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Form 1040nr EzForm 1040nr ez 2. Form 1040nr ez Employees' Pay Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tests for Deducting PayTest 1—Reasonableness Test 2—For Services Performed Kinds of PayAwards Bonuses Education Expenses Fringe Benefits Loans or Advances Property Reimbursements for Business Expenses Sick and Vacation Pay Introduction You can generally deduct the amount you pay your employees for the services they perform. Form 1040nr ez The pay may be in cash, property, or services. Form 1040nr ez It may include wages, salaries, bonuses, commissions, or other non-cash compensation such as vacation allowances and fringe benefits. Form 1040nr ez For information about deducting employment taxes, see chapter 5. Form 1040nr ez You can claim employment credits, such as the following, if you hire individuals who meet certain requirements. Form 1040nr ez Empowerment zone employment credit (Form 8844). Form 1040nr ez Indian employment credit (Form 8845). Form 1040nr ez Work opportunity credit (Form 5884). Form 1040nr ez Credit for employer differential wage payments (Form 8932). Form 1040nr ez Reduce your deduction for employee wages by the amount of employment credits you claim. Form 1040nr ez For more information about these credits, see the form on which the credit is claimed. Form 1040nr ez Topics - This chapter discusses: Tests for deducting pay Kinds of pay Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits See chapter 12 for information about getting publications and forms. Form 1040nr ez Tests for Deducting Pay To be deductible, your employees' pay must be an ordinary and necessary business expense and you must pay or incur it. Form 1040nr ez These and other requirements that apply to all business expenses are explained in chapter 1. Form 1040nr ez In addition, the pay must meet both of the following tests. Form 1040nr ez Test 1. Form 1040nr ez It must be reasonable. Form 1040nr ez Test 2. Form 1040nr ez It must be for services performed. Form 1040nr ez The form or method of figuring the pay does not affect its deductibility. Form 1040nr ez For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible. Form 1040nr ez Test 1—Reasonableness You must be able to prove that the pay is reasonable. Form 1040nr ez Whether the pay is reasonable depends on the circumstances that existed when you contracted for the services, not those that exist when reasonableness is questioned. Form 1040nr ez If the pay is excessive, the excess pay is disallowed as a deduction. Form 1040nr ez Factors to consider. Form 1040nr ez Determine the reasonableness of pay by the facts and circumstances. Form 1040nr ez Generally, reasonable pay is the amount that a similar business would pay for the same or similar services. Form 1040nr ez To determine if pay is reasonable, also consider the following items and any other pertinent facts. Form 1040nr ez The duties performed by the employee. Form 1040nr ez The volume of business handled. Form 1040nr ez The character and amount of responsibility. Form 1040nr ez The complexities of your business. Form 1040nr ez The amount of time required. Form 1040nr ez The cost of living in the locality. Form 1040nr ez The ability and achievements of the individual employee performing the service. Form 1040nr ez The pay compared with the gross and net income of the business, as well as with distributions to shareholders if the business is a corporation. Form 1040nr ez Your policy regarding pay for all your employees. Form 1040nr ez The history of pay for each employee. Form 1040nr ez Test 2—For Services Performed You must be able to prove the payment was made for services actually performed. Form 1040nr ez Employee-shareholder salaries. Form 1040nr ez If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-shareholder. Form 1040nr ez The excessive part of the salary would not be allowed as a salary deduction by the corporation. Form 1040nr ez For more information on corporate distributions to shareholders, see Publication 542, Corporations. Form 1040nr ez Kinds of Pay Some of the ways you may provide pay to your employees in addition to regular wages or salaries are discussed next. Form 1040nr ez For specialized and detailed information on employees' pay and the employment tax treatment of employees' pay, see Publications 15, 15-A, and 15-B. Form 1040nr ez Awards You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. Form 1040nr ez If you give property to an employee as an employee achievement award, your deduction may be limited. Form 1040nr ez Achievement awards. Form 1040nr ez An achievement award is an item of tangible personal property that meets all the following requirements. Form 1040nr ez It is given to an employee for length of service or safety achievement. Form 1040nr ez It is awarded as part of a meaningful presentation. Form 1040nr ez It is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay. Form 1040nr ez Length-of-service award. Form 1040nr ez An award will qualify as a length-of-service award only if either of the following applies. Form 1040nr ez The employee receives the award after his or her first 5 years of employment. Form 1040nr ez The employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years. Form 1040nr ez Safety achievement award. Form 1040nr ez An award for safety achievement will qualify as an achievement award unless one of the following applies. Form 1040nr ez It is given to a manager, administrator, clerical employee, or other professional employee. Form 1040nr ez During the tax year, more than 10% of your employees, excluding those listed in (1), have already received a safety achievement award (other than one of very small value). Form 1040nr ez Deduction limit. Form 1040nr ez Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following. Form 1040nr ez $400 for awards that are not qualified plan awards. Form 1040nr ez $1,600 for all awards, whether or not qualified plan awards. Form 1040nr ez A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. Form 1040nr ez A highly compensated employee is an employee who meets either of the following tests. Form 1040nr ez The employee was a 5% owner at any time during the year or the preceding year. Form 1040nr ez The employee received more than $115,000 in pay for the preceding year. Form 1040nr ez You can choose to ignore test (2) if the employee was not also in the top 20% of employees ranked by pay for the preceding year. Form 1040nr ez An award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be qualified plan awards except for this limit) is more than $400. Form 1040nr ez To figure this average cost, ignore awards of nominal value. Form 1040nr ez Deduct achievement awards as a nonwage business expense on your return or business schedule. Form 1040nr ez You may not owe employment taxes on the value of some achievement awards you provide to an employee. Form 1040nr ez See Publication 15-B. Form 1040nr ez Bonuses You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. Form 1040nr ez However, the total bonuses, salaries, and other pay must be reasonable for the services performed. Form 1040nr ez If the bonus is paid in property, see Property , later. Form 1040nr ez Gifts of nominal value. Form 1040nr ez If, to promote employee goodwill, you distribute food or merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense. Form 1040nr ez Your deduction for de minimis gifts of food or drink are not subject to the 50% deduction limit that generally applies to meals. Form 1040nr ez For more information on this deduction limit, see Meals and lodging , later. Form 1040nr ez Education Expenses If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. Form 1040nr ez Deduct them on the “Employee benefit programs” or other appropriate line of your tax return. Form 1040nr ez For information on educational assistance programs, see Educational Assistance in section 2 of Publication 15-B. Form 1040nr ez Fringe Benefits A fringe benefit is a form of pay for the performance of services. Form 1040nr ez You can generally deduct the cost of fringe benefits. Form 1040nr ez You may be able to exclude all or part of the value of some fringe benefits from your employees' pay. Form 1040nr ez You also may not owe employment taxes on the value of the fringe benefits. Form 1040nr ez See Table 2-1, Special Rules for Various Types of Fringe Benefits, in Publication 15-B for details. Form 1040nr ez Your deduction for the cost of fringe benefits for activities generally considered entertainment, amusement, or recreation, or for a facility used in connection with such an activity (for example, a company aircraft) for certain officers, directors, and more-than-10% shareholders is limited. Form 1040nr ez Certain fringe benefits are discussed next. Form 1040nr ez See Publication 15-B for more details on these and other fringe benefits. Form 1040nr ez Meals and lodging. Form 1040nr ez You can usually deduct the cost of furnishing meals and lodging to your employees. Form 1040nr ez Deduct the cost in whatever category the expense falls. Form 1040nr ez For example, if you operate a restaurant, deduct the cost of the meals you furnish to employees as part of the cost of goods sold. Form 1040nr ez If you operate a nursing home, motel, or rental property, deduct the cost of furnishing lodging to an employee as expenses for utilities, linen service, salaries, depreciation, etc. Form 1040nr ez Deduction limit on meals. Form 1040nr ez You can generally deduct only 50% of the cost of furnishing meals to your employees. Form 1040nr ez However, you can deduct the full cost of the following meals. Form 1040nr ez Meals whose value you include in an employee's wages. Form 1040nr ez Meals that qualify as a de minimis fringe benefit as discussed in section 2 of Publication 15-B. Form 1040nr ez This generally includes meals you furnish to employees at your place of business if more than half of these employees are provided the meals for your convenience. Form 1040nr ez Meals you furnish to your employees at the work site when you operate a restaurant or catering service. Form 1040nr ez Meals you furnish to your employees as part of the expense of providing recreational or social activities, such as a company picnic. Form 1040nr ez Meals you are required by federal law to furnish to crew members of certain commercial vessels (or would be required to furnish if the vessels were operated at sea). Form 1040nr ez This does not include meals you furnish on vessels primarily providing luxury water transportation. Form 1040nr ez Meals you furnish on an oil or gas platform or drilling rig located offshore or in Alaska. Form 1040nr ez This includes meals you furnish at a support camp that is near and integral to an oil or gas drilling rig located in Alaska. Form 1040nr ez Employee benefit programs. Form 1040nr ez Employee benefit programs include the following. Form 1040nr ez Accident and health plans. Form 1040nr ez Adoption assistance. Form 1040nr ez Cafeteria plans. Form 1040nr ez Dependent care assistance. Form 1040nr ez Education assistance. Form 1040nr ez Life insurance coverage. Form 1040nr ez Welfare benefit funds. Form 1040nr ez You can generally deduct amounts you spend on employee benefit programs on the applicable line of your tax return. Form 1040nr ez For example, if you provide dependent care by operating a dependent care facility for your employees, deduct your costs in whatever categories they fall (utilities, salaries, etc. Form 1040nr ez ). Form 1040nr ez Life insurance coverage. Form 1040nr ez You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. Form 1040nr ez See Regulations section 1. Form 1040nr ez 264-1 for more information. Form 1040nr ez Welfare benefit funds. Form 1040nr ez A welfare benefit fund is a funded plan (or a funded arrangement having the effect of a plan) that provides welfare benefits to your employees, independent contractors, or their beneficiaries. Form 1040nr ez Welfare benefits are any benefits other than deferred compensation or transfers of restricted property. Form 1040nr ez Your deduction for contributions to a welfare benefit fund is limited to the fund's qualified cost for the tax year. Form 1040nr ez If your contributions to the fund are more than its qualified cost, carry the excess over to the next tax year. Form 1040nr ez Generally, the fund's “qualified cost” is the total of the following amounts, reduced by the after-tax income of the fund. Form 1040nr ez The cost you would have been able to deduct using the cash method of accounting if you had paid for the benefits directly. Form 1040nr ez The contributions added to a reserve account that are needed to fund claims incurred but not paid as of the end of the year. Form 1040nr ez These claims can be for supplemental unemployment benefits, severance pay, or disability, medical, or life insurance benefits. Form 1040nr ez For more information, see sections 419(c) and 419A of the Internal Revenue Code and the related regulations. Form 1040nr ez Loans or Advances You generally can deduct as wages an advance you make to an employee for services performed if you do not expect the employee to repay the advance. Form 1040nr ez However, if the employee performs no services, treat the amount you advanced as a loan. Form 1040nr ez If the employee does not repay the loan, treat it as income to the employee. Form 1040nr ez Below-market interest rate loans. Form 1040nr ez On certain loans you make to an employee or shareholder, you are treated as having received interest income and as having paid compensation or dividends equal to that interest. Form 1040nr ez See Below-Market Loans in chapter 4. Form 1040nr ez Property If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. Form 1040nr ez The amount you can deduct is the property's fair market value on the date of the transfer less any amount the employee paid for the property. Form 1040nr ez You can claim the deduction only for the tax year in which your employee includes the property's value in income. Form 1040nr ez Your employee is deemed to have included the value in income if you report it on Form W-2, Wage and Tax Statement, in a timely manner. Form 1040nr ez You treat the deductible amount as received in exchange for the property, and you must recognize any gain or loss realized on the transfer, unless it is the company's stock transferred as payment for services. Form 1040nr ez Your gain or loss is the difference between the fair market value of the property and its adjusted basis on the date of transfer. Form 1040nr ez These rules also apply to property transferred to an independent contractor for services, generally reported on Form 1099-MISC, Miscellaneous Income. Form 1040nr ez Restricted property. Form 1040nr ez If the property you transfer for services is subject to restrictions that affect its value, you generally cannot deduct it and do not report gain or loss until it is substantially vested in the recipient. Form 1040nr ez However, if the recipient pays for the property, you must report any gain at the time of the transfer up to the amount paid. Form 1040nr ez “Substantially vested” means the property is not subject to a substantial risk of forfeiture. Form 1040nr ez This means that the recipient is not likely to have to give up his or her rights in the property in the future. Form 1040nr ez Reimbursements for Business Expenses You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. Form 1040nr ez However, your deduction may be limited. Form 1040nr ez If you make the payment under an accountable plan, deduct it in the category of the expense paid. Form 1040nr ez For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. Form 1040nr ez If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W-2. Form 1040nr ez See Reimbursement of Travel, Meals, and Entertainment in chapter 11 for more information about deducting reimbursements and an explanation of accountable and nonaccountable plans. Form 1040nr ez Sick and Vacation Pay Sick pay. Form 1040nr ez You can deduct amounts you pay to your employees for sickness and injury, including lump-sum amounts, as wages. Form 1040nr ez However, your deduction is limited to amounts not compensated by insurance or other means. Form 1040nr ez Vacation pay. Form 1040nr ez Vacation pay is an employee benefit. Form 1040nr ez It includes amounts paid for unused vacation leave. Form 1040nr ez You can deduct vacation pay only in the tax year in which the employee actually receives it. Form 1040nr ez This rule applies regardless of whether you use the cash or accrual method of accounting. Form 1040nr ez Prev Up Next Home More Online Publications
Through various programs, the Department of Agriculture's Rural Development works to improve the economy and quality of life of rural America.