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Filing Income Tax Return

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Filing Income Tax Return

Filing income tax return 1. Filing income tax return   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Filing income tax return Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Filing income tax return The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Filing income tax return If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Filing income tax return Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Filing income tax return Rental income is any payment you receive for the use or occupation of property. Filing income tax return In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Filing income tax return When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Filing income tax return Most individual taxpayers use the cash method. Filing income tax return Cash method. Filing income tax return   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Filing income tax return You constructively receive income when it is made available to you, for example, by being credited to your bank account. Filing income tax return Accrual method. Filing income tax return    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Filing income tax return You generally deduct your expenses when you incur them, rather than when you pay them. Filing income tax return More information. Filing income tax return   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Filing income tax return Types of Income The following are common types of rental income. Filing income tax return Advance rent. Filing income tax return   Advance rent is any amount you receive before the period that it covers. Filing income tax return Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Filing income tax return Example. Filing income tax return On March 18, 2013, you signed a 10-year lease to rent your property. Filing income tax return During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Filing income tax return You must include $19,200 in your rental income in the first year. Filing income tax return Canceling a lease. Filing income tax return   If your tenant pays you to cancel a lease, the amount you receive is rent. Filing income tax return Include the payment in your income in the year you receive it regardless of your method of accounting. Filing income tax return Expenses paid by tenant. Filing income tax return   If your tenant pays any of your expenses, those payments are rental income. Filing income tax return Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Filing income tax return For more information, see Rental Expenses , later. Filing income tax return Example 1. Filing income tax return Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Filing income tax return Under the terms of the lease, your tenant does not have to pay this bill. Filing income tax return Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Filing income tax return You can deduct the utility payment made by your tenant as a rental expense. Filing income tax return Example 2. Filing income tax return While you are out of town, the furnace in your rental property stops working. Filing income tax return Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Filing income tax return Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Filing income tax return You can deduct the repair payment made by your tenant as a rental expense. Filing income tax return Property or services. Filing income tax return   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Filing income tax return   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Filing income tax return Example. Filing income tax return Your tenant is a house painter. Filing income tax return He offers to paint your rental property instead of paying 2 months rent. Filing income tax return You accept his offer. Filing income tax return Include in your rental income the amount the tenant would have paid for 2 months rent. Filing income tax return You can deduct that same amount as a rental expense for painting your property. Filing income tax return Security deposits. Filing income tax return   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Filing income tax return But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Filing income tax return    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Filing income tax return Include it in your income when you receive it. Filing income tax return Other Sources of Rental Income Lease with option to buy. Filing income tax return   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Filing income tax return If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Filing income tax return Part interest. Filing income tax return   If you own a part interest in rental property, you must report your part of the rental income from the property. Filing income tax return Rental of property also used as your home. Filing income tax return   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Filing income tax return However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Filing income tax return See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Filing income tax return Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Filing income tax return Personal use of rental property. Filing income tax return   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Filing income tax return Also, your rental expense deductions may be limited. Filing income tax return See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Filing income tax return Part interest. Filing income tax return   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Filing income tax return Example. Filing income tax return Roger owns a one-half undivided interest in a rental house. Filing income tax return Last year he paid $968 for necessary repairs on the property. Filing income tax return Roger can deduct $484 (50% × $968) as a rental expense. Filing income tax return He is entitled to reimbursement for the remaining half from the co-owner. Filing income tax return When To Deduct You generally deduct your rental expenses in the year you pay them. Filing income tax return If you use the accrual method, see Publication 538 for more information. Filing income tax return Types of Expenses Listed below are the most common rental expenses. Filing income tax return Advertising. Filing income tax return Auto and travel expenses. Filing income tax return Cleaning and maintenance. Filing income tax return Commissions. Filing income tax return Depreciation. Filing income tax return Insurance. Filing income tax return Interest (other). Filing income tax return Legal and other professional fees. Filing income tax return Local transportation expenses. Filing income tax return Management fees. Filing income tax return Mortgage interest paid to banks, etc. Filing income tax return Points. Filing income tax return Rental payments. Filing income tax return Repairs. Filing income tax return Taxes. Filing income tax return Utilities. Filing income tax return Some of these expenses, as well as other less common ones, are discussed below. Filing income tax return Depreciation. Filing income tax return   Depreciation is a capital expense. Filing income tax return It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Filing income tax return   You can begin to depreciate rental property when it is ready and available for rent. Filing income tax return See Placed in Service under When Does Depreciation Begin and End in chapter 2. Filing income tax return Insurance premiums paid in advance. Filing income tax return   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Filing income tax return You cannot deduct the total premium in the year you pay it. Filing income tax return See chapter 6 of Publication 535 for information on deductible premiums. Filing income tax return Interest expense. Filing income tax return   You can deduct mortgage interest you pay on your rental property. Filing income tax return When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Filing income tax return Chapter 4 of Publication 535 explains mortgage interest in detail. Filing income tax return Expenses paid to obtain a mortgage. Filing income tax return   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Filing income tax return These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Filing income tax return Form 1098, Mortgage Interest Statement. Filing income tax return   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Filing income tax return If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Filing income tax return Attach a statement to your return showing the name and address of the other person. Filing income tax return On the dotted line next to line 13, enter “See attached. Filing income tax return ” Legal and other professional fees. Filing income tax return   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Filing income tax return For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Filing income tax return You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Filing income tax return Local benefit taxes. Filing income tax return   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Filing income tax return These charges are nondepreciable capital expenditures and must be added to the basis of your property. Filing income tax return However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Filing income tax return Local transportation expenses. Filing income tax return   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Filing income tax return However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Filing income tax return See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Filing income tax return   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Filing income tax return For 2013, the standard mileage rate for business use is 56. Filing income tax return 5 cents per mile. Filing income tax return For more information, see chapter 4 of Publication 463. Filing income tax return    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Filing income tax return In addition, you must complete Form 4562, Part V, and attach it to your tax return. Filing income tax return Pre-rental expenses. Filing income tax return   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Filing income tax return Rental of equipment. Filing income tax return   You can deduct the rent you pay for equipment that you use for rental purposes. Filing income tax return However, in some cases, lease contracts are actually purchase contracts. Filing income tax return If so, you cannot deduct these payments. Filing income tax return You can recover the cost of purchased equipment through depreciation. Filing income tax return Rental of property. Filing income tax return   You can deduct the rent you pay for property that you use for rental purposes. Filing income tax return If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Filing income tax return Travel expenses. Filing income tax return   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Filing income tax return You must properly allocate your expenses between rental and nonrental activities. Filing income tax return You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Filing income tax return The cost of improvements is recovered by taking depreciation. Filing income tax return For information on travel expenses, see chapter 1 of Publication 463. Filing income tax return    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Filing income tax return Uncollected rent. Filing income tax return   If you are a cash basis taxpayer, do not deduct uncollected rent. Filing income tax return Because you have not included it in your income, it is not deductible. Filing income tax return   If you use an accrual method, report income when you earn it. Filing income tax return If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Filing income tax return See chapter 10 of Publication 535 for more information about business bad debts. Filing income tax return Vacant rental property. Filing income tax return   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Filing income tax return However, you cannot deduct any loss of rental income for the period the property is vacant. Filing income tax return Vacant while listed for sale. Filing income tax return   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Filing income tax return If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Filing income tax return Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Filing income tax return These charges are also called loan origination fees, maximum loan charges, or premium charges. Filing income tax return Any of these charges (points) that are solely for the use of money are interest. Filing income tax return Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Filing income tax return The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Filing income tax return In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Filing income tax return The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Filing income tax return If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Filing income tax return De minimis OID. Filing income tax return   The OID is de minimis if it is less than one-fourth of 1% (. Filing income tax return 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Filing income tax return   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Filing income tax return On a constant-yield basis over the term of the loan. Filing income tax return On a straight line basis over the term of the loan. Filing income tax return In proportion to stated interest payments. Filing income tax return In its entirety at maturity of the loan. Filing income tax return You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Filing income tax return Example. Filing income tax return Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Filing income tax return The loan is to be repaid over 30 years. Filing income tax return During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Filing income tax return When the loan was made, she paid $1,500 in points to the lender. Filing income tax return The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Filing income tax return Carol determines that the points (OID) she paid are de minimis based on the following computation. Filing income tax return Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Filing income tax return 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Filing income tax return Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Filing income tax return Under the straight line method, she can deduct $50 each year for 30 years. Filing income tax return Constant-yield method. Filing income tax return   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Filing income tax return   You figure your deduction for the first year in the following manner. Filing income tax return Determine the issue price of the loan. Filing income tax return If you paid points on the loan, the issue price generally is the difference between the principal and the points. Filing income tax return Multiply the result in (1) by the yield to maturity (defined later). Filing income tax return Subtract any qualified stated interest payments (defined later) from the result in (2). Filing income tax return This is the OID you can deduct in the first year. Filing income tax return Yield to maturity (YTM). Filing income tax return   This rate is generally shown in the literature you receive from your lender. Filing income tax return If you do not have this information, consult your lender or tax advisor. Filing income tax return In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Filing income tax return Qualified stated interest (QSI). Filing income tax return   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Filing income tax return Example—Year 1. Filing income tax return The facts are the same as in the previous example. Filing income tax return The yield to maturity on Carol's loan is 10. Filing income tax return 2467%, compounded annually. Filing income tax return She figured the amount of points (OID) she could deduct in 2013 as follows. Filing income tax return Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Filing income tax return 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Filing income tax return To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Filing income tax return Then follow steps (2) and (3), earlier. Filing income tax return Example—Year 2. Filing income tax return Carol figured the deduction for 2014 as follows. Filing income tax return Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Filing income tax return 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Filing income tax return    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Filing income tax return A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Filing income tax return However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Filing income tax return Points when loan refinance is more than the previous outstanding balance. Filing income tax return   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Filing income tax return For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Filing income tax return Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Filing income tax return Improvements. Filing income tax return   You must capitalize any expense you pay to improve your rental property. Filing income tax return An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Filing income tax return Betterments. Filing income tax return   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Filing income tax return Restoration. Filing income tax return   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Filing income tax return Adaptation. Filing income tax return   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Filing income tax return Separate the costs of repairs and improvements, and keep accurate records. Filing income tax return You will need to know the cost of improvements when you sell or depreciate your property. Filing income tax return The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Filing income tax return Table 1-1. Filing income tax return Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications
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Where to File Paper Tax Returns - With or Without a Payment

Where to File Tax Returns - Addresses Listed by Return Type
Where to file addresses listed by return type for use during calendar year 2013.

Where to File Certain Elections, Statements, Returns and Other Documents
This page provides up-to-date information on filing addresses for certain elections, statements, returns and other documents required by the Code of Federal Regulations (CFR) Title 26

Where to Send Non-Return Forms (Applications and Payments)
Where to send certain payments and applications other than tax returns. This page provides a quick guide for where to send certain non-return forms, applications, and payments.

Where to File - Tax Exempt and Government Entities
Where to file addresses for tax exempt and government entities.

Private Delivery Services (PDS)
Use these addresses ONLY IF you are using a private delivery service to send your returns to IRS. If you are not using a private delivery service, use the links above to find the correct mailing address to mail your return.

Page Last Reviewed or Updated: 13-Feb-2014

The Filing Income Tax Return

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