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

Free state tax fileing Publication 575 - Introductory Material Table of Contents What's New Reminders IntroductionThe General Rule. Free state tax fileing Individual retirement arrangements (IRAs). Free state tax fileing Civil service retirement benefits. Free state tax fileing Social security and equivalent tier 1 railroad retirement benefits. Free state tax fileing Tax-sheltered annuity plans (403(b) plans). Free state tax fileing Ordering forms and publications. Free state tax fileing Tax questions. Free state tax fileing Useful Items - You may want to see: What's New For purposes of the net investment income tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Free state tax fileing However, these distributions are taken into account when determining the modified adjusted gross income threshold. Free state tax fileing Distributions from a nonqualified retirement plan are included in net investment income. Free state tax fileing See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Free state tax fileing Reminders Future developments. Free state tax fileing  For the latest information about developments related to Publication 575, such as legislation enacted after it was published, go to www. Free state tax fileing irs. Free state tax fileing gov/pub575. Free state tax fileing In-plan Roth rollovers. Free state tax fileing   Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Free state tax fileing For more information, see In-plan Roth rollovers under Rollovers, discussed later. Free state tax fileing Photographs of missing children. Free state tax fileing  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free state tax fileing Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free state tax fileing You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free state tax fileing Introduction This publication discusses the tax treatment of distributions you receive from pension and annuity plans and also shows you how to report the income on your federal income tax return. Free state tax fileing How these distributions are taxed depends on whether they are periodic payments (amounts received as an annuity) that are paid at regular intervals over several years or nonperiodic payments (amounts not received as an annuity). Free state tax fileing What is covered in this publication?   This publication contains information that you need to understand the following topics. Free state tax fileing How to figure the tax-free part of periodic payments under a pension or annuity plan, including using a simple worksheet for payments under a qualified plan. Free state tax fileing How to figure the tax-free part of nonperiodic payments from qualified and nonqualified plans, and how to use the optional methods to figure the tax on lump-sum distributions from pension, stock bonus, and profit-sharing plans. Free state tax fileing How to roll over certain distributions from a retirement plan into another retirement plan or IRA. Free state tax fileing How to report disability payments, and how beneficiaries and survivors of employees and retirees must report benefits paid to them. Free state tax fileing How to report railroad retirement benefits. Free state tax fileing When additional taxes on certain distributions may apply (including the tax on early distributions and the tax on excess accumulation). Free state tax fileing For additional information on how to report pension or annuity payments on your federal income tax return, be sure to review the instructions on the back of Copies B, C, and 2 of the Form 1099-R that you received and the instructions for Form 1040, lines 16a and 16b (Form 1040A, lines 12a and 12b or Form 1040NR, lines 17a and 17b). Free state tax fileing A “corrected” Form 1099-R replaces the corresponding original Form 1099-R if the original Form 1099-R contained an error. Free state tax fileing Make sure you use the amounts shown on the corrected Form 1099-R when reporting information on your tax return. Free state tax fileing What is not covered in this publication?   The following topics are not discussed in this publication. Free state tax fileing The General Rule. Free state tax fileing   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Free state tax fileing For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Free state tax fileing Although this publication will help you determine whether you can use the General Rule, it will not help you use it to determine the tax treatment of your pension or annuity income. Free state tax fileing For that and other information on the General Rule, see Publication 939, General Rule for Pensions and Annuities. Free state tax fileing Individual retirement arrangements (IRAs). Free state tax fileing   Information on the tax treatment of amounts you receive from an IRA is in Publication 590, Individual Retirement Arrangements (IRAs). Free state tax fileing Civil service retirement benefits. Free state tax fileing   If you are retired from the federal government (regular, phased, or disability retirement) or are the survivor or beneficiary of a federal employee or retiree who died, get Publication 721, Tax Guide to U. Free state tax fileing S. Free state tax fileing Civil Service Retirement Benefits. Free state tax fileing Publication 721 covers the tax treatment of federal retirement benefits, primarily those paid under the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS). Free state tax fileing It also covers benefits paid from the Thrift Savings Plan (TSP). Free state tax fileing Social security and equivalent tier 1 railroad retirement benefits. Free state tax fileing   For information about the tax treatment of these benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Free state tax fileing However, this publication (575) covers the tax treatment of the non-social security equivalent benefit portion of tier 1 railroad retirement benefits, tier 2 benefits, vested dual benefits, and supplemental annuity benefits paid by the U. Free state tax fileing S. Free state tax fileing Railroad Retirement Board. Free state tax fileing Tax-sheltered annuity plans (403(b) plans). Free state tax fileing   If you work for a public school or certain tax-exempt organizations, you may be eligible to participate in a 403(b) retirement plan offered by your employer. Free state tax fileing Although this publication covers the treatment of benefits under 403(b) plans and discusses in-plan Roth rollovers from 403(b) plans to designated Roth accounts, it does not cover other tax provisions that apply to these plans. Free state tax fileing For that and other information on 403(b) plans, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations. Free state tax fileing Comments and suggestions. Free state tax fileing   We welcome your comments about this publication and your suggestions for future editions. Free state tax fileing   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free state tax fileing NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free state tax fileing Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free state tax fileing   You can send your comments from www. Free state tax fileing irs. Free state tax fileing gov/formspubs/. Free state tax fileing Click on “More Information” and then on “Comment on Tax Forms and Publications. Free state tax fileing ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free state tax fileing Ordering forms and publications. Free state tax fileing   Visit www. Free state tax fileing irs. Free state tax fileing gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free state tax fileing Internal Revenue Service 1201 N. Free state tax fileing Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free state tax fileing   If you have a tax question, check the information available on IRS. Free state tax fileing gov or call 1-800-829-1040. Free state tax fileing We cannot answer tax questions sent to either of the above addresses. Free state tax fileing Useful Items - You may want to see: Publication 524 Credit for the Elderly or the Disabled 525 Taxable and Nontaxable Income 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) 571 Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations 590 Individual Retirement Arrangements (IRAs) 721 Tax Guide to U. Free state tax fileing S. Free state tax fileing Civil Service Retirement Benefits 915 Social Security and Equivalent Railroad Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Free state tax fileing 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts See How To Get Tax Help near the end of this publication for information about getting publications and forms. Free state tax fileing Prev  Up  Next   Home   More Online Publications