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