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2008 Tax Return

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2008 Tax Return

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

2008 tax return 2. 2008 tax return   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. 2008 tax return You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. 2008 tax return This chapter discusses accounting methods. 2008 tax return For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. 2008 tax return Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. 2008 tax return Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. 2008 tax return Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 2008 tax return A material item is one that affects the proper time for inclusion of income or allowance of a deduction. 2008 tax return An item considered material for financial statement purposes is generally also considered material for income tax purposes. 2008 tax return See Publication 538 for more information. 2008 tax return You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. 2008 tax return If you later want to change your accounting method, you generally must get IRS approval. 2008 tax return How to obtain IRS approval is discussed later under Changes in Methods of Accounting . 2008 tax return Types of accounting methods. 2008 tax return   Generally, you can use any of the following accounting methods. 2008 tax return Each method is discussed in detail below. 2008 tax return Cash method. 2008 tax return Accrual method. 2008 tax return Special methods of accounting for certain items of income and expenses. 2008 tax return Combination (hybrid) method using elements of two or more of the above. 2008 tax return Business and other items. 2008 tax return   You can account for business and personal items using different accounting methods. 2008 tax return For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. 2008 tax return Two or more businesses. 2008 tax return   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 2008 tax return Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. 2008 tax return Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. 2008 tax return However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. 2008 tax return See Accrual Method Required , later. 2008 tax return Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. 2008 tax return Items of income include money received as well as property or services received. 2008 tax return If you receive property or services, you must include the fair market value (FMV) of the property or services in income. 2008 tax return See chapter 3 for information on how to report farm income on your income tax return. 2008 tax return Constructive receipt. 2008 tax return   Income is constructively received when an amount is credited to your account or made available to you without restriction. 2008 tax return You do not need to have possession of the income for it to be treated as income for the tax year. 2008 tax return If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. 2008 tax return Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. 2008 tax return Direct payments and counter-cyclical payments. 2008 tax return   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. 2008 tax return Delaying receipt of income. 2008 tax return   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. 2008 tax return You must report the income in the year the money or property is received or made available to you without restriction. 2008 tax return Example. 2008 tax return Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. 2008 tax return She was told in December that her payment was available. 2008 tax return She requested not to be paid until January 2014. 2008 tax return However, she must still include this payment in her 2013 income because it was made available to her in 2013. 2008 tax return Debts paid by another person or canceled. 2008 tax return   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. 2008 tax return If you receive income in this way, you constructively receive the income when the debt is canceled or paid. 2008 tax return See Cancellation of Debt in chapter 3. 2008 tax return Deferred payment contract. 2008 tax return   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. 2008 tax return However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. 2008 tax return Example. 2008 tax return You are a farmer who uses the cash method and a calendar tax year. 2008 tax return You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. 2008 tax return You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. 2008 tax return However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. 2008 tax return Repayment of income. 2008 tax return   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. 2008 tax return If the repayment is more than $3,000, a special rule applies. 2008 tax return For details, see Repayments in chapter 11 of Publication 535, Business Expenses. 2008 tax return Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. 2008 tax return This includes business expenses for which you contest liability. 2008 tax return However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. 2008 tax return See chapter 4 for information on how to deduct farm business expenses on your income tax return. 2008 tax return Prepayment. 2008 tax return   Generally, you cannot deduct expenses paid in advance. 2008 tax return This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 2008 tax return Example. 2008 tax return On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. 2008 tax return In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. 2008 tax return In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. 2008 tax return An exception applies if the expense qualifies for the 12-month rule. 2008 tax return See Publication 538 for more information and examples. 2008 tax return See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. 2008 tax return Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. 2008 tax return The purpose of an accrual method of accounting is to correctly match income and expenses. 2008 tax return Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. 2008 tax return See Accrual Method Required and Farm Inventory , later. 2008 tax return Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. 2008 tax return Under this rule, include an amount in income on the earliest of the following dates. 2008 tax return When you receive payment. 2008 tax return When the income amount is due to you. 2008 tax return When you earn the income. 2008 tax return When title passes. 2008 tax return If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. 2008 tax return Inventory. 2008 tax return   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. 2008 tax return An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 2008 tax return See Publication 538 for more information. 2008 tax return Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. 2008 tax return Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. 2008 tax return The all-events test has been met. 2008 tax return This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. 2008 tax return Economic performance has occurred. 2008 tax return Economic performance. 2008 tax return   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 2008 tax return If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. 2008 tax return If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2008 tax return Example. 2008 tax return Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. 2008 tax return She entered into a contract with ABC Farm Consulting in 2012. 2008 tax return The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. 2008 tax return It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. 2008 tax return Jane paid ABC Farm Consulting $2,000 in December 2012. 2008 tax return Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. 2008 tax return Economic performance for Jane's liability in the contract occurs as the services are provided. 2008 tax return Jane incurs the $2,000 cost in 2013. 2008 tax return An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. 2008 tax return For more information, see Economic Performance in Publication 538. 2008 tax return Special rule for related persons. 2008 tax return   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. 2008 tax return Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. 2008 tax return For more information, see Internal Revenue Code section 267. 2008 tax return Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. 2008 tax return A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. 2008 tax return A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. 2008 tax return A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. 2008 tax return A tax shelter. 2008 tax return Note. 2008 tax return Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). 2008 tax return Family corporation. 2008 tax return   A family corporation is generally a corporation that meets one of the following ownership requirements. 2008 tax return Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. 2008 tax return Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. 2008 tax return Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. 2008 tax return For more information on family corporations, see Internal Revenue Code section 447. 2008 tax return Tax shelter. 2008 tax return   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. 2008 tax return Its principal purpose is the avoidance or evasion of federal income tax. 2008 tax return It is a farming syndicate. 2008 tax return A farming syndicate is an entity that meets either of the following tests. 2008 tax return Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. 2008 tax return More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. 2008 tax return   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. 2008 tax return   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. 2008 tax return Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. 2008 tax return This record should show the actual count or measurement of the inventory. 2008 tax return It should also show all factors that enter into its valuation, including quality and weight, if applicable. 2008 tax return Hatchery business. 2008 tax return   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. 2008 tax return Products held for sale. 2008 tax return   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. 2008 tax return , must be included in inventory. 2008 tax return Supplies. 2008 tax return   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. 2008 tax return Deduct the cost of supplies in the year used or consumed in operations. 2008 tax return Do not include incidental supplies in inventory as these are deductible in the year of purchase. 2008 tax return Livestock. 2008 tax return   Livestock held primarily for sale must be included in inventory. 2008 tax return Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. 2008 tax return See also Unit-livestock-price method , later. 2008 tax return If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. 2008 tax return Growing crops. 2008 tax return   Generally, growing crops are not required to be included in inventory. 2008 tax return However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. 2008 tax return See Uniform capitalization rules below. 2008 tax return Also see Uniform Capitalization Rules in  chapter 6. 2008 tax return Items to include in inventory. 2008 tax return   Your inventory should include all items held for sale, or for use as feed, seed, etc. 2008 tax return , whether raised or purchased, that are unsold at the end of the year. 2008 tax return Uniform capitalization rules. 2008 tax return   The following applies if you are required to use an accrual method of accounting. 2008 tax return The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. 2008 tax return The costs of animals are subject to the uniform capitalization rules. 2008 tax return Inventory valuation methods. 2008 tax return   The following methods, described below, are those generally available for valuing inventory. 2008 tax return The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 2008 tax return Cost. 2008 tax return Lower of cost or market. 2008 tax return Farm-price method. 2008 tax return Unit-livestock-price method. 2008 tax return Cost and lower of cost or market methods. 2008 tax return   See Publication 538 for information on these valuation methods. 2008 tax return If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. 2008 tax return However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. 2008 tax return Farm-price method. 2008 tax return   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. 2008 tax return Market price is the current price at the nearest market in the quantities you usually sell. 2008 tax return Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. 2008 tax return If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. 2008 tax return Unit-livestock-price method. 2008 tax return   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. 2008 tax return You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. 2008 tax return The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. 2008 tax return Unit prices and classifications are subject to approval by the IRS on examination of your return. 2008 tax return You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. 2008 tax return IRS approval is not required for these adjustments. 2008 tax return Any other changes in unit prices or classifications do require IRS approval. 2008 tax return   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. 2008 tax return This method accounts only for the increase in cost of raising an animal to maturity. 2008 tax return It does not provide for any decrease in the animal's market value after it reaches maturity. 2008 tax return Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. 2008 tax return   Do not include sold or lost animals in the year-end inventory. 2008 tax return If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. 2008 tax return The animals on hand at the end of the year are considered those most recently acquired. 2008 tax return   You must include in inventory all livestock purchased primarily for sale. 2008 tax return You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. 2008 tax return However, you must be consistent from year to year, regardless of the method you have chosen. 2008 tax return You cannot change your method without obtaining approval from the IRS. 2008 tax return   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. 2008 tax return If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. 2008 tax return However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. 2008 tax return This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. 2008 tax return It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. 2008 tax return Uniform capitalization rules. 2008 tax return   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. 2008 tax return This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. 2008 tax return Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. 2008 tax return Example 1. 2008 tax return You are a farmer who uses an accrual method of accounting. 2008 tax return You keep your books on the calendar year basis. 2008 tax return You sell grain in December 2013 but you are not paid until January 2014. 2008 tax return Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. 2008 tax return Example 2. 2008 tax return Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. 2008 tax return Under this method, you include the sales proceeds in income for 2014, the year you receive payment. 2008 tax return Deduct the costs of producing the grain in the year you pay for them. 2008 tax return Special Methods of Accounting There are special methods of accounting for certain items of income and expense. 2008 tax return Crop method. 2008 tax return   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. 2008 tax return You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. 2008 tax return Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. 2008 tax return    See chapter 4 for details on deducting the costs of operating a farm. 2008 tax return Also see Regulations section 1. 2008 tax return 162-12. 2008 tax return Other special methods. 2008 tax return   Other special methods of accounting apply to the following items. 2008 tax return Amortization, see chapter 7. 2008 tax return Casualties, see chapter 11. 2008 tax return Condemnations, see chapter 11. 2008 tax return Depletion, see chapter 7. 2008 tax return Depreciation, see chapter 7. 2008 tax return Farm business expenses, see chapter 4. 2008 tax return Farm income, see chapter 3. 2008 tax return Installment sales, see chapter 10. 2008 tax return Soil and water conservation expenses, see chapter 5. 2008 tax return Thefts, see chapter 11. 2008 tax return Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. 2008 tax return However, the following restrictions apply. 2008 tax return If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. 2008 tax return If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 2008 tax return Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). 2008 tax return Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. 2008 tax return You may also have to pay a fee. 2008 tax return To obtain approval, you must generally file Form 3115. 2008 tax return There are instances when you can obtain automatic consent to change certain methods of accounting. 2008 tax return See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. 2008 tax return For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. 2008 tax return Also see Publication 538. 2008 tax return 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