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Income taxes free Publication 15-A - Main Content Table of Contents 1. Income taxes free Who Are Employees?Independent Contractors Common-Law Employees Statutory Employees Statutory Nonemployees Misclassification of Employees 2. Income taxes free Employee or Independent Contractor?Common-Law Rules Industry Examples 3. Income taxes free Employees of Exempt OrganizationsSocial security and Medicare taxes. Income taxes free FUTA tax. Income taxes free 4. Income taxes free Religious Exemptions and Special Rules for MinistersForm W-2. Income taxes free Self-employed. Income taxes free Employees. Income taxes free 5. Income taxes free 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. Income taxes free 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. Income taxes free Special Rules for Paying TaxesCommon Paymaster Agents Reporting Agents Employee's Portion of Taxes Paid by Employer International Social Security Agreements 8. Income taxes free Pensions and AnnuitiesFederal Income Tax Withholding 9. Income taxes free Alternative Methods for Figuring WithholdingTerm of continuous employment. Income taxes free 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. Income taxes free Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersWithholding Tables How To Get Tax Help 1. Income taxes free 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. Income taxes free The person performing the services may be: An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee. Income taxes free This discussion explains these four categories. Income taxes free 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. Income taxes free 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. Income taxes free However, in some cases you may be required to withhold under the backup withholding requirements on these payments. Income taxes free See Publication 15 (Circular E) for information on backup withholding. Income taxes free 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. Income taxes free However, whether such people are employees or independent contractors depends on the facts in each case. Income taxes free 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. Income taxes free 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. Income taxes free This is so even when you give the employee freedom of action. Income taxes free What matters is that you have the right to control the details of how the services are performed. Income taxes free For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2. Income taxes free If you have an employer-employee relationship, it makes no difference how it is labeled. Income taxes free The substance of the relationship, not the label, governs the worker's status. Income taxes free It does not matter whether the individual is employed full time or part time. Income taxes free For employment tax purposes, no distinction is made between classes of employees. Income taxes free Superintendents, managers, and other supervisory personnel are all employees. Income taxes free 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. Income taxes free A director of a corporation is not an employee with respect to services performed as a director. Income taxes free You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. Income taxes free However, the wages of certain employees may be exempt from one or more of these taxes. Income taxes free See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4). Income taxes free Leased employees. Income taxes free   Under certain circumstances, a firm that furnishes workers to other firms is the employer of those workers for employment tax purposes. Income taxes free 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. Income taxes free   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. Income taxes free 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. Income taxes free 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. Income taxes free For information on employee leasing as it relates to pension plan qualification requirements, see Leased employee in Publication 560, Retirement Plans for Small Business. Income taxes free Additional information. Income taxes free   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. Income taxes free 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. Income taxes free 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 . Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. Income taxes free The work performed for you must be the salesperson's principal business activity. Income taxes free See Salesperson in section 2. Income taxes free Social security and Medicare taxes. Income taxes free   You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. Income taxes free The service contract states or implies that substantially all the services are to be performed personally by them. Income taxes free 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). Income taxes free The services are performed on a continuing basis for the same payer. Income taxes free Federal unemployment (FUTA) tax. Income taxes free   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. Income taxes free 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. Income taxes free Income tax. Income taxes free   Do not withhold federal income tax from the wages of statutory employees. Income taxes free Reporting payments to statutory employees. Income taxes free   Furnish Form W-2 to a statutory employee, and check “Statutory employee” in box 13. Income taxes free Show your payments to the employee as “other compensation” in box 1. Income taxes free 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. Income taxes free The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. Income taxes free 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. Income taxes free 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. Income taxes free H-2A agricultural workers. Income taxes free   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Income taxes free Statutory Nonemployees There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Income taxes free 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. Income taxes free Direct sellers. Income taxes free   Direct sellers include persons falling within any of the following three groups. Income taxes free 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. Income taxes free 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. Income taxes free 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). Income taxes free   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. Income taxes free Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. Income taxes free Licensed real estate agents. Income taxes free   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. Income taxes free Companion sitters. Income taxes free   Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. Income taxes free 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. Income taxes free Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. Income taxes free Misclassification of Employees Consequences of treating an employee as an independent contractor. Income taxes free   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. Income taxes free See section 2 in Publication 15 (Circular E) for more information. Income taxes free Relief provision. Income taxes free   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. Income taxes free To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. Income taxes free You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. Income taxes free Technical service specialists. Income taxes free   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. Income taxes free 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. Income taxes free   This limit on the application of the rule does not affect the determination of whether such workers are employees under the common-law rules. Income taxes free The common-law rules control whether the specialist is treated as an employee or an independent contractor. Income taxes free 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. Income taxes free Test proctors and room supervisors. Income taxes free   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. Income taxes free Voluntary Classification Settlement Program (VCSP). Income taxes free   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. Income taxes free To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Income taxes free For more information, visit IRS. Income taxes free gov and enter “VCSP” in the search box. Income taxes free 2. Income taxes free 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. Income taxes free An employer does not generally have to withhold or pay over any federal taxes on payments to independent contractors. Income taxes free 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. Income taxes free In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Income taxes free 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. Income taxes free These facts are discussed next. Income taxes free Behavioral control. Income taxes free   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. Income taxes free   An employee is generally subject to the business' instructions about when, where, and how to work. Income taxes free All of the following are examples of types of instructions about how to do work. Income taxes free When and where to do the work. Income taxes free What tools or equipment to use. Income taxes free What workers to hire or to assist with the work. Income taxes free Where to purchase supplies and services. Income taxes free What work must be performed by a specified  individual. Income taxes free What order or sequence to follow. Income taxes free   The amount of instruction needed varies among different jobs. Income taxes free 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. Income taxes free A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. Income taxes free 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. Income taxes free Training that the business gives to the worker. Income taxes free   An employee may be trained to perform services in a particular manner. Income taxes free Independent contractors ordinarily use their own methods. Income taxes free Financial control. Income taxes free   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. Income taxes free   Independent contractors are more likely to have unreimbursed expenses than are employees. Income taxes free Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. Income taxes free However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer. Income taxes free The extent of the worker's investment. Income taxes free   An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. Income taxes free However, a significant investment is not necessary for independent contractor status. Income taxes free The extent to which the worker makes his or her services available to the relevant market. Income taxes free   An independent contractor is generally free to seek out business opportunities. Income taxes free Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. Income taxes free How the business pays the worker. Income taxes free   An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. Income taxes free This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. Income taxes free An independent contractor is often paid a flat fee or on a time and materials basis for the job. Income taxes free However, it is common in some professions, such as law, to pay independent contractors hourly. Income taxes free The extent to which the worker can realize a profit or loss. Income taxes free   An independent contractor can make a profit or loss. Income taxes free Type of relationship. Income taxes free   Facts that show the parties' type of relationship include: Written contracts describing the relationship the parties intended to create. Income taxes free Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. Income taxes free The permanency of the relationship. Income taxes free 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. Income taxes free The extent to which services performed by the worker are a key aspect of the regular business of the company. Income taxes free 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. Income taxes free 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. Income taxes free This would indicate an employer-employee relationship. Income taxes free IRS help. Income taxes free   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. Income taxes free Industry Examples The following examples may help you properly classify your workers. Income taxes free Building and Construction Industry Example 1. Income taxes free Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. Income taxes free She did not advance funds to help him carry on the work. Income taxes free She makes direct payments to the suppliers for all necessary materials. Income taxes free She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. Income taxes free She pays them an hourly rate and exercises almost constant supervision over the work. Income taxes free Jerry is not free to transfer his assistants to other jobs. Income taxes free He may not work on other jobs while working for Wilma. Income taxes free He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. Income taxes free He and his assistants perform personal services for hourly wages. Income taxes free Jerry Jones and his assistants are employees of Wilma White. Income taxes free Example 2. Income taxes free Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. Income taxes free He uses his own tools and performs services in the order designated by the corporation and according to its specifications. Income taxes free The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. Income taxes free He does not have a place of business or hold himself out to perform similar services for others. Income taxes free Either party can end the services at any time. Income taxes free Milton Manning is an employee of the corporation. Income taxes free Example 3. Income taxes free Wallace Black agreed with the Sawdust Co. Income taxes free to supply the construction labor for a group of houses. Income taxes free The company agreed to pay all construction costs. Income taxes free However, he supplies all the tools and equipment. Income taxes free He performs personal services as a carpenter and mechanic for an hourly wage. Income taxes free He also acts as superintendent and foreman and engages other individuals to assist him. Income taxes free The company has the right to select, approve, or discharge any helper. Income taxes free A company representative makes frequent inspections of the construction site. Income taxes free When a house is finished, Wallace is paid a certain percentage of its costs. Income taxes free He is not responsible for faults, defects of construction, or wasteful operation. Income taxes free At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. Income taxes free The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages. Income taxes free Wallace Black and his assistants are employees of the Sawdust Co. Income taxes free Example 4. Income taxes free Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. Income taxes free A signed contract established a flat amount for the services rendered by Bill Plum. Income taxes free Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. Income taxes free He hires his own roofers who are treated as employees for federal employment tax purposes. Income taxes free If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. Income taxes free Bill Plum, doing business as Plum Roofing, is an independent contractor. Income taxes free Example 5. Income taxes free Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. Income taxes free She is to receive $1,280 every 2 weeks for the next 10 weeks. Income taxes free This is not considered payment by the hour. Income taxes free Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. Income taxes free She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. Income taxes free Vera is an independent contractor. Income taxes free Trucking Industry Example. Income taxes free Rose Trucking contracts to deliver material for Forest, Inc. Income taxes free , at $140 per ton. Income taxes free Rose Trucking is not paid for any articles that are not delivered. Income taxes free At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. Income taxes free All operating expenses, including insurance coverage, are paid by Jan Rose. Income taxes free All equipment is owned or rented by Jan and she is responsible for all maintenance. Income taxes free None of the drivers are provided by Forest, Inc. Income taxes free Jan Rose, operating as Rose Trucking, is an independent contractor. Income taxes free Computer Industry Example. Income taxes free Steve Smith, a computer programmer, is laid off when Megabyte, Inc. Income taxes free , downsizes. Income taxes free Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. Income taxes free 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. Income taxes free Megabyte provides Steve with no instructions beyond the specifications for the product itself. Income taxes free 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. Income taxes free Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. Income taxes free Steve works at home and is not expected or allowed to attend meetings of the software development group. Income taxes free Steve is an independent contractor. Income taxes free Automobile Industry Example 1. Income taxes free Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. Income taxes free She works six days a week and is on duty in Bob's showroom on certain assigned days and times. Income taxes free She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Income taxes free Lists of prospective customers belong to the dealer. Income taxes free She is required to develop leads and report results to the sales manager. Income taxes free Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. Income taxes free She is paid a commission and is eligible for prizes and bonuses offered by Bob. Income taxes free Bob also pays the cost of health insurance and group-term life insurance for Donna. Income taxes free Donna is an employee of Bob Blue. Income taxes free Example 2. Income taxes free Sam Sparks performs auto repair services in the repair department of an auto sales company. Income taxes free He works regular hours and is paid on a percentage basis. Income taxes free He has no investment in the repair department. Income taxes free 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. Income taxes free Sam is an employee of the sales company. Income taxes free Example 3. Income taxes free An auto sales agency furnishes space for Helen Bach to perform auto repair services. Income taxes free She provides her own tools, equipment, and supplies. Income taxes free She seeks out business from insurance adjusters and other individuals and does all of the body and paint work that comes to the agency. Income taxes free 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. Income taxes free Helen is an independent contractor and the helpers are her employees. Income taxes free Attorney Example. Income taxes free 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. Income taxes free Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. Income taxes free Donna has a part-time receptionist who also does the bookkeeping. Income taxes free She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. Income taxes free For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. Income taxes free Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. Income taxes free 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. Income taxes free Donna is an independent contractor. Income taxes free Taxicab Driver Example. Income taxes free Tom Spruce rents a cab from Taft Cab Co. Income taxes free for $150 per day. Income taxes free He pays the costs of maintaining and operating the cab. Income taxes free Tom Spruce keeps all fares that he receives from customers. Income taxes free Although he receives the benefit of Taft's two-way radio communication equipment, dispatcher, and advertising, these items benefit both Taft and Tom Spruce. Income taxes free Tom Spruce is an independent contractor. Income taxes free Salesperson To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. Income taxes free 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). Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 3. Income taxes free Employees of Exempt Organizations Many nonprofit organizations are exempt from federal income tax. Income taxes free Although they do not have to pay federal income tax themselves, they must still withhold federal income tax from the pay of their employees. Income taxes free However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees. Income taxes free Section 501(c)(3) organizations. Income taxes free   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. Income taxes free These organizations are usually corporations and are exempt from federal income tax under section 501(a). Income taxes free Social security and Medicare taxes. Income taxes free   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. Income taxes free The organization pays an employee less than $100 in a calendar year. Income taxes free 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. Income taxes free 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. Income taxes free   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. Income taxes free 28 or more in a year. Income taxes free 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. Income taxes free See Members of recognized religious sects opposed to insurance in section 4. Income taxes free FUTA tax. Income taxes free   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. Income taxes free This exemption cannot be waived. Income taxes free Do not file Form 940 to report wages paid by these organizations or pay the tax. Income taxes free Note. Income taxes free 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. Income taxes free Other than section 501(c)(3) organizations. Income taxes free   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. Income taxes free However, these organizations are not exempt from withholding federal income, social security, or Medicare tax from their employees' pay, or from paying FUTA tax. Income taxes free Two special rules for social security, Medicare, and FUTA taxes apply. Income taxes free 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. Income taxes free 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. Income taxes free The above rules do not apply to employees who work for pension plans and other similar organizations described in section 401(a). Income taxes free 4. Income taxes free Religious Exemptions and Special Rules for Ministers Special rules apply to the treatment of ministers for social security and Medicare tax purposes. Income taxes free An exemption from social security and Medicare taxes is available for ministers and certain other religious workers and members of certain recognized religious sects. Income taxes free For more information on getting an exemption, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Income taxes free Ministers. Income taxes free   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Income taxes free 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. Income taxes free   Ministers are employees if they perform services in the exercise of ministry and are subject to your will and control. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free For more information, see Publication 517. Income taxes free Form W-2. Income taxes free   If your minister is an employee, report all taxable compensation as wages in box 1 on Form W-2. Income taxes free Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Publication 15 (Circular E). Income taxes free Do not include a parsonage allowance (excludable housing allowance) in this amount. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free For more information on ministers, see Publication 517. Income taxes free Exemptions for ministers and others. Income taxes free   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. Income taxes free 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. Income taxes free The exemption applies only to qualified services performed for the religious organization. Income taxes free See Revenue Procedure 91-20, 1991-1 C. Income taxes free B. Income taxes free 524, for guidelines to determine whether an organization is a religious order or whether an individual is a member of a religious order. Income taxes free   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. Income taxes free See Publication 517 for more information about claiming an exemption from self-employment tax using Form 4361. Income taxes free Members of recognized religious sects opposed to insurance. Income taxes free   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. Income taxes free 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). Income taxes free If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. Income taxes free Religious opposition based on the teachings of the sect is the only legal basis for the exemption. Income taxes free In addition, your religious sect (or division) must have existed since December 31, 1950. Income taxes free Self-employed. Income taxes free   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. Income taxes free Employees. Income taxes free   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. Income taxes free This applies to partnerships only if each partner is a member of the sect. Income taxes free 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. Income taxes free To get the exemption, the employee must file Form 4029. Income taxes free   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. Income taxes free 5. Income taxes free Wages and Other Compensation Publication 15 (Circular E) provides a general discussion of taxable wages. Income taxes free Publication 15-B discusses fringe benefits. Income taxes free The following topics supplement those discussions. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free See chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Publication 15 (Circular E), for more information. Income taxes free These rules generally apply to temporary work assignments both inside and outside the U. Income taxes free S. Income taxes free 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. Income taxes free 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. Income taxes free Excludable employee achievement awards also are not subject to FUTA tax. Income taxes free Limits. Income taxes free   The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. Income taxes free A higher limit of $1,600 applies to qualified plan awards. Income taxes free Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. Income taxes free 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. Income taxes free   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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free These amounts are reportable on Form W-2. Income taxes free 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. Income taxes free Any amounts that you pay for room and board are not excludable from the recipient's gross income. Income taxes free A qualified scholarship is not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Income taxes free For more information, see Publication 970, Tax Benefits for Education. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free Back Pay Treat back pay as wages in the year paid and withhold and pay employment taxes as required. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free Amounts that represent a return to the employee of amounts previously subject to tax are not taxable and are not subject to withholding. Income taxes free 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. Income taxes free It does not matter whether the separation is temporary or permanent. Income taxes free 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. Income taxes free To qualify as supplemental unemployment benefits for these purposes, the benefits must meet the following requirements. Income taxes free Benefits are paid only to unemployed former employees who are laid off by the employer. Income taxes free Eligibility for benefits depends on meeting prescribed conditions after termination. Income taxes free 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. Income taxes free The right to benefits does not accrue until a prescribed period after termination. Income taxes free Benefits are not attributable to the performance of particular services. Income taxes free No employee has any right to the benefits until qualified and eligible to receive benefits. Income taxes free Benefits may not be paid in a lump sum. Income taxes free Withholding on taxable supplemental unemployment benefits must be based on the withholding certificate (Form W-4) that the employee gave to you. Income taxes free Golden Parachute Payments A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. Income taxes free 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. Income taxes free Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. Income taxes free See Regulations section 1. Income taxes free 280G-1 for more information. Income taxes free No deduction is allowed to the corporation for any excess parachute payment. Income taxes free To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. Income taxes free A parachute payment for purposes of section 280G is any payment that meets all of the following. Income taxes free The payment is in the nature of compensation. Income taxes free The payment is to, or for the benefit of, a disqualified individual. Income taxes free 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. Income taxes free 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. Income taxes free The payment has an aggregate present value of at least three times the individual's base amount. Income taxes free The base amount is the average annual compensation for service includible in the individual's gross income over the most recent 5 taxable years. Income taxes free An excess parachute payment amount is the excess of any parachute payment over the base amount. Income taxes free For more information, see Regulations section 1. Income taxes free 280G-1. Income taxes free The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. Income taxes free If the recipient is an employee, the 20% excise tax is to be withheld by the corporation. Income taxes free Example. Income taxes free An officer of a corporation receives a golden parachute payment of $400,000. Income taxes free This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. Income taxes free The excess parachute payment is $300,000 ($400,000 minus $100,000). Income taxes free The corporation cannot deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). Income taxes free Reporting golden parachute payments. Income taxes free   Golden parachute payments to employees must be reported on Form W-2. Income taxes free See the General Instructions for Forms W-2 and W-3 for details. Income taxes free For nonemployee reporting of these payments, see Box 7. Income taxes free Nonemployee Compensation in the Instructions for Form 1099-MISC. Income taxes free Exempt payments. Income taxes free   Payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules. Income taxes free See section 280G(b)(5) and (6) for more information. Income taxes free 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. Income taxes free This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. Income taxes free This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. Income taxes free Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). Income taxes free The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. Income taxes free You can get these rates by calling 1-800-829-4933 or by visiting IRS. Income taxes free gov. Income taxes free For more information, see section 7872 and its related regulations. Income taxes free 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. Income taxes free 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. Income taxes free Do not include these amounts in the income of the transferors. Income taxes free These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies. Income taxes free 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. Income taxes free 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. Income taxes free Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. Income taxes free 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. Income taxes free Specific rules for reporting are provided in the instructions to the forms. Income taxes free The provisions do not affect the application or reporting of social security, Medicare, or FUTA taxes. Income taxes free 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. Income taxes free For more information about nonqualified deferred compensation plans, see Regulations sections 1. Income taxes free 409A-1 through 1. Income taxes free 409A-6. Income taxes free Notice 2008-113 provides guidance on the correction of certain operation failures of a NQDC plan. Income taxes free Notice 2008-113, 2008-51 I. Income taxes free R. Income taxes free B. Income taxes free 1305, is available at www. Income taxes free irs. Income taxes free gov/irb/2008-51_IRB/ar12. Income taxes free html. Income taxes free Also see Notice 2010-6, 2010-3 I. Income taxes free R. Income taxes free B. Income taxes free 275, available at www. Income taxes free irs. Income taxes free gov/irb/2010-03_IRB/ar08. Income taxes free html and Notice 2010-80, 2010-51 I. Income taxes free R. Income taxes free B. Income taxes free 853, available at www. Income taxes free irs. Income taxes free gov/irb/2010-51_IRB/ar08. Income taxes free html. Income taxes free Social security, Medicare, and FUTA taxes. Income taxes free   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. Income taxes free   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. Income taxes free 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. Income taxes free You will have to determine later, when the amount is reasonably ascertainable, whether any additional taxes are required. Income taxes free 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. Income taxes free For more information, see Regulations sections 31. Income taxes free 3121(v)(2)-1 and 31. Income taxes free 3306(r)(2)-1. Income taxes free 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. Income taxes free 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. Income taxes free See Regulations section 31. Income taxes free 3121(a)(5)-2 for the definition of a salary reduction agreement. Income taxes free 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. Income taxes free These excluded amounts are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. Income taxes free However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. Income taxes free See Publication 560 for more information about SEPs. Income taxes free Salary reduction simplified employee pensions (SARSEP) repealed. Income taxes free   You may not establish a SARSEP after 1996. Income taxes free However, SARSEPs established before January 1, 1997, may continue to receive contributions. Income taxes free 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. Income taxes free An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. Income taxes free However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. Income taxes free For more information about SIMPLE retirement plans, see Publication 560. Income taxes free 6. Income taxes free Sick Pay Reporting The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014. Income taxes free Information about this change will be included in the revision of Publication 15-A that is expected to post to IRS. Income taxes free gov in December 2014. Income taxes free Special rules apply to the reporting of sick pay payments to employees. Income taxes free How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company. Income taxes free Sick pay is usually subject to social security, Medicare, and FUTA taxes. Income taxes free For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. Income taxes free Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. Income taxes free 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. Income taxes free It may be paid by either the employer or a third party, such as an insurance company. Income taxes free Sick pay includes both short- and long-term benefits. Income taxes free It is often expressed as a percentage of the employee's regular wages. Income taxes free Payments That Are Not Sick Pay Sick pay does not include the following payments. Income taxes free Disability retirement payments. Income taxes free Disability retirement payments are not sick pay and are not discussed in this section. Income taxes free Those payments are subject to the rules for federal income tax withholding from pensions and annuities. Income taxes free See section 8. Income taxes free Workers' compensation. Income taxes free 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. Income taxes free But see Payments in the nature of workers' compensation—public employees next. Income taxes free Payments in the nature of workers' compensation—public employees. Income taxes free 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. Income taxes free 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. Income taxes free Payments under a statute in the nature of a workers' compensation law are not sick pay and are not subject to employment taxes. Income taxes free For more information, see Regulations section 31. Income taxes free 3121(a)(2)-1. Income taxes free Medical expense payments. Income taxes free 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. Income taxes free Payments unrelated to absence from work. Income taxes free Accident or health insurance payments unrelated to absence from work are not sick pay and are not subject to employment taxes. Income taxes free 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. Income taxes free Example. Income taxes free Donald was injured in a car accident and lost an eye. Income taxes free Under a policy paid for by Donald's employer, Delta Insurance Co. Income taxes free paid Donald $20,000 as compensation for the loss of his eye. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free Definition of employer. Income taxes free   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. Income taxes free Note. Income taxes free 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). Income taxes free Third-Party Payers of Sick Pay Employer's agent. Income taxes free   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. Income taxes free A third party may be your agent even if the third party is responsible for determining which employees are eligible to receive payments. Income taxes free For example, if a third party provides administrative services only, the third party is your agent. Income taxes free 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. Income taxes free Whether an insurance company or other third party is your agent depends on the terms of their agreement with you. Income taxes free   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. Income taxes free This responsibility remains with you. Income taxes free However, under an exception to this rule, the parties may enter into an agreement that makes the third-party agent responsible for employment taxes. Income taxes free 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. Income taxes free Third party not employer's agent. Income taxes free   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. Income taxes free   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. Income taxes free This liability is transferred if the third party takes the following steps. Income taxes free Withholds the employee social security and Medicare taxes from the sick pay payments. Income taxes free Makes timely deposits of the employee social security and Medicare taxes. Income taxes free Notifies the employer for whom the employee normally works of the payments on which employee taxes were withheld and deposited. Income taxes free 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. Income taxes free 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. Income taxes free 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. Income taxes free For multi-employer plans, see the special rule discussed next. Income taxes free Multi-employer plan timing rule. Income taxes free   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. Income taxes free If the third-party insurer making the payments complies wi
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