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1040 easy Publication 957 - Main Content Table of Contents 1. 1040 easy What is Back Pay?Reporting Back Pay Back Pay Under a Statute Nonstatutory Back Pay Format for Report to the SSA Questions 2. 1040 easy Special Wage PaymentsReporting Special Wage Payments Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments Nonqualified Deferred Compensation and Section 457 Plans Additional Reporting Examples for Nonqualified Deferred Compensation (NQDC) PlansSpecial rule for box 11 of Form W-2 (distributions and deferral in the same year). 1040 easy 1. 1040 easy What is Back Pay? Back pay is pay received in a tax year(s) for actual or deemed employment in an earlier tax year(s). 1040 easy For social security coverage and benefit purposes, all back pay, whether or not under a statute, is wages if it is payment for covered employment. 1040 easy Damages for personal injury, interest, penalties, and legal fees included with back pay awards are not wages. 1040 easy Report all back pay. 1040 easy However, the tax year(s) for which back pay is credited as wages for social security purposes is different if it is awarded under a statute. 1040 easy See Back Pay Under a Statute , later, for more information. 1040 easy Reporting Back Pay The Internal Revenue Service (IRS) and the SSA consider back pay awards to be wages. 1040 easy However, for income tax purposes, the IRS treats all back pay as wages in the year paid. 1040 easy Employers should use Form W-2, Wage and Tax Statement, or electronic wage reports to report back pay as wages in the year they actually pay the employee. 1040 easy The SSA no longer accepts reports on tapes, cartridges, and diskettes. 1040 easy Example. 1040 easy In 2012, Terry Morris earned wages of $50,000. 1040 easy In the same year, she received $100,000 in settlement of a back pay case against her employer that covered the periods January 2007 through December 2011. 1040 easy Her employer properly reflected social security wages of $110,100 and Medicare wages of $150,000 on her 2012 Form W-2. 1040 easy However, if an employer did not include back pay wages on a previously filed Form W-2, magnetic media, or electronically filed wage report, the employer should prepare a wage correction report, Form W-2c, Corrected Wage and Tax Statement, or electronically filed report, to add the back pay award to the wages previously reported. 1040 easy Example. 1040 easy If, in the above example, Terry Morris' employer had prepared her 2012 Form W-2 reporting social security and Medicare wages of only $50,000 each, the employer would have to correct that report. 1040 easy A Form W-2c correcting the 2012 Form W-2 would show previously reported social security and Medicare wages of $50,000 and the correct amount of $110,100 for social security wages and $150,000 for Medicare wages. 1040 easy SSA treatment of back pay under a statute. 1040 easy   Under the law, the SSA credits back pay awarded under a statute to an individual's earnings record in the period(s) the wages should have been paid. 1040 easy This is important because wages not credited to the proper year may result in lower social security benefits or failure to meet the requirements for benefits. 1040 easy   However, back pay under statute payments will remain posted to the employee's social security earnings record in the year reported on Form W-2 (or Form W-2c) unless the employer or employee notifies the SSA (in a separate, special report) of the back pay under a statute payment. 1040 easy Then, the SSA can allocate the statutory back pay to the appropriate periods. 1040 easy   If a back pay award is not made under a statute, the SSA credits back pay as wages in the year paid. 1040 easy    If employers do notify the SSA of this payment, they should prepare a special report (with the information noted below) and send it to: Social Security Administration Attn: CPS Back Pay Staff 7-B-15 SWT 1500 Woodlawn Drive Baltimore, MD 21241-0001 Be sure to send this special report to the above address because the SSA handles it separately from other reports. 1040 easy    If you paid the back pay award in the same tax year to which it applies, report the wages on that year's Form W-2. 1040 easy No further action is necessary. 1040 easy Example. 1040 easy In 2012, Judy Wilson received a salary of $30,000 and a back pay under statute award of $2,000 for the period January through June 2012. 1040 easy Her employer properly reported wages of $32,000 for social security and Medicare on her 2012 Form W-2. 1040 easy No further action is necessary. 1040 easy Information the SSA needs to properly credit back pay under a statute (special report). 1040 easy   After you complete the special report, you or the employee should send it to the SSA when or after you submit the Form W-2 (on paper or electronically) to the SSA for the year you pay the statutory back pay to the employee. 1040 easy There is no statute of limitations on the filing of the special report to enable the SSA to allocate the wages. 1040 easy The special report must include the following information. 1040 easy The employer's name, address, and employer identification number (EIN). 1040 easy A signed statement citing the federal or state statute under which the payment was made. 1040 easy If the statute is not identified, the SSA will assume the payment was not under a statute and will not allocate to earlier period(s). 1040 easy The name and telephone number of a person to contact. 1040 easy The SSA may have additional questions concerning the back pay case or the individual employee's information. 1040 easy A list of employees receiving the payment and the following information for each employee: The tax year you paid and reported the back pay. 1040 easy The employee's social security number (SSN). 1040 easy The employee's name (as shown on his or her social security card). 1040 easy The amount of the back pay award excluding any amounts specifically designated otherwise, for example, damages for personal injury, interest, penalties, and legal fees. 1040 easy The period(s) the back pay award covers (beginning and ending dates—month and year). 1040 easy The other wages paid subject to social security and/or Medicare taxes and reported in the same year as the back pay award (if none, show zero)*. 1040 easy Do not include the back pay award shown in that wage report. 1040 easy If you originally submitted the report under an establishment number, show that number and the amount of money that is to remain under that establishment number. 1040 easy The amount to allocate to each reporting period*. 1040 easy This includes any amount you want allocated (if applicable) to the tax year of the award payment. 1040 easy If you do not give the SSA specific amounts to allocate, the SSA does the allocation by dividing the back pay award by the number of months or years covered by the award. 1040 easy *Note. 1040 easy   For periods before January 1, 1978 (before January 1, 1981, for state and local government employers covered by a Section 218 agreement), show the wage amounts for each calendar quarter ending March 31, June 30, September 30, and December 31. 1040 easy For all tax years, show and identify the social security and/or Medicare Qualified Government Employment (MQGE) wages (where applicable) separately. 1040 easy MQGE is applicable to federal employees beginning in 1983, and for certain state and local government employees beginning in 1986. 1040 easy For tax years 1991 and later, list the social security and Medicare wages separately. 1040 easy If you originally reported the individual's wages under an establishment or payroll record unit number, show the amount of wages to remain in the award year for that number and furnish that number to the SSA along with the EIN. 1040 easy Back Pay Under a Statute Back pay awarded under a statute is a payment by an employer following an award, determination, or agreement approved or sanctioned by a court or government agency responsible for enforcing a federal or state statute that protects an employee's right to employment or wages. 1040 easy Examples of pertinent statutes include: Age Discrimination in Employment Act, Americans with Disabilities Act, Equal Pay Act, Fair Labor Standards Act, National Labor Relations Act, State minimum wage laws, and State statutes that protect rights to employment and wages. 1040 easy Payments based on laws that have a similar effect to those listed above also may qualify as payments made under a statute. 1040 easy Back pay awards, under some of the statutes listed above, may be compensation for personal injury and not pay for employment. 1040 easy Such awards are not wages for social security coverage purposes. 1040 easy If a court-approved or sanctioned settlement agreement states that the agreement is not an admission of discrimination, liability, or act of wrongdoing, the statement does not change the nature of a back pay award. 1040 easy The payments made in such a settlement may still be back pay and wages under the rules discussed here. 1040 easy Nonstatutory Back Pay A payment for back wages negotiated between an employer and employee without an award, determination, or agreement approved or sanctioned by a court or government agency, the payment is not made under a statute. 1040 easy Delayed wage payments and retroactive pay increases resulting from union negotiation or payments under local ordinances or regulations are back pay and are wages. 1040 easy However, they are not payments made under a statute. 1040 easy If you are uncertain whether the back pay award was under a qualified statute, you may need to contact your personnel department or legal counsel or the attorney who filed the suit. 1040 easy Format for Report to the SSA Use the format shown in Table 1, later, to send the SSA the information needed to properly credit back pay under a statute. 1040 easy In a cover letter, include: Name and address of the employer, Statute under which you paid the back pay, Name and telephone number of the employer contact, and Signature of the reporting official. 1040 easy Under certain circumstances, back pay may be a special wage payment and excluded from wages counted under the social security earnings test. 1040 easy If you pay back pay to an employee age 61 or older, report it to the SSA in accordance with this section. 1040 easy Read Special Wage Payments, later, for additional reporting instructions. 1040 easy Questions If you have questions concerning back pay under a statute, call the SSA at 1-800-772-6270. 1040 easy Exception. 1040 easy   If you are a state or local government employer who was covered by an agreement under Section 218 of the Social Security Act before January 1, 1987, and you paid a back pay award before January 1, 1987, which you did not report to the SSA, contact your state Social Security Administrator's office. 1040 easy Table 1. 1040 easy Format for Report (Under Covering Letter) to Request SSA to Allocate Back Pay Under Statute Wages Employer's EIN: xx-xxxxxxx Tax Year in Which Award Payment Was Paid: 2012 (1) SSN and Employee Name (2)1 Award Amount and Period(s) (3)2,3 Other Soc. 1040 easy Sec. 1040 easy /Med. 1040 easy Wages Paid In Award Year (4)3 Allocation     Soc. 1040 easy Sec. 1040 easy Med. 1040 easy /MQGE Year Soc. 1040 easy Sec. 1040 easy Med. 1040 easy /MQGE xxx-xx-xxxx HELEN T. 1040 easy SMITH $100,000 1/2009 - 12/2012 $40,000 $40,000 2009 2010 2011 2012 $20,000 25,000 27,000 28,000 $20,000 25,000 27,000 28,000 xxx-xx-xxxx SAM W. 1040 easy EVANS 30,000 7/89-12/91 -0- -0- 1989 1990 1991   6,000 12,000 12,000 xxx-xx-xxxx ROLAND S. 1040 easy ADAMS 15,000 7/80-12/81 -0- -0- 9/80 12/80 1981 3,500 3,500 8,000   1Exclude amounts specifically designated as damages, penalties, etc. 1040 easy  2Exclude the amount of back pay, if any, included in that amount. 1040 easy  3For periods before January 1, 1978 (and for state and local government (Section 218) employers before January 1, 1981), show the wage amounts by calendar quarters. 1040 easy The social security and/or Medicare Qualified Government Employment (MQGE) wages (where applicable) must be shown separately FOR ALL YEARS. 1040 easy (Wages subject ONLY to MQGE would be shown in the Medicare/MQGE column; no wages would be shown in the Soc. 1040 easy Sec. 1040 easy column. 1040 easy ) For tax years 1991 and later, the social security and Medicare wages must be listed separately. 1040 easy Explanation of examples. 1040 easy Helen T. 1040 easy Smith–The back pay award, excluding interest, was $100,000 for the periods 1/2009-12/2012. 1040 easy In 2012, this employee was also paid $40,000 in other wages. 1040 easy (Her Form W-2 for 2012 reported $110,100 for social security and $140,000 for Medicare. 1040 easy The SSA allocation will result in adjusted posted wages of $68,000 for social security and $68,000 for Medicare for 2012. 1040 easy ) Sam W. 1040 easy Evans–The back pay award was $30,000 for the periods 7/89-12/91. 1040 easy This employee was hired in 1989 and was subject to MQGE only. 1040 easy He was no longer employed by this governmental employer in 2012. 1040 easy (His Form W-2 for 2012 reported $30,000 for social security and $30,000 for Medicare. 1040 easy After the SSA allocation, he will not have any net posted wages for 2012. 1040 easy ) Roland S. 1040 easy Adams–The back pay award was $15,000 for the periods 7/80-12/81. 1040 easy He was no longer employed by this state and local government (Section 218) employer in 2012. 1040 easy (His Form W-2 for 2012 reported $15,000 for social security and $15,000 for Medicare; after the SSA allocation, he will not have any net posted wages for 2012. 1040 easy ) If the state Social Security Administrator's office needs more information, they can contact the SSA at the following address:   Social Security Administration Office of Income Security Programs Office of Earnings and Program Integrity Policy 6401 Security Boulevard 2506 OPS Baltimore, MD 21235 2. 1040 easy Special Wage Payments A special wage payment (SWP) is an amount paid by an employer to an employee (or former employee) for services performed in a prior year. 1040 easy Employers should report to the SSA special wage payments made to employees and former employees who are recipients of social security retirement benefits. 1040 easy Special wage payments made to a retired employee receiving social security or to an employee who continues to work while receiving social security benefits may reduce the benefits the individual receives if not reported to the SSA. 1040 easy Special wage payments may include (but are not limited to): Accumulated sick and vacation pay, Back pay, Bonuses, Deferred compensation, Payments because of retirement, Sales commissions, Severance pay, and Stock options. 1040 easy Note. 1040 easy Payments made after retirement that are part of the normal payroll cycle should not be routinely reported as special wage payments. 1040 easy Earnings Test. 1040 easy   Benefits paid to a social security beneficiary under full retirement age may be reduced if the beneficiary continues to work. 1040 easy The SSA uses the information in boxes 1, 3, and 5 of Form W-2 to determine the beneficiary's current year earnings. 1040 easy Special wage payments, which are for services performed in a prior year, will increase the current year earnings on Form W-2, which also may result in a reduction in the beneficiary's benefits. 1040 easy If a benefit is reduced because of a special wage payment, the beneficiary must get documentation from the employer before the SSA can restore the deducted portion. 1040 easy Therefore, employer reports of special wage payments help prevent incorrect benefit reductions. 1040 easy Reporting Special Wage Payments Employers must report special wage payments for income tax purposes and social security and Medicare taxes in the year received. 1040 easy Report income, social security, and/or Medicare taxes for special wage payments on Form W-2. 1040 easy See Nonqualified Deferred Compensation and Section 457 Plans, later, for reporting nonqualified deferred compensation plan deferrals and payments on Form W-2. 1040 easy In addition, report to the SSA special wage payments made during the reporting year to retired employees and employees who continue to work while receiving social security benefits. 1040 easy Submit reports after the close of the tax year. 1040 easy To avoid delays in processing, submit reports in time to reach the SSA by April 1. 1040 easy Use one of the following reporting methods. 1040 easy Electronic reporting. 1040 easy   Special wage payment files can be sent electronically by logging onto Business Services Online (BSO) via the socialsecurity. 1040 easy gov website. 1040 easy BSO enables organizations and authorized individuals to conduct business with and submit confidential information to the Social Security Administration. 1040 easy You must register to use this website. 1040 easy The web address is www. 1040 easy socialsecurity. 1040 easy gov/bso/bsowelcome. 1040 easy htm. 1040 easy   Use the specifications and record layout shown in  Table 2, later. 1040 easy Only one file at a time may be submitted. 1040 easy If your file is large (>10MB), or you have a slow internet connection, the transmission will be faster if the file is zipped. 1040 easy A zipped file contains a file that has been compressed to reduce its file size. 1040 easy WinZip and PKZIP are examples of acceptable compression packages. 1040 easy   Electronic submissions not meeting the specifications in Table 2 will be rejected. 1040 easy Paper listing. 1040 easy   A paper listing can be used to report special wage payments to several employees. 1040 easy Use the format shown in Table 3, later. 1040 easy Submit paper listings to the local SSA office nearest your place of business. 1040 easy Visit www. 1040 easy socialsecurity. 1040 easy gov/locator to find a Social Security office near you. 1040 easy Form SSA-131. 1040 easy   Use Form SSA-131 to report special wage payments made to an employee. 1040 easy Also use this form to report nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in box 11 of Form W-2. 1040 easy    This image is too large to be displayed in the current screen. 1040 easy Please click the link to view the image. 1040 easy Publication 957 Reporting Back Pay to the Social Security Administration Instructions for Form SSA–131   EMPLOYER INSTRUCTIONS FOR COMPLETING SPECIAL WAGE PAYMENT FORM 1. 1040 easy Provide the EIN that was used or will be used to report the employee's wages on the Form W-2. 1040 easy 2. 1040 easy Enter the date the employee retired. 1040 easy Enter “Not Retired” if the employee has not retired. 1040 easy 3. 1040 easy Enter the date that the employee last performed services; was not expected to return to work; and was not subject to recall to render additional services. 1040 easy This date should be the same as or earlier than the date in item “2”. 1040 easy Enter “Not Retired” if the employee has not retired. 1040 easy 4. 1040 easy Enter the wages that were paid to the employee in the tax year that were for services that were performed in years prior to the tax year or that were paid on account of retirement. 1040 easy  Examples (not all inclusive) of payments to be included: Payments in lieu of vacation that were earned in a year prior to the tax year. 1040 easy Accumulated sick payments which were paid in a lump sum based on “retirement” as the sole condition of payment. 1040 easy Accumulated sick payments paid at or after the date in item 3, which were earned in a year prior to the tax year. 1040 easy Payments “on account of retirement”–dismissal, severance or termination pay paid because of retirement. 1040 easy Bonuses which are paid pursuant to a prior contract, agreement or promise causing the employee to expect such payments regularly; or announced to induce the employee to work more steadily, rapidly or efficiently or to remain with the employer. 1040 easy Stock Options. 1040 easy   Do not include in item “4” payments: For annual, sick, holiday, or vacation pay if used (absence from work) prior to the date of retirement (earlier of items “2” or “3”). 1040 easy That were reported or will be reported under “Nonqualified Plans” on the Form W-2. 1040 easy That were deducted from the employee's wages and paid to a deferred compensation plan (e. 1040 easy g. 1040 easy , 401k). 1040 easy Employees health and dental plan benefits (non-covered/non-taxable for Social Security Wages). 1040 easy Bonuses earned and paid in the tax year. 1040 easy 5. 1040 easy Check whether payments listed in item 4 will be made for years after the tax year. 1040 easy If yes, please show the amounts and years in which these will be paid, if known. 1040 easy 6. 1040 easy Nonqualified deferred compensation and section 457 plans only. 1040 easy If you were unable to report nonqualified deferred compensation or section 457 plan payments and deferrals (contributions) on Form W-2 because both payments and deferrals occurred during the year, show the amount of wages earned by the employee during the tax year. 1040 easy Generally, the wages earned will be the compensation reported in block 1 of Form W-2 less payments from a nonqualified deferred compensation (or 457) plan, but including any amounts deferred under the plan during the tax year (See IRS Publication 957). 1040 easy Paperwork/Privacy Act Notice: This report is authorized by regulation 20 CFR 404. 1040 easy 702. 1040 easy The information that you provide will be used in making a determination regarding the amount of Social Security benefits payable to the above named individual. 1040 easy While your response is voluntary, if you do not respond we may not be able to make a correct determination regarding the amount of Social Security benefits payable to the above named individual for the year in question. 1040 easy We may also use the information you give us when we match records by computer. 1040 easy Matching programs compare our records with those of other Federal, State, or local government agencies. 1040 easy Many agencies may use matching programs to find or prove that a person qualifies for benefits paid by the Federal Government. 1040 easy The law allows us to do this even if you do not agree to it. 1040 easy Explanations about these and other reasons why information you provide us may be used or given out are available in Social Security Offices. 1040 easy If you want to learn more about this, contact any Social Security Office. 1040 easy The Paperwork Reduction Act: This information collection meets the clearance requirements of 44 U. 1040 easy S. 1040 easy C. 1040 easy §3507, as amended by Section 2 of the Paperwork Reduction Act of 1995. 1040 easy You are not required to answer these questions unless we display a valid Office of Management and Budget control number. 1040 easy We estimate that it will take you about 20 minutes to read the instructions, gather the necessary facts, and answer the questions. 1040 easy Form SSA-131 (8-2001) EF (06-2002)   Submit Form SSA-131 to the SSA office nearest your place of business. 1040 easy Or, the employee can submit it to the SSA office handling the claim. 1040 easy You or the employee must submit this form before the SSA can exclude the special wage payments for purposes of the earnings test. 1040 easy If reporting on more than one employee, complete a separate Form SSA-131 for each employee or use the paper listing format (except for reporting nonqualified and section 457 plan deferrals and payments) in Table 3. 1040 easy Do not report payments from nonqualified deferred compensation or section 457 plans that were reported in box 11 of Form W-2. 1040 easy Use Form SSA-131 if deferrals to and payments from nonqualified or section 457 plans occurred during the tax year. 1040 easy Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments A nonstatutory (nonqualified) option to purchase stock which is exercised in a year after the year in which the option was earned is a special wage payment. 1040 easy It should not count for the social security earnings test. 1040 easy Nonstatutory (nonqualified) options exercised as special wage payments by retired employees or employees who continue to work while receiving social security benefits should be reported by employers using the above reporting methods. 1040 easy Nonqualified Deferred Compensation and Section 457 Plans A nonqualified deferred compensation plan is a plan or arrangement established and maintained by an employer for one or more of its employees that provides for the deferral of compensation, but does not meet the requirements for a tax-qualified deferred compensation plan. 1040 easy For social security and Medicare purposes, deferred compensation plans for employees of state and local governments (section 457 plans) are treated the same as nonqualified plans. 1040 easy Nonqualified and section 457 plans are reported differently than other special wage payments. 1040 easy See Reporting Amounts Deferred to Nonqualified and Section 457 Plans below for specific instructions. 1040 easy Reporting Amounts Deferred to Nonqualified and Section 457 Plans Generally, when the related services are performed, nonqualified deferred compensation is subject to social security and Medicare tax when deferred. 1040 easy However, if nonqualified and section 457 plans contain provisions that delay the employee's right to receive payments from the plan, a period of substantial risk of forfeiture exists. 1040 easy The plans' deferrals, or contributions, are not subject to social security and Medicare taxes until the period of substantial risk of forfeiture ends. 1040 easy No risk of forfeiture. 1040 easy   If there is no risk of forfeiture, report wage amounts deferred to a nonqualified deferred compensation or section 457 plan in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. 1040 easy Example. 1040 easy Company X's nonqualified deferred compensation plan allows the deferral of up to $20,000 of employee salaries each year. 1040 easy The plan has no risk of forfeiture. 1040 easy In 2012, Employee A defers $20,000 to the plan from a total salary of $200,000. 1040 easy Form W-2 Completion Amount Box 1 $200,000 Box 3* 110,100 Box 5 200,000 *Wage base maximum for tax year 2012 Risk of forfeiture lapses before retirement. 1040 easy   If the substantial risk of forfeiture lapses before the employee retires, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. 1040 easy The accumulated deferrals are reported along with any other social security and Medicare wages earned during the year. 1040 easy   Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. 1040 easy If the employee continues working, future deferrals are social security and Medicare wages when they are earned. 1040 easy    Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services. 1040 easy Risk of forfeiture lapses at retirement. 1040 easy   When an employee's right to a payment is contingent upon working until retirement, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, as social security and/or Medicare wages in the year of retirement. 1040 easy Add the amount to other wages paid in that year, and enter in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. 1040 easy   Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. 1040 easy    Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services. 1040 easy Example—risk of forfeiture. 1040 easy At the end of the risk-of-forfeiture period for Company Y's nonqualified deferred compensation plan, Employee B's accumulated deferrals, plus interest earned by the plan, are $120,000, not including B's $20,000 deferral for this year. 1040 easy B's wages, including this year's deferred amount, are $80,000. 1040 easy Form W-2 Completion Amount Box 1 $60,000 Box 3* 110,100 Box 5 200,000 Box 11 120,000 *Wage base maximum for tax year 2012 Reporting Payments From Nonqualified and Nongovernmental Section 457 Plans When an employee or former employee retires and begins receiving payments (distributions) from a nonqualified or nongovernmental section 457 plan, report the payments in boxes 1 and 11 of Form W-2. 1040 easy Report payments (distributions) from a governmental section 457 plan on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1040 easy Example. 1040 easy Employee D retired from the XYZ company and began receiving social security benefits. 1040 easy XYZ paid D a $12,000 bonus upon retirement for sales made in a prior year, and D received $25,000 in payments from XYZ's nonqualified deferred compensation plan. 1040 easy In addition, D agreed to continue performing services for XYZ, but on a part-time basis for wages of $15,000 per year. 1040 easy D made no deferrals to the nonqualified plan this year. 1040 easy Form W-2 Completion Amount Box 1 $52,000 Box 3 27,000 Box 5 27,000 Box 11 25,000 Report the $12,000 bonus to the SSA using electronic reporting, a paper listing, or Form SSA-131. 1040 easy For more information, see Reporting Special Wage Payments , earlier. 1040 easy Reporting Payments and Deferrals in the Same Year Do not complete box 11 when payments (distributions) are made from a nonqualified plan and deferrals are reported in boxes 3 and/or 5 of Form W-2 (including current year deferrals). 1040 easy Report to the SSA on Form SSA-131 the total amount the employee earned during the tax year. 1040 easy Normally, the amount earned is the amount reported in box 1 of Form W-2 less payments from a nonqualified or section 457 plan, but including any amounts deferred under the plan during the tax year. 1040 easy See Form SSA-131 and its instructions, earlier. 1040 easy Example. 1040 easy Employee K retired this year from Company XYZ and began receiving social security benefits. 1040 easy During the year he earned wages of $50,000 and deferred $35,000 of the wages into the company's nonqualified deferred compensation plan. 1040 easy K also received $75,000 in payments from the company's nonqualified plan. 1040 easy Form W-2 Completion Amount Special Wage Payment $75,000 Wages 50,000 Minus: deferral 35,000 Total reported in Box 1 $90,000     Wages including deferral reported in  Boxes 3 and 5 $50,000     Leave Box 11 blank. 1040 easy File Form SSA-131 -0-     Form SSA-131 Completion Amount from Box 1 of Form W-2 $90,000 Minus: payments from a nonqualified plan 75,000 Plus: amounts deferred into the plan during the year 35,000 Total wages earned for purposes of Form SSA-131 (item 6) $50,000 Additional Reporting Examples for Nonqualified Deferred Compensation (NQDC) Plans It is not necessary to show amounts deferred during the year under an NQDC plan subject to section 409A. 1040 easy If you report section 409A deferrals, show the amount in box 12 of Form W-2 using code Y. 1040 easy For more information, see Notice 2008-115, 2008-52 I. 1040 easy R. 1040 easy B. 1040 easy 1367, available at www. 1040 easy irs. 1040 easy gov/irb/2008-52_IRB/ar10. 1040 easy html. 1040 easy Special reporting rules apply when an NQDC plan is not compliant with section 409A (when there has been a “plan failure”). 1040 easy Income included under section 409A from an NQDC plan is reported in box 1 and box 12 of Form W-2 using code Z. 1040 easy See Notice 2008-115. 1040 easy The following examples use small dollar amounts for illustrative purposes. 1040 easy However, the amount reported in box 3 of Form W-2 is always limited by the social security earnings wage base (for example, $110,100 for 2012). 1040 easy The term “vested” in the following examples means that the amount deferred is not subject to a substantial risk of forfeiture. 1040 easy Conversely, the term “not vested” means that the amount deferred is subject to a substantial risk of forfeiture. 1040 easy The examples assume that the NQDC plan is in compliance with section 409A, and that amounts deferred under the plan are not includible in gross income as they are deferred. 1040 easy For purposes of the examples, it is assumed that the regular pay of the employee is remuneration for employment and wages for employment tax purposes except to the extent the deferral of a portion of the regular pay results in a reduction in wages. 1040 easy Example 1: Deferral that is immediately vested (no substantial risk of forfeiture) with no distributions and no vesting of prior-year deferrals. 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into her employer’s NQDC plan. 1040 easy The deferral of $20 was vested upon deferral and there was an employer match of $10 under the plan, which was also vested. 1040 easy Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10. 1040 easy Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 vested deferral) $180 Box 3 ($200 Regular pay plus $10 Employer match, vested) 210 Box 5 ($200 Regular pay plus $10 Employer match, vested) 210 Box 11 -0- Example 2: Deferral with delayed vesting (substantial risk of forfeiture) of employee and employer portions (no distributions and no vesting of prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s nonqualified deferred compensation plan. 1040 easy The deferral of $20 was not vested upon deferral, and there was an employer match of $10 under the plan, which was also not vested. 1040 easy Regular pay = $200; Deferral, not vested = $20; Employer match, not vested = $10. 1040 easy Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 Deferral, not vested) $180 Box 3 ($200 Regular pay minus $20 Deferral, not vested) 180 Box 5 ($200 Regular pay minus $20 Deferral, not vested) 180 Box 11 -0- Example 3: Deferral that is immediately vested with prior-year deferrals and investment earnings on the prior-year deferrals that are now vesting (no distributions). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s nonqualified deferred compensation plan. 1040 easy The deferral of $20 was vested upon deferral. 1040 easy During the year, $100 of prior-year deferrals and $15 of investment earnings on the $100 of prior-year deferrals became vested. 1040 easy Regular pay = $200; Deferral, vested = $20; Vesting of prior-year deferrals = $100; Vesting of investment earnings on $100 of prior-year deferral = $15. 1040 easy Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 Deferral, vested) $180 Box 3 ($200 Regular pay plus $100 vested prior-year deferral plus $15 earnings on deferral) 315 Box 5 ($200 Regular pay plus $100 vested prior-year deferral plus $15 vested investment earnings on prior year deferral) 315 Box 11 ($100 vested prior-year deferral plus $15 earnings) 115 Example 4: No deferrals but there are distributions (no vesting of prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $100, and the employee deferred no pay into the employer’s NQDC plan. 1040 easy There was no vesting of prior-year deferrals under the plan. 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $100; Distribution = $50. 1040 easy Form W-2 Completion Amount Box 1 ($100 Regular pay plus $50 Distribution) $150 Box 3 ($100 Regular pay ) 100 Box 5 ($100 Regular pay) 100 Box 11 ($50 Distribution) 50 Special rule for box 11 of Form W-2 (distributions and deferral in the same year). 1040 easy   If, in the same year, there are NQDC distributions and there are deferrals that are reportable in boxes 3 and/or 5 (current or prior-year deferrals) of Form W-2, do not complete box 11. 1040 easy Instead, report on Form SSA-131 the total amount the employee earned during the year. 1040 easy * Submit the SSA-131 to the nearest SSA office or give it to the employee. 1040 easy   *Generally, the amount earned by the employee during the tax year for purposes of item 6 of Form SSA-131 is the amount reported in box 1 of Form W-2 plus current-year deferrals that are vested (employee and employer portions) less distributions. 1040 easy Do not consider prior-year deferrals that are vesting in the current year. 1040 easy If there was a plan failure, the box 1 amount in this calculation should be as if there were no plan failure. 1040 easy Example 5: Deferral that is immediately vested and there are distributions (no vesting of prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. 1040 easy There was also an employer match of $10. 1040 easy The deferral and employer match were vested upon deferral. 1040 easy There was no vesting of prior-year deferrals under the plan. 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10; Distribution = $50. 1040 easy Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 Deferral, vested) $230 Boxes 3 and 5 ($200 Regular pay plus $10 vested employer match) 210 Leave Box 11 blank. 1040 easy File Form SSA-131 -0-     Form SSA-131 Completion Item 6 - amount of wages earned by the employee during the tax year ($230 from Box 1 of Form W-2 minus $50 Distribution plus $30 vested current year employee deferral and employer match) $210 Example 6: Deferral with delayed vesting and there are distributions (no vesting of prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. 1040 easy The deferral was not vested upon deferral. 1040 easy There was no vesting of prior-year deferrals under the plan. 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $200; Deferral, not vested = $20; Distribution = $50. 1040 easy Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 Deferral, not vested) $230 Boxes 3 and 5 ($200 Regular pay minus $20 deferral that is not vested) 180 Box 11 ($50 Distribution). 1040 easy 50 Example 7: Deferral that is immediately vested and there are distributions (also vesting of prior-year deferrals and earnings on those prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. 1040 easy The deferral was vested upon deferral. 1040 easy There was vesting of $100 of prior-year deferrals and $15 of earnings on the $100 prior-year deferral under the plan. 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $200; Deferral, vested = $20; Distribution = $50; Vesting of prior-year deferrals ($100) and earnings on those prior-year deferrals ($15) = $115. 1040 easy Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 vested deferral $230 Boxes 3 and 5 ($200 Regular pay Plus $115 vested prior deferral (with vested earnings on the deferral)) 315 Leave Box 11 blank. 1040 easy File Form SSA-131 -0-     Form SSA-131 Completion Item 6, amount of wages earned by the employee during the tax year ($230 from Box 1 of Form W-2 minus $50 Distribution plus $20 vested current year deferral) $200 Example 8: Deferral with delayed vesting and there are distributions (vesting of prior-year deferrals, including employer matches, and earnings on those deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. 1040 easy The deferral was not vested upon deferral. 1040 easy There was also vesting of prior-year deferrals and employer matches and earnings on these amounts under the plan ($115). 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $200; Deferral, not vested = $20; Distribution = $50; Vesting of prior-year deferrals and employer match = $100 plus earnings on that $100 of $15. 1040 easy Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 regular pay minus $20 Deferral, not vested) $230 Boxes 3 and 5 ($200 Regular pay plus $115 vested prior-year deferral and prior year employer match and earning on the prior year amounts minus $20 deferral that is not vested) 295 Leave Box 11 blank. 1040 easy File Form SSA-131 -0-     Form SSA-131 Completion Item 6 ($230 Amount from Box 1 of Form W-2 minus $50 Distribution) $180 Table 2. 1040 easy Specifications for Electronic Reporting of Special Wage Payments Record Position  Field Size   Description Start End 1 3 3 Record Type—must include only the capital letters “SWP” 4 12 9 SSN—must be numeric and may not be all zeros 13 27 15 Last Name—all capitals and no punctuation; may have blanks on right only 28 38 11 First Name—all capitals and no punctuation; may have blanks on right only 39 39 1 Middle Initial—must be either a capital letter or blank 40 48 9 EIN—must be numeric and may not be all zeros 49 59 11 Payment—must be numeric; may not be all zeros; last two digits on right are assumed to be cents; no period or dollar sign 60 63 4 Payment Year—must be only a four-digit year 64 66 3 SSA Office Code—must be numeric and may be all zeros 67 67 1 Payment Type Code—must be the capital letter “T” 68 117 50 Filler  The record format is a fixed length of 117. 1040 easy  The file format is ASCII. 1040 easy  Submit only one file at a time. 1040 easy   Table 3. 1040 easy Sample—Paper Listing for Reporting Special Wage Payments to Several Employees Report of Special Wage PaymentsTax Year: Page of A. 1040 easy Employer Name: EIN:   Address: Contact Name:     Phone: ( )   . 1040 easy 1) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other: 2) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other: 3) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other: 4) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other: 5) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other:     INSTRUCTIONS:   Enter tax year and page number. 1040 easy   A. 1040 easy Employer name, employer identification number (EIN), address, the name of a contact person, and a phone number where the contact person can be reached during normal business hours. 1040 easy   B. 1040 easy Employee's name. 1040 easy   C. 1040 easy Employee's social security number (SSN). 1040 easy   D. 1040 easy Total amount of special wage payments made to the employee. 1040 easy   E. 1040 easy Type of special wage payment from the following list: (1) Vacation Pay, (2) Sick Pay, (3) Severance Pay,  (4) Bonus, (5) Deferred Compensation, (6) Stock Options, and (7) Other—Please explain. 1040 easy   Do not use a paper listing for nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in block 11 of Form W-2. 1040 easy (Get Form SSA-131. 1040 easy )                 Prev  Up  Next   Home   More Online 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Assess Your Needs

Only you can decide if you need these features. Sellers of cars, major appliances and other expensive items may try to sell you a service contract or "extended warranty." Service contracts or "extended warranties" can add hundreds to your purchase price and are rarely worth the cost. Some sellers may try to frighten you or lead you to believe that purchasing an extended warranty is required. Some duplicate warranty coverage you get automatically from a manufacturer or dealer. Ask these questions before you agree to one of these contracts:

  • Does the dealer, the manufacturer, or an independent company back the service contract?
  • How are claims handled? Who will do the work and where it will be done?
  • What happens to your coverage if the dealer or administrator goes out of business?
  • Do you need prior authorization for repair work?
  • Are there any situations when coverage can be denied? You may not have protection from common wear and tear. And some manufacturers do not honor contracts if you fail to follow their recommendations for routine maintenance.

The 1040 Easy

1040 easy 12. 1040 easy   Self-Employment Tax Table of Contents What's New for 2013 What's New for 2014 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Why Pay Self-Employment Tax? How To Pay Self-Employment TaxReplacing a lost social security card. 1040 easy Name change. 1040 easy Penalty for underpayment of estimated tax. 1040 easy Who Must Pay Self-Employment Tax?Limited partner. 1040 easy Community property. 1040 easy Figuring Self-Employment EarningsLandlord Participation in Farming Methods for Figuring Net EarningsRegular Method Farm Optional Method Nonfarm Optional Method Using Both Optional Methods Reporting Self-Employment Tax What's New for 2013 Tax rates. 1040 easy  For tax years beginning in 2013, the social security part of the self-employment tax increases from 10. 1040 easy 4% to 12. 1040 easy 4%. 1040 easy The Medicare part of the tax remains at 2. 1040 easy 9%. 1040 easy As a result, the self-employment tax is increased from 13. 1040 easy 3% to 15. 1040 easy 3%. 1040 easy Additional Medicare Tax. 1040 easy . 1040 easy  For tax years beginning in 2013, a 0. 1040 easy 9% Additional Medicare Tax applies to your Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above a threshold amount. 1040 easy Use Form 8959, Additional Medicare Tax, to figure this tax. 1040 easy For more information, see the Instructions for Form 8959. 1040 easy Maximum net earnings. 1040 easy  The maximum net self-employment earnings subject to the social security part (12. 1040 easy 4%) of the self-employment tax increased to $113,700 for 2013. 1040 easy There is no maximum limit on earnings subject to the Medicare part (2. 1040 easy 9%). 1040 easy What's New for 2014 Maximum net earnings. 1040 easy  The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2014 will be discussed in the 2013 Publication 334. 1040 easy Introduction Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. 1040 easy It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. 1040 easy You usually have to pay SE tax if you are self-employed. 1040 easy You are usually self-employed if you operate your own farm on land you either own or rent. 1040 easy You have to figure SE tax on Schedule SE (Form 1040). 1040 easy Farmers who have employees may have to pay the employer's share of social security and Medicare taxes, as well. 1040 easy See chapter 13 for information on employment taxes. 1040 easy Self-employment tax rate. 1040 easy   For tax years beginning in 2013, the self-employment tax rate is 15. 1040 easy 3%. 1040 easy The rate consists of two parts: 12. 1040 easy 4% for social security (old-age, survivors, and disability insurance) and 2. 1040 easy 9% for Medicare (hospital insurance). 1040 easy Topics - This chapter discusses: Why pay self-employment tax How to pay self-employment tax Who must pay self-employment tax Figuring self-employment earnings Landlord participation in farming Methods for figuring net earnings Reporting self-employment tax Useful Items - You may want to see: Publication 541 Partnerships Form (and Instructions) 1040 U. 1040 easy S. 1040 easy Individual Income Tax Return Sch F (Form 1040) Profit or Loss From Farming Sch SE (Form 1040) Self-Employment Tax 1065 U. 1040 easy S. 1040 easy Return of Partnership Income Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. 1040 easy See chapter 16 for information about getting publications and forms. 1040 easy Why Pay Self-Employment Tax? Social security benefits are available to self-employed persons just as they are to wage earners. 1040 easy Your payments of SE tax contribute to your coverage under the social security system. 1040 easy Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. 1040 easy How to become insured under social security. 1040 easy   You must be insured under the social security system before you begin receiving social security benefits. 1040 easy You are insured if you have the required number of credits (also called quarters of coverage). 1040 easy Earning credits in 2013. 1040 easy   You can earn a maximum of four credits per year. 1040 easy For 2013, you earn one credit for each $1,160 of combined wages and self-employment earnings subject to social security tax. 1040 easy You need $4,640 ($1,160 × 4) of combined wages and self-employment earnings subject to social security tax to earn four credits in 2013. 1040 easy It does not matter whether the income is earned in 1 quarter or is spread over 2 or more quarters. 1040 easy For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office or visit the SSA website at www. 1040 easy socialsecurity. 1040 easy gov. 1040 easy Making false statements to get or to increase social security benefits may subject you to penalties. 1040 easy The Social Security Administration (SSA) time limit for posting self-employment earnings. 1040 easy   Generally, the SSA will give you credit only for self-employment earnings reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. 1040 easy    If you file your tax return or report a change in your self-employment earnings after the SSA time limit for posting self-employment earnings, the SSA may change its records, but only to remove or reduce the amount. 1040 easy The SSA will not change its records to increase your self-employment earnings after the SSA time limit listed above. 1040 easy How To Pay Self-Employment Tax To pay SE tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN). 1040 easy This section explains how to: Obtain an SSN or ITIN, and Pay your SE tax using estimated tax. 1040 easy An ITIN does not entitle you to social security benefits. 1040 easy Obtaining an ITIN does not change your immigration or employment status under U. 1040 easy S. 1040 easy law. 1040 easy Obtaining a social security number. 1040 easy   If you have never had an SSN, apply for one using Form SS-5, Application for a Social Security Card. 1040 easy The application is also available in Spanish. 1040 easy You can get this form at any Social Security office or by calling 1-800-772-1213. 1040 easy    You can also download Form SS-5 from the Social Security Administration website at  www. 1040 easy socialsecurity. 1040 easy gov. 1040 easy   If you have a social security number from the time you were an employee, you must use that number. 1040 easy Do not apply for a new one. 1040 easy Replacing a lost social security card. 1040 easy   If you have a number but lost your card, file Form SS-5. 1040 easy You will get a new card showing your original number, not a new number. 1040 easy Name change. 1040 easy   If your name has changed since you received your social security card, complete Form SS-5 to report a name change. 1040 easy Obtaining an individual taxpayer identification number. 1040 easy   The IRS will issue you an ITIN, for tax use only, if you are a nonresident or resident alien and you do not have, and are not eligible to get, an SSN. 1040 easy To apply for an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number. 1040 easy You can get this form by calling 1-800-829-3676. 1040 easy For more information on ITINs, see Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number. 1040 easy Form W-7 and Publication 1915 are also available in Spanish. 1040 easy    You can also download Form W-7 from the IRS website at IRS. 1040 easy gov. 1040 easy Paying estimated tax. 1040 easy   Estimated tax is the method used to pay tax (including SE tax) on income not subject to withholding. 1040 easy You generally have to make estimated tax payments if you expect to owe tax, including SE tax, of $1,000 or more when you file your return. 1040 easy Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay the tax. 1040 easy   However, if at least two-thirds of your gross income for 2013 or 2014 was from farming and you file your 2014 Form 1040 and pay all the tax due by March 2, 2015, you do not have to pay any estimated tax. 1040 easy For more information about estimated tax for farmers, see chapter 15. 1040 easy Penalty for underpayment of estimated tax. 1040 easy   You may have to pay a penalty if you do not pay enough estimated tax by its due date. 1040 easy Who Must Pay Self-Employment Tax? You must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. 1040 easy The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits. 1040 easy Aliens. 1040 easy   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. 1040 easy S. 1040 easy citizens. 1040 easy Nonresident aliens are not subject to self-employment tax. 1040 easy However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. 1040 easy S. 1040 easy residents for self-employment tax purposes. 1040 easy For more information on aliens, see Publication 519, U. 1040 easy S. 1040 easy Tax Guide for Aliens. 1040 easy Are you self-employed?   You are self-employed if you carry on a trade or business (such as running a farm) as a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. 1040 easy A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. 1040 easy Share farmer. 1040 easy   You are a self-employed farmer under an income-sharing arrangement if both the following apply. 1040 easy You produce a crop or raise livestock on land belonging to another person. 1040 easy Your share of the crop or livestock, or the proceeds from their sale, depends on the amount produced. 1040 easy Your net farm profit or loss from the income-sharing arrangement is reported on Schedule F (Form 1040) and included in your self-employment earnings. 1040 easy   If you produce a crop or livestock on land belonging to another person and are to receive a specified rate of pay, a fixed sum of money, or a fixed quantity of the crop or livestock, and not a share of the crop or livestock or their proceeds, you may be either self-employed or an employee of the landowner. 1040 easy This will depend on whether the landowner has the right to direct or control your performance of services. 1040 easy Example. 1040 easy A share farmer produces a crop on land owned by another person on a 50-50 crop-share basis. 1040 easy Under the terms of their agreement, the share farmer furnishes the labor and half the cost of seed and fertilizer. 1040 easy The landowner furnishes the machinery and equipment used to produce and harvest the crop, and half the cost of seed and fertilizer. 1040 easy The share farmer is provided a house in which to live. 1040 easy The landowner and the share farmer decide on a cropping plan. 1040 easy The share farmer is a self-employed farmer for purposes of the agreement to produce the crops, and the share farmer's part of the profit or loss from the crops is reported on Schedule F (Form 1040) and included in self-employment earnings. 1040 easy The tax treatment of the landowner is discussed later under Landlord Participation in Farming. 1040 easy Contract farming. 1040 easy   Under typical contract farming arrangements, the grower receives a fixed payment per unit of crops or finished livestock delivered to the processor or packing company. 1040 easy Since the grower typically furnishes labor and bears some production risk, the payments are reported on Schedule F and are therefore subject to self-employment tax. 1040 easy 4-H Club or FFA project. 1040 easy   If an individual participates in a 4-H Club or Future Farmers of America (FFA) project, any net income received from sales or prizes related to the project may be subject to income tax. 1040 easy Report the net income as “Other income” on line 21 of Form 1040. 1040 easy If necessary, attach a statement showing the gross income and expenses. 1040 easy The net income may not be subject to SE tax if the project is primarily for educational purposes and not for profit, and is completed by the individual under the rules and economic restrictions of the sponsoring 4-H or FFA organization. 1040 easy Such a project is generally not considered a trade or business. 1040 easy Partners in a partnership. 1040 easy   Generally, you are self-employed if you are a member of a partnership that carries on a trade or business. 1040 easy Limited partner. 1040 easy   If you are a limited partner, your partnership income is generally not subject to SE tax. 1040 easy However, guaranteed payments you receive for services you perform for the partnership are subject to SE tax and should be reported to you in box 14 of your Schedule K-1 (Form 1065). 1040 easy Business Owned and Operated by Spouses. 1040 easy   If you and your spouse jointly own and operate a farm as an unincorporated business and share in the profits and losses, you are partners in a partnership whether or not you have a formal partnership agreement. 1040 easy You must file Form 1065, instead of Schedule F, unless you make a joint election to be treated as a qualified joint venture. 1040 easy Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. 1040 easy Qualified joint venture. 1040 easy   If you and your spouse each materially participate as the only members of a jointly owned and operated farm, and you file a joint tax return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. 1040 easy For an explanation of “material participation,” see the instructions for Schedule C, line G, and the instructions for Schedule F, line E. 1040 easy   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. 1040 easy Each of you must file a separate Schedule F and a separate Schedule SE. 1040 easy For more information, see Qualified Joint Venture in the Instructions for Schedule SE (Form 1040). 1040 easy Spouse employee. 1040 easy   If your spouse is your employee, not your partner, you must withhold and pay social security and Medicare taxes for him or her. 1040 easy For more information about employment taxes, see chapter 13. 1040 easy Community property. 1040 easy   If you are a partner and your distributive share of any income or loss from a trade or business carried on by the partnership is community property, treat your share as your self-employment earnings. 1040 easy Do not treat any of your share as self-employment earnings of your spouse. 1040 easy Figuring Self-Employment Earnings Farmer. 1040 easy   If you are self-employed as a farmer, use Schedule F (Form 1040) to figure your self-employment earnings. 1040 easy Partnership income or loss. 1040 easy   If you are a member of a partnership that carries on a trade or business, the partnership should report your self-employment earnings in box 14, code A, of your Schedule K-1 (Form 1065). 1040 easy Box 14 of Schedule K-1 may also provide amounts for gross farming or fishing income (code B) and gross nonfarm income (code C). 1040 easy Use these amounts if you use the farm or nonfarm optional method to figure net earnings from self-employment (see Methods for Figuring Net Earnings , later). 1040 easy   If you are a general partner, you may need to reduce these reported earnings by amounts you claim as a section 179 deduction, unreimbursed partnership expenses, or depletion on oil and gas properties. 1040 easy   If the amount reported is a loss, include only the deductible amount when you figure your total self-employment earnings. 1040 easy   For more information, see the Partner's Instructions for Schedule K-1 (Form 1065). 1040 easy   For general information on partnerships, see Publication 541. 1040 easy More than one business. 1040 easy   If you have self-employment earnings from more than one trade, business, or profession, you generally must combine the net profit or loss from each to determine your total self-employment earnings. 1040 easy A loss from one business reduces your profit from another business. 1040 easy However, do not combine earnings from farm and nonfarm businesses if you are using one of the optional methods (discussed later) to figure net earnings. 1040 easy Community property. 1040 easy   If any of the income from a farm or business, other than a partnership, is community property under state law, it is included in the self-employment earnings of the spouse carrying on the trade or business. 1040 easy Lost income payments. 1040 easy   Lost income payments received from insurance or other sources for reducing or stopping farming activities are included in self-employment earnings. 1040 easy These include USDA payments to compensate for lost income resulting from reductions in tobacco quotas and allotments. 1040 easy Even if you are not farming when you receive the payment, it is included in self-employment earnings if it relates to your farm business (even though it is temporarily inactive). 1040 easy A connection exists if it is clear the payment would not have been made but for your conduct of your farm business. 1040 easy Gain or loss. 1040 easy   A gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers is not included in self-employment earnings. 1040 easy It does not matter whether the disposition is a sale, exchange, or involuntary conversion. 1040 easy For example, gains or losses from the disposition of the following types of property are not included in self-employment earnings. 1040 easy Investment property. 1040 easy Depreciable property or other fixed assets used in your trade or business. 1040 easy Livestock held for draft, breeding, sport, or dairy purposes, and not held primarily for sale, regardless of how long the livestock was held, or whether it was raised or purchased. 1040 easy Unharvested standing crops sold with land held more than 1 year. 1040 easy Timber, coal, or iron ore held for more than 1 year if an economic interest was retained, such as a right to receive coal royalties. 1040 easy   A gain or loss from the cutting of timber is not included in self-employment earnings if the cutting is treated as a sale or exchange. 1040 easy For more information on electing to treat the cutting of timber as a sale or exchange, see Timber in chapter 8. 1040 easy Wages and salaries. 1040 easy   Wages and salaries received for services performed as an employee and covered by social security or railroad retirement are not included in self-employment earnings. 1040 easy   Wages paid in kind to you for agricultural labor, such as commodity wages, are not included in self-employment earnings. 1040 easy Retired partner. 1040 easy   Retirement income received by a partner from his or her partnership under a written plan is not included in self-employment earnings if all the following apply. 1040 easy The retired partner performs no services for the partnership during the year. 1040 easy The retired partner is owed only the retirement payments. 1040 easy The retired partner's share (if any) of the partnership capital was fully paid to the retired partner. 1040 easy The payments to the retired partner are lifelong periodic payments. 1040 easy Conservation Reserve Program (CRP) payments. 1040 easy   Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a longterm contract with the USDA, agreeing to convert to a less intensive use of that cropland. 1040 easy You must include the annual rental payments and any onetime incentive payment you receive under the program on Schedule F, lines 4a and 4b. 1040 easy Cost share payments you receive may qualify for the costsharing exclusion. 1040 easy See Cost-Sharing Exclusion (Improvements), above. 1040 easy CRP payments are reported to you on Form 1099G. 1040 easy Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. 1040 easy See the instructions for Schedule SE (Form 1040). 1040 easy Self-employed health insurance deduction. 1040 easy   You cannot deduct the self-employed health insurance deduction you report on Form 1040, line 29, from self-employment earnings on Schedule SE (Form 1040). 1040 easy Landlord Participation in Farming As a general rule, income and deductions from rentals and from personal property leased with real estate are not included in determining self-employment earnings. 1040 easy However, income and deductions from farm rentals, including government commodity program payments received by a landowner who rents land, are included if the rental arrangement provides that the landowner will, and does, materially participate in the production or management of production of the farm products on the land. 1040 easy Crop shares. 1040 easy   Rent paid in the form of crop shares is included in self-employment earnings for the year you sell, exchange, give away, or use the crop shares if you meet one of the four material participation tests (discussed next) at the time the crop shares are produced. 1040 easy Feeding such crop shares to livestock is considered using them. 1040 easy Your gross income for figuring your self-employment earnings includes the fair market value of the crop shares when they are used as feed. 1040 easy Material participation for landlords. 1040 easy   You materially participate if you have an arrangement with your tenant for your participation and you meet one or more of the following tests. 1040 easy You do at least three of the following. 1040 easy Pay, using cash or credit, at least half the direct costs of producing the crop or livestock. 1040 easy Furnish at least half the tools, equipment, and livestock used in the production activities. 1040 easy Advise or consult with your tenant. 1040 easy Inspect the production activities periodically. 1040 easy You regularly and frequently make, or take an important part in making, management decisions substantially contributing to or affecting the success of the enterprise. 1040 easy You work 100 hours or more spread over a period of 5 weeks or more in activities connected with agricultural production. 1040 easy You do things that, considered in their totality, show you are materially and significantly involved in the production of the farm commodities. 1040 easy These tests may be used as general guides for determining whether you are a material participant. 1040 easy Example. 1040 easy Drew Houston agrees to produce a crop on J. 1040 easy Clarke's cotton farm, with each receiving half the proceeds. 1040 easy Clarke advises Houston when to plant, spray, and pick the cotton. 1040 easy During the growing season, Clarke inspects the crop every few days to determine whether Houston is properly taking care of the crop. 1040 easy Houston furnishes all labor needed to grow and harvest the crop. 1040 easy The management decisions made by Clarke in connection with the care of the cotton crop and his regular inspection of the crop establish that he participates to a material degree in the cotton production operations. 1040 easy The income Clarke receives from his cotton farm is included in his self-employment earnings. 1040 easy Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. 1040 easy The regular method. 1040 easy The farm optional method. 1040 easy The nonfarm optional method. 1040 easy You must use the regular method unless you are eligible to use one or both of the optional methods. 1040 easy See Figure 12-1 , shown later. 1040 easy Figure 12-1. 1040 easy Can I Use the Optional Methods? Please click here for the text description of the image. 1040 easy Figure 12–1. 1040 easy Can I Use the Optional Methods? Why use an optional method?   You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. 1040 easy You want to receive credit for social security benefit coverage. 1040 easy You incurred child or dependent care expenses for which you could claim a credit. 1040 easy (An optional method may increase your earned income, which could increase your credit. 1040 easy ) You are entitled to the earned income credit. 1040 easy (An optional method may increase your earned income, which could increase your credit. 1040 easy ) You are entitled to the additional child tax credit. 1040 easy (An optional method may increase your earned income, which could increase your credit. 1040 easy ) Effects of using an optional method. 1040 easy   Using an optional method could increase your SE tax. 1040 easy Paying more SE tax may result in you getting higher social security disability or retirement benefits. 1040 easy   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller SE tax or no SE tax using the regular method. 1040 easy   The optional methods may be used only to figure your SE tax. 1040 easy To figure your income tax, include your actual self-employment earnings in gross income, regardless of which method you use to determine SE tax. 1040 easy Regular Method Multiply your total self-employment earnings by 92. 1040 easy 35% (. 1040 easy 9235) to get your net earnings under the regular method. 1040 easy See Short Schedule SE, line 4, or Long Schedule SE, line 4a. 1040 easy Net earnings figured using the regular method are also called “actual net earnings. 1040 easy ” Farm Optional Method Use the farm optional method only for self-employment earnings from a farming business. 1040 easy You can use this method if you meet either of the following tests. 1040 easy Your gross farm income is $6,960 or less. 1040 easy Your net farm profits are less than $5,024. 1040 easy Gross farm income. 1040 easy   Your gross farm income is the total of the amounts from: Schedule F (Form 1040), line 9, and Schedule K-1 (Form 1065), box 14, code B (from farm partnerships). 1040 easy Net farm profits. 1040 easy   Net farm profits generally are the total of the amounts from: Schedule F (Form 1040), line 34, and Schedule K-1 (Form 1065), box 14, code A (from farm partnerships). 1040 easy However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. 1040 easy For more information, see Partnership income or loss , earlier. 1040 easy Figuring farm net earnings. 1040 easy   If you meet either of the two tests explained above, use Table 12-1. 1040 easy Figuring Farm Net Earnings , to figure your net earnings from self-employment under the farm optional method. 1040 easy Table 12-1. 1040 easy Figuring Farm Net Earnings IF your gross farm income  is. 1040 easy . 1040 easy . 1040 easy THEN your net earnings are equal to. 1040 easy . 1040 easy . 1040 easy $6,960 or less Two-thirds of your gross farm income. 1040 easy More than $6,960 $4,640 Optional method can reduce or eliminate SE tax. 1040 easy   If your gross farm income is $6,960 or less and your farm net earnings figured under the farm optional method are less than your actual net earnings, you can use the farm optional method to reduce or eliminate your SE tax. 1040 easy Your actual net earnings are your net earnings figured using the regular method, explained earlier. 1040 easy Example. 1040 easy Your gross farm income is $540 and your net farm profit is $460. 1040 easy Consequently, your net earnings figured under the farm optional method are $360 (2/3 of $540) and your actual net earnings are $425 (92. 1040 easy 35% of $460). 1040 easy You owe no SE tax if you use the optional method because your net earnings under the farm optional method are less than $400. 1040 easy Nonfarm Optional Method This is an optional method available for determining net earnings from nonfarm self-employment, much like the farm optional method. 1040 easy If you are also engaged in a nonfarm business, you may be able to use this method to figure your nonfarm net earnings. 1040 easy You can use this method even if you do not use the farm optional method for determining your farm net earnings and even if you have a net loss from your nonfarm business. 1040 easy For more information about the nonfarm optional method, see Publication 334. 1040 easy You cannot combine farm and nonfarm self-employment earnings to figure your net earnings under either of the optional methods. 1040 easy Using Both Optional Methods If you use both optional methods, you must add the net earnings figured under each method to arrive at your total net earnings from self-employment. 1040 easy You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. 1040 easy If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. 1040 easy Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. 1040 easy Then, enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. 1040 easy Most taxpayers can use Section A–Short Schedule SE to figure their SE tax. 1040 easy However, certain taxpayers must use Section B–Long Schedule SE. 1040 easy Use the chart on page 1 of Schedule SE to find out which one to use. 1040 easy If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. 1040 easy Deduction for employer-equivalent portion of self-employment tax. 1040 easy   You can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. 1040 easy This deduction only affects your income tax. 1040 easy It does not affect either your net earnings from self-employment or your SE tax. 1040 easy   To deduct the tax, enter on Form 1040, line 27, the amount shown on Section A, Line 6, or Section B, line 13, Deduction for employer-equivalent portion of self-employment tax, of the Schedule SE. 1040 easy Joint return. 1040 easy   Even if you file a joint return, you cannot file a joint Schedule SE. 1040 easy This is true whether one spouse or both spouses have self-employment earnings. 1040 easy Your spouse is not considered self-employed just because you are. 1040 easy If both of you have self-employment earnings, each of you must complete a separate Schedule SE. 1040 easy However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. 1040 easy Attach both schedules to the joint return. 1040 easy If you and your spouse operate a business as a partnership, see Business Owned and Operated by Spouses and Qualified joint venture , earlier, under Who Must Pay 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