax cut Otherwise, go to line 3. H&r tax cut     3. H&r tax cut Enter the appropriate number from Table 1 below. H&r tax cut But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. H&r tax cut 310 4. H&r tax cut Divide line 2 by the number on line 3 4. H&r tax cut 100 5. H&r tax cut Multiply line 4 by the number of months for which this year's payments were made. H&r tax cut If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. H&r tax cut Otherwise, go to line 6 5. H&r tax cut 1,200 6. H&r tax cut Enter any amount previously recovered tax free in years after 1986. H&r tax cut This is the amount shown on line 10 of your worksheet for last year 6. H&r tax cut 0 7. H&r tax cut Subtract line 6 from line 2 7. H&r tax cut 31,000 8. H&r tax cut Enter the smaller of line 5 or line 7 8. H&r tax cut 1,200 9. H&r tax cut Taxable amount for year. H&r tax cut Subtract line 8 from line 1. H&r tax cut Enter the result, but not less than zero. H&r tax cut Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. H&r tax cut Note. H&r tax cut If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. H&r tax cut If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers, earlier, before entering an amount on your tax return. H&r tax cut 9. H&r tax cut $ 13,200 10. H&r tax cut Was your annuity starting date before 1987? □ Yes. H&r tax cut STOP. H&r tax cut Do not complete the rest of this worksheet. H&r tax cut  ☑ No. H&r tax cut Add lines 6 and 8. H&r tax cut This is the amount you have recovered tax free through 2013. H&r tax cut You will need this number if you need to fill out this worksheet next year. H&r tax cut 10. H&r tax cut 1,200 11. H&r tax cut Balance of cost to be recovered. H&r tax cut Subtract line 10 from line 2. H&r tax cut If zero, you will not have to complete this worksheet next year. H&r tax cut The payments you receive next year will generally be fully taxable 11. H&r tax cut $ 29,800 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. H&r tax cut   Table 1 for Line 3 Above       AND your annuity starting date was—   IF your age on your annuity starting date was . H&r tax cut . H&r tax cut . H&r tax cut   BEFORE November 19, 1996, enter on line 3 . H&r tax cut . H&r tax cut . H&r tax cut AFTER November 18, 1996, enter on line 3 . H&r tax cut . H&r tax cut . H&r tax cut   55 or under 300 360   56-60 260 310   61-65 240 260   66-70 170 210   71 or over 120 160 Table 2 for Line 3 Above   IF the annuitants' combined ages on your annuity starting date were . H&r tax cut . H&r tax cut . H&r tax cut   THEN enter on line 3 . H&r tax cut . H&r tax cut . H&r tax cut         110 or under   410         111-120   360         121-130   310         131-140   260         141 or over   210       Survivors of retirees. H&r tax cut   Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income in the same way the retiree would have included them in gross income. H&r tax cut   If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total received in your income. H&r tax cut The retiree's cost has already been recovered tax free. H&r tax cut   If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage the retiree used to your initial payment called for in the contract. H&r tax cut The resulting tax-free amount will then remain fixed. H&r tax cut Any increases in the survivor annuity are fully taxable. H&r tax cut   If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. H&r tax cut See Simplified Method , earlier. H&r tax cut How to report. H&r tax cut   If you file Form 1040, report your total annuity on line 16a, and the taxable part on line 16b. H&r tax cut If your pension or annuity is fully taxable, enter it on line 16b. H&r tax cut Do not make an entry on line 16a. H&r tax cut   If you file Form 1040A, report your total annuity on line 12a, and the taxable part on line 12b. H&r tax cut If your pension or annuity is fully taxable, enter it on line 12b. H&r tax cut Do not make an entry on line 12a. H&r tax cut   If you file Form 1040NR, report your total annuity on line 17a, and the taxable part on line 17b. H&r tax cut If your pension or annuity is fully taxable, enter it on line 17b. H&r tax cut Do not make an entry on line 17a. H&r tax cut Example. H&r tax cut You are a Form 1040 filer and you received monthly payments totaling $1,200 (12 months x $100) during 2013 from a pension plan that was completely financed by your employer. H&r tax cut You had paid no tax on the payments that your employer made to the plan, and the payments were not used to pay for accident, health, or long-term care insurance premiums (as discussed later under Insurance Premiums for Retired Public Safety Officers ). H&r tax cut The entire $1,200 is taxable. H&r tax cut You include $1,200 only on Form 1040, line 16b. H&r tax cut Joint return. H&r tax cut   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on line 16a of Form 1040, line 12a of Form 1040A, or line 17a of Form 1040NR. H&r tax cut Report the total of the taxable parts on line 16b of Form 1040, line 12b of Form 1040A, or line 17b of Form 1040NR. H&r tax cut Form 1099-R. H&r tax cut   You should receive a Form 1099-R for your pension or annuity. H&r tax cut Form 1099-R shows your pension or annuity for the year and any income tax withheld. H&r tax cut You should receive a Form W-2 if you receive distributions from certain nonqualified plans. H&r tax cut You must attach Forms 1099-R or Forms W-2 to your 2013 tax return if federal income tax was withheld. H&r tax cut Generally, you should be sent these forms by January 31, 2014. H&r tax cut Nonperiodic Distributions If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. H&r tax cut Nonperiodic distributions include cash withdrawals, distributions of current earnings (dividends) on your investment, and certain loans. H&r tax cut For information on how to figure the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Publication 575. H&r tax cut The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. H&r tax cut See Tax on Early Distributions, later. H&r tax cut Lump-sum distributions. H&r tax cut   If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. H&r tax cut The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. H&r tax cut The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. H&r tax cut You may be able to use the 10-year tax option to figure tax on the ordinary income part. H&r tax cut Form 1099-R. H&r tax cut   If you receive a total distribution from a plan, you should receive a Form 1099-R. H&r tax cut If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain part of the distribution. H&r tax cut The amount in box 2a, Taxable amount, minus the amount in box 3, Capital gain, is the ordinary income part. H&r tax cut More information. H&r tax cut   For more detailed information on lump-sum distributions, see Publication 575 or Form 4972, Tax on Lump-Sum Distributions. H&r tax cut Tax on Early Distributions Most distributions you receive from your qualified retirement plan and nonqualified annuity contracts before you reach age 59½ are subject to an additional tax of 10%. H&r tax cut The tax applies to the taxable part of the distribution. H&r tax cut For this purpose, a qualified retirement plan is: A qualified employee plan (including a qualified cash or deferred arrangement (CODA) under Internal Revenue Code section 401(k)), A qualified employee annuity plan, A tax-sheltered annuity plan (403(b) plan), or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). H&r tax cut  An IRA is also a qualified retirement plan for purposes of this tax. H&r tax cut General exceptions to tax. H&r tax cut   The early distribution tax does not apply to any distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. H&r tax cut Additional exceptions. H&r tax cut   There are additional exceptions to the early distribution tax for certain distributions from qualified retirement plans and nonqualified annuity contracts. H&r tax cut See Publication 575 for details. H&r tax cut Reporting tax. H&r tax cut   If you owe only the tax on early distributions and distribution code 1 (early distribution, no known exception) is correctly shown in Form 1099-R, box 7, multiply the taxable part of the early distribution by 10% (. H&r tax cut 10) and enter the result on Form 1040, line 58, or Form 1040NR, line 56. H&r tax cut See the instructions for line 58 of Form 1040 or line 56 of Form 1040NR for more information about reporting the early distribution tax. H&r tax cut Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date. H&r tax cut Unless the rule for 5% owners applies, this is generally April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. H&r tax cut However, your plan may require you to begin to receive payments by April 1 of the year that follows the year in which you reach 70½, even if you have not retired. H&r tax cut For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986). H&r tax cut  An IRA is also a qualified retirement plan for purposes of this tax. H&r tax cut An excess accumulation is the undistributed remainder of the required minimum distribution that was left in your qualified retirement plan. H&r tax cut 5% owners. H&r tax cut   If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified retirement plan, you must begin to receive distributions from the plan by April 1 of the year after the calendar year in which you reach age 70½. H&r tax cut See Publication 575 for more information. H&r tax cut Amount of tax. H&r tax cut   If you do not receive the required minimum distribution, you are subject to an additional tax. H&r tax cut The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. H&r tax cut You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall. H&r tax cut Form 5329. H&r tax cut   You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan. H&r tax cut Additional information. H&r tax cut   For more detailed information on the tax on excess accumulation, see Publication 575. H&r tax cut Insurance Premiums for Retired Public Safety Officers If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. H&r tax cut The premiums can be for coverage for you, your spouse, or dependent(s). H&r tax cut The distribution must be made directly from the plan to the insurance provider. H&r tax cut You can exclude from income the smaller of the amount of the insurance premiums or $3,000. H&r tax cut You can only make this election for amounts that would otherwise be included in your income. H&r tax cut The amount excluded from your income cannot be used to claim a medical expense deduction. H&r tax cut An eligible retirement plan is a governmental plan that is a: Qualified trust, Section 403(a) plan, Section 403(b) annuity, or Section 457(b) plan. H&r tax cut If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. H&r tax cut The taxable amount shown in box 2a of any Form 1099-R that you receive does not reflect the exclusion. H&r tax cut Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. H&r tax cut Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. H&r tax cut Enter “PSO” next to the appropriate line on which you report the taxable amount. H&r tax cut Railroad Retirement Benefits Benefits paid under the Railroad Retirement Act fall into two categories. H&r tax cut These categories are treated differently for income tax purposes. H&r tax cut Social security equivalent benefits. H&r tax cut   The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. H&r tax cut This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated for tax purposes like social security benefits. H&r tax cut (See Social Security and Equivalent Railroad Retirement Benefits , later. H&r tax cut ) Non-social security equivalent benefits. H&r tax cut   The second category contains the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB). H&r tax cut It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. H&r tax cut This category of benefits is treated as an amount received from a qualified employee plan. H&r tax cut This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. H&r tax cut Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. H&r tax cut More information. H&r tax cut   For more information about railroad retirement benefits, see Publication 575. H&r tax cut Military Retirement Pay Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040, lines 16a and 16b; on Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b. H&r tax cut But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally are not taxable. H&r tax cut For more information, including information about veterans' benefits and insurance, see Publication 525. H&r tax cut Social Security and Equivalent Railroad Retirement Benefits This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits. H&r tax cut Social security benefits include monthly retirement, survivor, and disability benefits. H&r tax cut They do not include supplemental security income (SSI) payments, which are not taxable. H&r tax cut Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. H&r tax cut They commonly are called the social security equivalent benefit (SSEB) portion of tier 1 benefits. H&r tax cut If you received these benefits during 2013, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form RRB-1042S if you are a nonresident alien), showing the amount of the benefits. H&r tax cut Are Any of Your Benefits Taxable? Note. H&r tax cut When the term “benefits” is used in this section, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement benefits. H&r tax cut  To find out whether any of your benefits may be taxable, compare the base amount for your filing status (explained later) with the total of: One-half of your benefits, plus All your other income, including tax-exempt interest. H&r tax cut When making this comparison, do not reduce your other income by any exclusions for: Interest from qualified U. H&r tax cut S. H&r tax cut savings bonds, Employer-provided adoption benefits, Foreign earned income or foreign housing, or Income earned in American Samoa or Puerto Rico by bona fide residents. H&r tax cut Figuring total income. H&r tax cut   To figure the total of one-half of your benefits plus your other income, use Worksheet 2-B. H&r tax cut If that total amount is more than your base amount, part of your benefits may be taxable. H&r tax cut If you are married and file a joint return for 2013, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. H&r tax cut Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable. H&r tax cut If the only income you received during 2013 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. H&r tax cut If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. H&r tax cut Worksheet 2-B. H&r tax cut A Quick Way To Check if Your Benefits May Be Taxable A. H&r tax cut Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. H&r tax cut Include  the full amount of any lump-sum benefit payments received in 2013, for 2013 and  earlier years. H&r tax cut (If you received more than one form, combine the amounts from box 5  and enter the total. H&r tax cut ) A. H&r tax cut     Note. H&r tax cut If the amount on line A is zero or less, stop here; none of your benefits are  taxable this year. H&r tax cut     B. H&r tax cut Enter one-half of the amount on line A B. H&r tax cut   C. H&r tax cut Enter your taxable pensions, wages, interest, dividends, and other taxable income C. H&r tax cut   D. H&r tax cut Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income for: •Interest from qualified U. H&r tax cut S. H&r tax cut savings bonds, •Employer-provided adoption benefits, •Foreign earned income or foreign housing, or •Income earned in American Samoa or Puerto Rico by bona fide residents D. H&r tax cut   E. H&r tax cut Add lines B, C, and D and enter the total E. H&r tax cut   F. H&r tax cut If you are: •Married filing jointly, enter $32,000 •Single, head of household, qualifying widow(er), or married filing separately and you  lived apart from your spouse for all of 2013, enter $25,000 •Married filing separately and you lived with your spouse at any time during 2013,  enter -0- F. H&r tax cut   G. H&r tax cut Is the amount on line F less than or equal to the amount on line E? □ No. H&r tax cut None of your benefits are taxable this year. H&r tax cut  □ Yes. H&r tax cut Some of your benefits may be taxable. H&r tax cut To figure how much of your benefits  are taxable, see Which worksheet to use under How Much Is Taxable. H&r tax cut     Base Amount Your base amount is: $25,000 if you are single, head of household, or qualifying widow(er) with dependent child, $25,000 if you are married filing separately and lived apart from your spouse for all of 2013, $32,000 if you are married filing jointly, or $0 if you are married filing separately and lived with your spouse at any time during 2013. H&r tax cut Repayment of Benefits Any repayment of benefits you made during 2013 must be subtracted from the gross benefits you received in 2013. H&r tax cut It does not matter whether the repayment was for a benefit you received in 2013 or in an earlier year. H&r tax cut If you repaid more than the gross benefits you received in 2013, see Repayments More Than Gross Benefits , later. H&r tax cut Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. H&r tax cut Your repayments are shown in box 4. H&r tax cut The amount in box 5 shows your net benefits for 2013 (box 3 minus box 4). H&r tax cut Use the amount in box 5 to figure whether any of your benefits are taxable. H&r tax cut Tax Withholding and Estimated Tax You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad retirement benefits. H&r tax cut If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. H&r tax cut If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay estimated tax during the year. H&r tax cut For details, see Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES, Estimated Tax for Individuals. H&r tax cut How Much Is Taxable? If part of your benefits is taxable, how much is taxable depends on the total amount of your benefits and other income. H&r tax cut Generally, the higher that total amount, the greater the taxable part of your benefits. H&r tax cut Maximum taxable part. H&r tax cut   The taxable part of your benefits usually cannot be more than 50%. H&r tax cut However, up to 85% of your benefits can be taxable if either of the following situations applies to you. H&r tax cut The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly). H&r tax cut You are married filing separately and lived with your spouse at any time during 2013. H&r tax cut   If you are a nonresident alien, 85% of your benefits are taxable. H&r tax cut However, this income is exempt under some tax treaties. H&r tax cut Which worksheet to use. H&r tax cut   A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. H&r tax cut However, you will need to use a different worksheet(s) if any of the following situations applies to you. H&r tax cut You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse were covered by a retirement plan at work. H&r tax cut In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits. H&r tax cut Situation (1) does not apply and you take one or more of the following exclusions. H&r tax cut Interest from qualified U. H&r tax cut S. H&r tax cut savings bonds (Form 8815). H&r tax cut Employer-provided adoption benefits (Form 8839). H&r tax cut Foreign earned income or housing (Form 2555 or Form 2555-EZ). H&r tax cut Income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. H&r tax cut In these situations, you must use Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure your taxable benefits. H&r tax cut You received a lump-sum payment for an earlier year. H&r tax cut In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. H&r tax cut See Lump-Sum Election , later. H&r tax cut How To Report Your Benefits If part of your benefits are taxable, you must use Form 1040, Form 1040A, or Form 1040NR. H&r tax cut You cannot use Form 1040EZ. H&r tax cut Reporting on Form 1040. H&r tax cut   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. H&r tax cut If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 20a. H&r tax cut Reporting on Form 1040A. H&r tax cut   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. H&r tax cut If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on line 14a. H&r tax cut Reporting on Form 1040NR. H&r tax cut   Report 85% of the total amount of your benefits (box 5 of your Form SSA-1042S or Form RRB-1042S) in the appropriate column of Form 1040NR, Schedule NEC, line 8. H&r tax cut Benefits not taxable. H&r tax cut   If you are filing Form 1040EZ, do not report any benefits on your tax return. H&r tax cut If you are filing Form 1040 or Form 1040A, report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on Form 1040, line 20a, or Form 1040A, line 14a. H&r tax cut Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. H&r tax cut If you are married filing separately and you lived apart from your spouse for all of 2013, also enter “D” to the right of the word “benefits” on Form 1040, line 20a, or Form 1040A, line 14a. H&r tax cut Lump-Sum Election You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2013 in your 2013 income, even if the payment includes benefits for an earlier year. H&r tax cut This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. H&r tax cut No part of the lump-sum death benefit is subject to tax. H&r tax cut For more information about the lump-sum death benefit, visit the Social Security Administration website at www. H&r tax cut SSA. H&r tax cut gov, and use keyword: death benefit. H&r tax cut Generally, you use your 2013 income to figure the taxable part of the total benefits received in 2013. H&r tax cut However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. H&r tax cut You can elect this method if it lowers your taxable benefits. H&r tax cut See Publication 915 for more information. H&r tax cut Repayments More Than Gross Benefits In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. H&r tax cut If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. H&r tax cut If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year. H&r tax cut If you have any questions about this negative figure, contact your local Social Security Administration office or your local U. H&r tax cut S. H&r tax cut Railroad Retirement Board field office. H&r tax cut Joint return. H&r tax cut   If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5 but your spouse's does not, subtract the box 5 amount on your form from the box 5 amount on your spouse's form. H&r tax cut You do this to get your net benefits when figuring if your combined benefits are taxable. H&r tax cut Repayment of benefits received in an earlier year. H&r tax cut   If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier year. H&r tax cut   If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. H&r tax cut Claim it on Schedule A (Form 1040), line 23. H&r tax cut   If this deduction is more than $3,000, you have to follow some special instructions. H&r tax cut See Publication 915 for those instructions. H&r tax cut Sickness and Injury Benefits Generally, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. H&r tax cut If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. H&r tax cut However, certain payments may not be taxable to you. H&r tax cut Some of these payments are discussed later in this section. H&r tax cut Also, see Military and Government Disability Pensions and Other Sickness and Injury Benefits in Publication 525. H&r tax cut Cost paid by you. H&r tax cut   If you pay the entire cost of an accident or health plan, do not include any amounts you receive from the plan for personal injury or sickness as income on your tax return. H&r tax cut If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. H&r tax cut Disability Pensions If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. H&r tax cut You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. H&r tax cut Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. H&r tax cut If you were 65 or older by the end of 2013 or you were retired on permanent and total disability and received taxable disability income, you may be able to claim the credit for the elderly or the disabled. H&r tax cut See Credit for the Elderly or the Disabled, later. H&r tax cut For more information on this credit, see Publication 524, Credit for the Elderly or the Disabled. H&r tax cut Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. H&r tax cut Report the payments on lines 16a and 16b of Form 1040, on lines 12a and 12b of Form 1040A, or on lines 17a and 17b of Form 1040NR. H&r tax cut For more information on pensions and annuities, see Publication 575. H&r tax cut Retirement and profit-sharing plans. H&r tax cut   If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not treat the payments as a disability pension. H&r tax cut The payments must be reported as a pension or annuity. H&r tax cut Accrued leave payment. H&r tax cut   If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. H&r tax cut The payment is not a disability payment. H&r tax cut Include it in your income in the tax year you receive it. H&r tax cut Long-Term Care Insurance Contracts In most cases, long-term care insurance contracts generally are treated as accident and health insurance contracts. H&r tax cut Amounts you receive from them (other than policyholder dividends or premium refunds) generally are excludable from income as amounts received for personal injury or sickness. H&r tax cut However, the amount you can exclude may be limited. H&r tax cut Long-term care insurance contracts are discussed in more detail in Publication 525. H&r tax cut Workers' Compensation Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. H&r tax cut The exemption also applies to your survivors. H&r tax cut The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. H&r tax cut If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. H&r tax cut For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. H&r tax cut Return to work. H&r tax cut   If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. H&r tax cut Other Sickness and Injury Benefits In addition to disability pensions and annuities, you may receive other payments for sickness or injury. H&r tax cut Federal Employees' Compensation Act (FECA). H&r tax cut   Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, are not taxable. H&r tax cut However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. H&r tax cut Report this income on Form 1040, line 7; Form 1040A, line 7; on Form 1040EZ, line 1; or Form 1040NR, line 8. H&r tax cut Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages. H&r tax cut    If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. H&r tax cut For a discussion of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier. H&r tax cut Other compensation. H&r tax cut   Many other amounts you receive as compensation for sickness or injury are not taxable. H&r tax cut These include the following amounts. H&r tax cut Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. H&r tax cut Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. H&r tax cut Compensation you receive for permanent loss or loss of use of a part or function of your body, for your permanent disfigurement, or for such loss or disfigurement suffered by your spouse or dependent(s). H&r tax cut This compensation must be based only on the injury and not on the period of your absence from work. H&r tax cut These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. H&r tax cut Life Insurance Proceeds Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. H&r tax cut This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. H&r tax cut Proceeds not received in installments. H&r tax cut   If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. H&r tax cut If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death. H&r tax cut Proceeds received in installments. H&r tax cut   If you receive life insurance proceeds in installments, you can exclude part of each installment from your income. H&r tax cut   To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. H&r tax cut Include anything over this excluded part in your income as interest. H&r tax cut Installments for life. H&r tax cut   If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. H&r tax cut If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee. H&r tax cut Surviving spouse. H&r tax cut   If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude, in any year, up to $1,000 of the interest included in the installments. H&r tax cut If you remarry, you can continue to take the exclusion. H&r tax cut Surrender of policy for cash. H&r tax cut   If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. H&r tax cut In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income. H&r tax cut You should receive a Form 1099-R showing the total proceeds and the taxable part. H&r tax cut Report these amounts on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or Form 1040NR, lines 17a and 17b. H&r tax cut Endowment Contract Proceeds An endowment contract is a policy that pays over to you a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. H&r tax cut Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. H&r tax cut To determine your cost, subtract from the total premiums (or other consideration) paid for the contract any amount that you previously received under the contract and excluded from your income. H&r tax cut Include in your income the part of the lump-sum payment that is more than your cost. H&r tax cut Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity. H&r tax cut The tax treatment of an annuity is explained in Publication 575. H&r tax cut For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. H&r tax cut This election must be made within 60 days after the lump-sum payment first becomes payable to you. H&r tax cut Accelerated Death Benefits Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are generally excluded from income if the insured is terminally or chronically ill. H&r tax cut However, see Exception , later. H&r tax cut For a chronically ill individual, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. H&r tax cut Accelerated death benefits paid on a per diem or other periodic basis without regard to the costs are excludable up to a limit. H&r tax cut In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill individual is sold or assigned to a viatical settlement provider, the amount received also is excluded from income. H&r tax cut Generally, a viatical settlement provider is one who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill. H&r tax cut To report taxable accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. H&r tax cut Terminally or chronically ill defined. H&r tax cut   A terminally ill person is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months from the date of the certification. H&r tax cut A chronically ill person is one who is not terminally ill but has been certified (within the previous 12 months) by a licensed health care practitioner as meeting either of the following conditions. H&r tax cut The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of 90 days or more because of a loss of functional capacity. H&r tax cut The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment. H&r tax cut Exception. H&r tax cut   The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable interest in the life of the insured because the insured: Is a director, officer, or employee of the other person, or Has a financial interest in the business of the other person. H&r tax cut Sale of Home You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your main home. H&r tax cut Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return. H&r tax cut You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. H&r tax cut Main home. H&r tax cut   Usually, your main home is the home you live in most of the time and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. H&r tax cut Repaying the first-time homebuyer credit because you sold your home. H&r tax cut   If you claimed a first-time homebuyer credit for your main home and you sell it, you may have to repay the credit. H&r tax cut For a home purchased in 2008 and used as your main home until sold in 2013, you must file Form 5405 and repay the balance of the unpaid credit on your 2013 tax return. H&r tax cut   For a home purchased after 2008, you generally must repay the entire credit if the home was sold (or otherwise ceased to be your main home) within 36 months of the purchase date. H&r tax cut If you purchased your home in 2009 and used it as your main home until sold in 2013, you do not have to repay the credit or file Form 5405. H&r tax cut If you purchased your home in 2010 and used it as your main home until sold in 2013, you may have to file Form 5405 and repay the entire credit on your 2013 tax return. H&r tax cut   See the Instructions for Form 5405 for more information about repaying the credit and exceptions to repayment that may apply to you. H&r tax cut Maximum Amount of Exclusion You can generally exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. H&r tax cut You meet the ownership test. H&r tax cut You meet the use test. H&r tax cut During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. H&r tax cut You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . H&r tax cut Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. H&r tax cut This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). H&r tax cut Exception to ownership and use tests. H&r tax cut   If you owned and lived in the property as your main home for less than 2 years, you still can claim an exclusion in some cases. H&r tax cut Generally, you must have sold the home due to a change in place of employment, health, or unforeseen circumstances. H&r tax cut The maximum amount you can exclude will be reduced. H&r tax cut See Publication 523, Selling Your Home, for more information. H&r tax cut Exception to use test for individuals with a disability. H&r tax cut   There is an exception to the use test if, during the 5-year period before the sale of your home: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year. H&r tax cut Under this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition. H&r tax cut   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. H&r tax cut Exception to ownership test for property acquired in a like-kind exchange. H&r tax cut   You must have owned your main home for at least 5 years to qualify for the exclusion if you acquired your main home in a like-kind exchange. H&r tax cut This special 5-year ownership rule continues to apply to a home you acquired in a like-kind exchange and gave to another person. H&r tax cut A like-kind exchange is an exchange of property held for productive use in a trade or business or for investment. H&r tax cut See Publication 523 for more information. H&r tax cut Period of nonqualified use. H&r tax cut   Generally, the gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gain is allocated to periods of nonqualified use. H&r tax cut Nonqualified use is any period after December 31, 2008, during which the property is not used as the main home. H&r tax cut See Publication 523 for more information. H&r tax cut Married Persons In the special situations discussed below, if you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use test, you can exclude up to $250,000 of gain. H&r tax cut However, see Special rules for joint returns , next. H&r tax cut Special rules for joint returns. H&r tax cut   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. H&r tax cut You are married and file a joint return for the year. H&r tax cut Either you or your spouse meets the ownership test. H&r tax cut Both you and your spouse meet the use test. H&r tax cut During the 2-year period ending on the date of the sale, neither you nor your spouse exclude gain from the sale of another home. H&r tax cut Sale of home by surviving spouse. H&r tax cut   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. H&r tax cut   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home in 2013. H&r tax cut The sale or exchange took place no more than 2 years after the date of death of your spouse. H&r tax cut You have not remarried. H&r tax cut You and your spouse met the use test at the time of your spouse's death. H&r tax cut You or your spouse met the ownership test at the time of your spouse's death. H&r tax cut Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. H&r tax cut Home transferred from spouse. H&r tax cut   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. H&r tax cut Use of home after divorce. H&r tax cut   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. H&r tax cut Business Use or Rental of Home You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. H&r tax cut However, you must meet the ownership and use tests. H&r tax cut See Publication 523 for more information. H&r tax cut Depreciation after May 6, 1997. H&r tax cut   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. H&r tax cut See Publication 523 for more information. H&r tax cut Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and you do not qualify to exclude all of it, You have a gain and you choose not to exclude it, or You received Form 1099-S. H&r tax cut If you have a gain that you cannot or choose not to exclude, if you received a Form 1099-S, or if you have a deductible loss, report the sale on your tax return. H&r tax cut Report the sale on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home. H&r tax cut If you used your home for business or to produce rental income, you may have to use Form 4797, Sales of Business Property, to report the sale of the business or rental part. H&r tax cut See Publication 523 for more information. H&r tax cut Reverse Mortgages A revers
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Tax Relief for Victims of Freedom and Noble Wildfires in Oklahoma

OK-2012-09, Aug. 23, 2012

Updated 9/27/2012 to include Noble Wildfire and include Cleveland County.

OKLAHOMA CITY — Victims of the Freedom and Noble Wildfires that began on Aug. 3, 2012, in parts of Oklahoma may qualify for tax relief from the Internal Revenue Service.

The President has declared Creek and Cleveland counties a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Aug. 3, and on or before Oct. 2, have been postponed to Oct. 2, 2012. This includes the quarterly estimated tax payment due on Sept. 17, 2012.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Aug. 3, and on or before Aug. 20, as long as the deposits are made by Aug. 20, 2012.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and is entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Oct. 2 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Aug. 3 and on or before Oct. 2.

The IRS also gives affected taxpayers until Oct. 2 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after Aug. 3 and on or before Oct. 2.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after Aug. 3 and on or before Aug. 20 provided the taxpayer makes these deposits by Aug. 20.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “OKLAHOMA/FREEDOM WILDFIRE” or "OKLAHOMA/NOBLE WILDFIRE" at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, IRS.gov, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

Page Last Reviewed or Updated: 14-Aug-2013

The H&r Tax Cut

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