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How To File Self Employed Taxes

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How To File Self Employed Taxes

How to file self employed taxes Publication 969 - Main Content Table of Contents Health Savings Accounts (HSAs)Qualifying for an HSA Contributions to an HSA Distributions From an HSA Balance in an HSA Death of HSA Holder Filing Form 8889 Employer Participation Medical Savings Accounts (MSAs)Archer MSAs Contributions to an MSA Distributions From an MSA Balance in an Archer MSA Death of the Archer MSA Holder Filing Form 8853 Employer Participation Medicare Advantage MSAs Flexible Spending Arrangements (FSAs)Qualifying for an FSA Contributions to an FSA Distributions From an FSA Balance in an FSA Employer Participation Health Reimbursement Arrangements (HRAs)Qualifying for an HRA Contributions to an HRA Distributions From an HRA Balance in an HRA Employer Participation How To Get Tax HelpLow Income Taxpayer Clinics Health Savings Accounts (HSAs) A health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. How to file self employed taxes You must be an eligible individual to qualify for an HSA. How to file self employed taxes No permission or authorization from the IRS is necessary to establish an HSA. How to file self employed taxes You set up an HSA with a trustee. How to file self employed taxes A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. How to file self employed taxes The HSA can be established through a trustee that is different from your health plan provider. How to file self employed taxes Your employer may already have some information on HSA trustees in your area. How to file self employed taxes If you have an Archer MSA, you can generally roll it over into an HSA tax free. How to file self employed taxes See Rollovers, later. How to file self employed taxes What are the benefits of an HSA?   You may enjoy several benefits from having an HSA. How to file self employed taxes You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040. How to file self employed taxes Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. How to file self employed taxes The contributions remain in your account until you use them. How to file self employed taxes The interest or other earnings on the assets in the account are tax free. How to file self employed taxes Distributions may be tax free if you pay qualified medical expenses. How to file self employed taxes See Qualified medical expenses , later. How to file self employed taxes An HSA is “portable. How to file self employed taxes ” It stays with you if you change employers or leave the work force. How to file self employed taxes Qualifying for an HSA To be an eligible individual and qualify for an HSA, you must meet the following requirements. How to file self employed taxes You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month. How to file self employed taxes You have no other health coverage except what is permitted under Other health coverage , later. How to file self employed taxes You are not enrolled in Medicare. How to file self employed taxes You cannot be claimed as a dependent on someone else's 2013 tax return. How to file self employed taxes Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). How to file self employed taxes If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage does not cover you. How to file self employed taxes If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. How to file self employed taxes This is true even if the other person does not actually claim your exemption. How to file self employed taxes Each spouse who is an eligible individual who wants an HSA must open a separate HSA. How to file self employed taxes You cannot have a joint HSA. How to file self employed taxes High deductible health plan (HDHP). How to file self employed taxes   An HDHP has: A higher annual deductible than typical health plans, and A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. How to file self employed taxes Out-of-pocket expenses include copayments and other amounts, but do not include premiums. How to file self employed taxes   An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible. How to file self employed taxes Preventive care includes, but is not limited to, the following. How to file self employed taxes Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals. How to file self employed taxes Routine prenatal and well-child care. How to file self employed taxes Child and adult immunizations. How to file self employed taxes Tobacco cessation programs. How to file self employed taxes Obesity weight-loss programs. How to file self employed taxes Screening services. How to file self employed taxes This includes screening services for the following: Cancer. How to file self employed taxes Heart and vascular diseases. How to file self employed taxes Infectious diseases. How to file self employed taxes Mental health conditions. How to file self employed taxes Substance abuse. How to file self employed taxes Metabolic, nutritional, and endocrine conditions. How to file self employed taxes Musculoskeletal disorders. How to file self employed taxes Obstetric and gynecological conditions. How to file self employed taxes Pediatric conditions. How to file self employed taxes Vision and hearing disorders. How to file self employed taxes For more information on screening services, see Notice 2004-23, 2004-15 I. How to file self employed taxes R. How to file self employed taxes B. How to file self employed taxes 725 available at www. How to file self employed taxes irs. How to file self employed taxes gov/irb/2004-15_IRB/ar10. How to file self employed taxes html. How to file self employed taxes     The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2013. How to file self employed taxes      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,250 $12,500 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. How to file self employed taxes Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. How to file self employed taxes    The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2014. How to file self employed taxes      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,350 $12,700 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. How to file self employed taxes Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. How to file self employed taxes   Self-only HDHP coverage is an HDHP covering only an eligible individual. How to file self employed taxes Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual). How to file self employed taxes Example. How to file self employed taxes An eligible individual and his dependent child are covered under an “employee plus one” HDHP offered by the individual's employer. How to file self employed taxes This is family HDHP coverage. How to file self employed taxes Family plans that do not meet the high deductible rules. How to file self employed taxes   There are some family plans that have deductibles for both the family as a whole and for individual family members. How to file self employed taxes Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. How to file self employed taxes If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. How to file self employed taxes Example. How to file self employed taxes You have family health insurance coverage in 2013. How to file self employed taxes The annual deductible for the family plan is $3,500. How to file self employed taxes This plan also has an individual deductible of $1,500 for each family member. How to file self employed taxes The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($2,500) for family coverage. How to file self employed taxes Other health coverage. How to file self employed taxes   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. How to file self employed taxes However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. How to file self employed taxes    You can have additional insurance that provides benefits only for the following items. How to file self employed taxes Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property. How to file self employed taxes A specific disease or illness. How to file self employed taxes A fixed amount per day (or other period) of hospitalization. How to file self employed taxes   You can also have coverage (whether provided through insurance or otherwise) for the following items. How to file self employed taxes Accidents. How to file self employed taxes Disability. How to file self employed taxes Dental care. How to file self employed taxes Vision care. How to file self employed taxes Long-term care. How to file self employed taxes    Plans in which substantially all of the coverage is through the items listed earlier are not HDHPs. How to file self employed taxes For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA. How to file self employed taxes Prescription drug plans. How to file self employed taxes   You can have a prescription drug plan, either as part of your HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. How to file self employed taxes If you can receive benefits before that deductible is met, you are not an eligible individual. How to file self employed taxes Other employee health plans. How to file self employed taxes   An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. How to file self employed taxes Health FSAs and HRAs are discussed later. How to file self employed taxes   However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements. How to file self employed taxes Limited-purpose health FSA or HRA. How to file self employed taxes These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. How to file self employed taxes Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible. How to file self employed taxes Suspended HRA. How to file self employed taxes Before the beginning of an HRA coverage period, you can elect to suspend the HRA. How to file self employed taxes The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. How to file self employed taxes When the suspension period ends, you are no longer eligible to make contributions to an HSA. How to file self employed taxes Post-deductible health FSA or HRA. How to file self employed taxes These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. How to file self employed taxes The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met. How to file self employed taxes Retirement HRA. How to file self employed taxes This arrangement pays or reimburses only those medical expenses incurred after retirement. How to file self employed taxes After retirement you are no longer eligible to make contributions to an HSA. How to file self employed taxes Health FSA – grace period. How to file self employed taxes   Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero. How to file self employed taxes See Flexible Spending Arrangements (FSAs) , later. How to file self employed taxes Contributions to an HSA Any eligible individual can contribute to an HSA. How to file self employed taxes For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. How to file self employed taxes For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. How to file self employed taxes Family members or any other person may also make contributions on behalf of an eligible individual. How to file self employed taxes Contributions to an HSA must be made in cash. How to file self employed taxes Contributions of stock or property are not allowed. How to file self employed taxes Limit on Contributions The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. How to file self employed taxes For 2013, if you have self-only HDHP coverage, you can contribute up to $3,250. How to file self employed taxes If you have family HDHP coverage, you can contribute up to $6,450. How to file self employed taxes For 2014, if you have self-only HDHP coverage, you can contribute up to $3,300. How to file self employed taxes If you have family HDHP coverage you can contribute up to $6,550. How to file self employed taxes If you were, or were considered (under the last-month rule, discussed later), an eligible individual for the entire year and did not change your type of coverage, you can contribute the full amount based on your type of coverage. How to file self employed taxes However, if you were not an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of: The limitation shown on the Line 3 Limitation Chart and Worksheetin the Instructions for Form 8889, Health Savings Accounts (HSAs), or The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year. How to file self employed taxes If you had family HDHP coverage on the first day of the last month of your tax year, your contribution limit for 2013 is $6,450 even if you changed coverage during the year. How to file self employed taxes Last-month rule. How to file self employed taxes   Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. How to file self employed taxes You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month. How to file self employed taxes Testing period. How to file self employed taxes   If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. How to file self employed taxes For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month. How to file self employed taxes For example, December 1, 2013, through December 31, 2014. How to file self employed taxes   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the total contributions made to your HSA that would not have been made except for the last-month rule. How to file self employed taxes You include this amount in your income in the year in which you fail to be an eligible individual. How to file self employed taxes This amount is also subject to a 10% additional tax. How to file self employed taxes The income and additional tax are shown on Form 8889, Part III. How to file self employed taxes Example 1. How to file self employed taxes Chris, age 53, becomes an eligible individual on December 1, 2013. How to file self employed taxes He has family HDHP coverage on that date. How to file self employed taxes Under the last-month rule, he contributes $6,450 to his HSA. How to file self employed taxes Chris fails to be an eligible individual in June 2014. How to file self employed taxes Because Chris did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), he must include in his 2014 income the contributions made in 2013 that would not have been made except for the last-month rule. How to file self employed taxes Chris uses the worksheet in the Form 8889 instructions to determine this amount. How to file self employed taxes January -0- February -0- March -0- April -0- May -0- June -0- July -0- August -0- September -0- October -0- November -0- December $6,450. How to file self employed taxes 00 Total for all months $6,450. How to file self employed taxes 00 Limitation. How to file self employed taxes Divide the total by 12 $537. How to file self employed taxes 50 Chris would include $5,912. How to file self employed taxes 50 ($6,450. How to file self employed taxes 00 – $537. How to file self employed taxes 50) in his gross income on his 2014 tax return. How to file self employed taxes Also, a 10% additional tax applies to this amount. How to file self employed taxes Example 2. How to file self employed taxes Erika, age 39, has self-only HDHP coverage on January 1, 2013. How to file self employed taxes Erika changes to family HDHP coverage on November 1, 2013. How to file self employed taxes Because Erika has family HDHP coverage on December 1, 2013, she contributes $6,450 for 2013. How to file self employed taxes Erika fails to be an eligible individual in March 2014. How to file self employed taxes Because she did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), she must include in income the contribution made that would not have been made except for the last-month rule. How to file self employed taxes Erika uses the worksheet in the Form 8889 instructions to determine this amount. How to file self employed taxes January $3,250. How to file self employed taxes 00 February $3,250. How to file self employed taxes 00 March $3,250. How to file self employed taxes 00 April $3,250. How to file self employed taxes 00 May $3,250. How to file self employed taxes 00 June $3,250. How to file self employed taxes 00 July $3,250. How to file self employed taxes 00 August $3,250. How to file self employed taxes 00 September $3,250. How to file self employed taxes 00 October $3,250. How to file self employed taxes 00 November $6,450. How to file self employed taxes 00 December $6,450. How to file self employed taxes 00 Total for all months $45,400. How to file self employed taxes 00 Limitation. How to file self employed taxes Divide the total by 12 $3,783. How to file self employed taxes 34 Erika would include $2,666. How to file self employed taxes 67 ($6,450 – $3,783. How to file self employed taxes 34) in her gross income on her 2014 tax return. How to file self employed taxes Also, a 10% additional tax applies to this amount. How to file self employed taxes Additional contribution. How to file self employed taxes   If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000. How to file self employed taxes For example, if you have self-only coverage, you can contribute up to $4,250 (the contribution limit for self-only coverage ($3,250) plus the additional contribution of $1,000). How to file self employed taxes However, see Enrolled in Medicare , later. How to file self employed taxes If you have more than one HSA in 2013, your total contributions to all the HSAs cannot be more than the limits discussed earlier. How to file self employed taxes Reduction of contribution limit. How to file self employed taxes   You must reduce the amount that can be contributed (including any additional contribution) to your HSA by the amount of any contribution made to your Archer MSA (including employer contributions) for the year. How to file self employed taxes A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP. How to file self employed taxes Rules for married people. How to file self employed taxes   If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage. How to file self employed taxes If each spouse has family coverage under a separate plan, the contribution limit for 2013 is $6,450. How to file self employed taxes You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouses' Archer MSAs. How to file self employed taxes After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division. How to file self employed taxes The rules for married people apply only if both spouses are eligible individuals. How to file self employed taxes If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. How to file self employed taxes If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $8,450. How to file self employed taxes Each spouse must make the additional contribution to his or her own HSA. How to file self employed taxes Example. How to file self employed taxes For 2013, Mr. How to file self employed taxes Auburn and his wife are both eligible individuals. How to file self employed taxes They each have family coverage under separate HDHPs. How to file self employed taxes Mr. How to file self employed taxes Auburn is 58 years old and Mrs. How to file self employed taxes Auburn is 53. How to file self employed taxes Mr. How to file self employed taxes and Mrs. How to file self employed taxes Auburn can split the family contribution limit ($6,450) equally or they can agree on a different division. How to file self employed taxes If they split it equally, Mr. How to file self employed taxes Auburn can contribute $4,225 to an HSA (one-half the maximum contribution for family coverage ($3,225) + $1,000 additional contribution) and Mrs. How to file self employed taxes Auburn can contribute $3,225 to an HSA. How to file self employed taxes Employer contributions. How to file self employed taxes   You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. How to file self employed taxes This includes amounts contributed to your account by your employer through a cafeteria plan. How to file self employed taxes Enrolled in Medicare. How to file self employed taxes   Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. How to file self employed taxes Example. How to file self employed taxes You turned age 65 in July 2013 and enrolled in Medicare. How to file self employed taxes You had an HDHP with self-only coverage and are eligible for an additional contribution of $1,000. How to file self employed taxes Your contribution limit is $2,125 ($4,250 × 6 ÷ 12). How to file self employed taxes Qualified HSA funding distribution. How to file self employed taxes   A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. How to file self employed taxes This distribution cannot be made from an ongoing SEP IRA or SIMPLE IRA. How to file self employed taxes For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made. How to file self employed taxes   The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. How to file self employed taxes The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. How to file self employed taxes The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. How to file self employed taxes The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made. How to file self employed taxes   You can make only one qualified HSA funding distribution during your lifetime. How to file self employed taxes However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. How to file self employed taxes The total qualified HSA funding distribution cannot be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled. How to file self employed taxes Example. How to file self employed taxes In 2013, you are an eligible individual, age 57, with self-only HDHP coverage. How to file self employed taxes You can make a qualified HSA funding distribution of $4,250 ($3,250 plus $1,000 additional contribution). How to file self employed taxes Funding distribution – testing period. How to file self employed taxes   You must remain an eligible individual during the testing period. How to file self employed taxes For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month. How to file self employed taxes For example, if a qualified HSA funding distribution is contributed to your HSA on August 10, 2013, your testing period begins in August 2013, and ends on August 31, 2014. How to file self employed taxes   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA funding distribution. How to file self employed taxes You include this amount in income in the year in which you fail to be an eligible individual. How to file self employed taxes This amount is also subject to a 10% additional tax. How to file self employed taxes The income and the additional tax are shown on Form 8889, Part III. How to file self employed taxes   Each qualified HSA funding distribution allowed has its own testing period. How to file self employed taxes For example, you are an eligible individual, age 45, with self-only HDHP coverage. How to file self employed taxes On June 18, 2013, you make a qualified HSA funding distribution of $3,250. How to file self employed taxes On July 27, 2013, you enroll in family HDHP coverage and on August 17, 2013, you make a qualified HSA funding distribution of $3,200. How to file self employed taxes Your testing period for the first distribution begins in June 2013 and ends on June 30, 2014. How to file self employed taxes Your testing period for the second distribution begins in August 2013 and ends on August 31, 2014. How to file self employed taxes   The testing period rule that applies under the last-month rule (discussed earlier) does not apply to amounts contributed to an HSA through a qualified HSA funding distribution. How to file self employed taxes If you remain an eligible individual during the entire funding distribution testing period, then no amount of that distribution is included in income and will not be subject to the additional tax for failing to meet the last-month rule testing period. How to file self employed taxes Rollovers A rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit. How to file self employed taxes Archer MSAs and other HSAs. How to file self employed taxes   You can roll over amounts from Archer MSAs and other HSAs into an HSA. How to file self employed taxes You do not have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA. How to file self employed taxes Rollover contributions do not need to be in cash. How to file self employed taxes Rollovers are not subject to the annual contribution limits. How to file self employed taxes   You must roll over the amount within 60 days after the date of receipt. How to file self employed taxes You can make only one rollover contribution to an HSA during a 1-year period. How to file self employed taxes Note. How to file self employed taxes If you instruct the trustee of your HSA to transfer funds directly to the trustee of another of your HSAs, the transfer is not considered a rollover. How to file self employed taxes There is no limit on the number of these transfers. How to file self employed taxes Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889. How to file self employed taxes When To Contribute You can make contributions to your HSA for 2013 until April 15, 2014. How to file self employed taxes If you fail to be an eligible individual during 2013, you can still make contributions, up until April 15, 2014, for the months you were an eligible individual. How to file self employed taxes Your employer can make contributions to your HSA between January 1, 2014, and April 15, 2014, that are allocated to 2013. How to file self employed taxes Your employer must notify you and the trustee of your HSA that the contribution is for 2013. How to file self employed taxes The contribution will be reported on your 2014 Form W-2. How to file self employed taxes Reporting Contributions on Your Return Contributions made by your employer are not included in your income. How to file self employed taxes Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. How to file self employed taxes Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income. How to file self employed taxes Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. How to file self employed taxes The contributions are treated as a distribution of money and are not included in the partner's gross income. How to file self employed taxes Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. How to file self employed taxes In both situations, the partner can deduct the contribution made to the partner's HSA. How to file self employed taxes Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee's gross income. How to file self employed taxes The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. How to file self employed taxes Form 8889. How to file self employed taxes   Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. How to file self employed taxes You should include all contributions made for 2013, including those made by April 15, 2014, that are designated for 2013. How to file self employed taxes Contributions made by your employer and qualified HSA funding distributions are also shown on the form. How to file self employed taxes   You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year. How to file self employed taxes Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. How to file self employed taxes Follow the instructions for Form 8889. How to file self employed taxes Report your HSA deduction on Form 1040 or Form 1040NR. How to file self employed taxes Excess contributions. How to file self employed taxes   You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. How to file self employed taxes Excess contributions are not deductible. How to file self employed taxes Excess contributions made by your employer are included in your gross income. How to file self employed taxes If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. How to file self employed taxes   Generally, you must pay a 6% excise tax on excess contributions. How to file self employed taxes See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. How to file self employed taxes The excise tax applies to each tax year the excess contribution remains in the account. How to file self employed taxes   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions. How to file self employed taxes You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made. How to file self employed taxes You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings. How to file self employed taxes If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income is not an excess contribution. How to file self employed taxes If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later. How to file self employed taxes Deducting an excess contribution in a later year. How to file self employed taxes   You may be able to deduct excess contributions for previous years that are still in your HSA. How to file self employed taxes The excess contribution you can deduct for the current year is the lesser of the following two amounts. How to file self employed taxes Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year. How to file self employed taxes The total excess contributions in your HSA at the beginning of the year. How to file self employed taxes   Amounts contributed for the year include contributions by you, your employer, and any other person. How to file self employed taxes They also include any qualified HSA funding distribution made to your HSA. How to file self employed taxes Any excess contribution remaining at the end of a tax year is subject to the excise tax. How to file self employed taxes See Form 5329. How to file self employed taxes Distributions From an HSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. How to file self employed taxes When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA. How to file self employed taxes You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. How to file self employed taxes If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax. How to file self employed taxes You do not have to make distributions from your HSA each year. How to file self employed taxes If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. How to file self employed taxes Generally, a distribution is money you get from your health savings account. How to file self employed taxes Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated. How to file self employed taxes The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. How to file self employed taxes Qualified medical expenses. How to file self employed taxes   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. How to file self employed taxes These are explained in Publication 502, Medical and Dental Expenses. How to file self employed taxes   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for HSA purposes. How to file self employed taxes A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. How to file self employed taxes   For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. How to file self employed taxes State law determines when an HSA is established. How to file self employed taxes An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established. How to file self employed taxes   If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses. How to file self employed taxes   Qualified medical expenses are those incurred by the following persons. How to file self employed taxes You and your spouse. How to file self employed taxes All dependents you claim on your tax return. How to file self employed taxes Any person you could have claimed as a dependent on your return except that: The person filed a joint return, The person had gross income of $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. How to file self employed taxes    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. How to file self employed taxes You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA. How to file self employed taxes Insurance premiums. How to file self employed taxes   You cannot treat insurance premiums as qualified medical expenses unless the premiums are for: Long-term care insurance. How to file self employed taxes Health care continuation coverage (such as coverage under COBRA). How to file self employed taxes Health care coverage while receiving unemployment compensation under federal or state law. How to file self employed taxes Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap). How to file self employed taxes   The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. How to file self employed taxes See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040). How to file self employed taxes   Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. How to file self employed taxes For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses. How to file self employed taxes Health coverage tax credit. How to file self employed taxes   You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. How to file self employed taxes See Publication 502 for more information on this credit. How to file self employed taxes Deemed distributions from HSAs. How to file self employed taxes   The following situations result in deemed taxable distributions from your HSA. How to file self employed taxes You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2013. How to file self employed taxes Your account ceases to be an HSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8889. How to file self employed taxes You used any portion of any of your HSAs as security for a loan at any time in 2013. How to file self employed taxes You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. How to file self employed taxes   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the HSA, Lending of money between you and the HSA, Furnishing goods, services, or facilities between you and the HSA, and Transfer to or use by you, or for your benefit, of any assets of the HSA. How to file self employed taxes   Any deemed distribution will not be treated as used to pay qualified medical expenses. How to file self employed taxes These distributions are included in your income and are subject to the additional 20% tax, discussed later. How to file self employed taxes Recordkeeping. How to file self employed taxes You must keep records sufficient to show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. How to file self employed taxes Do not send these records with your tax return. How to file self employed taxes Keep them with your tax records. How to file self employed taxes Reporting Distributions on Your Return How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier). How to file self employed taxes If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. How to file self employed taxes However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. How to file self employed taxes Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. How to file self employed taxes If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. How to file self employed taxes Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. How to file self employed taxes You may have to pay an additional 20% tax on your taxable distribution. How to file self employed taxes HSA administration and maintenance fees withdrawn by the trustee are not reported as distributions from the HSA. How to file self employed taxes Additional tax. How to file self employed taxes   There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. How to file self employed taxes Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. How to file self employed taxes Exceptions. How to file self employed taxes   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. How to file self employed taxes Balance in an HSA An HSA is generally exempt from tax. How to file self employed taxes You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. How to file self employed taxes Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). How to file self employed taxes Earnings on amounts in an HSA are not included in your income while held in the HSA. How to file self employed taxes Death of HSA Holder You should choose a beneficiary when you set up your HSA. How to file self employed taxes What happens to that HSA when you die depends on whom you designate as the beneficiary. How to file self employed taxes Spouse is the designated beneficiary. How to file self employed taxes   If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death. How to file self employed taxes Spouse is not the designated beneficiary. How to file self employed taxes   If your spouse is not the designated beneficiary of your HSA: The account stops being an HSA, and The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. How to file self employed taxes If your estate is the beneficiary, the value is included on your final income tax return. How to file self employed taxes The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death. How to file self employed taxes Filing Form 8889 You must file Form 8889 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. How to file self employed taxes You must file the form even if only your employer or your spouse's employer made contributions to the HSA. How to file self employed taxes If, during the tax year, you are the beneficiary of two or more HSAs or you are a beneficiary of an HSA and you have your own HSA, you must complete a separate Form 8889 for each HSA. How to file self employed taxes Enter “statement” at the top of each Form 8889 and complete the form as instructed. How to file self employed taxes Next, complete a controlling Form 8889 combining the amounts shown on each of the statement Forms 8889. How to file self employed taxes Attach the statements to your tax return after the controlling Form 8889. How to file self employed taxes Employer Participation This section contains the rules that employers must follow if they decide to make HSAs available to their employees. How to file self employed taxes Unlike the previous discussions, “you” refers to the employer and not to the employee. How to file self employed taxes Health plan. How to file self employed taxes   If you want your employees to be able to have an HSA, they must have an HDHP. How to file self employed taxes You can provide no additional coverage other than those exceptions listed previously under Other health coverage . How to file self employed taxes Contributions. How to file self employed taxes   You can make contributions to your employees' HSAs. How to file self employed taxes You deduct the contributions on your business income tax return for the year in which you make the contributions. How to file self employed taxes If the contribution is allocated to the prior year, you still deduct it in the year in which you made the contribution. How to file self employed taxes   For more information on employer contributions, see Notice 2008-59, 2008-29 I. How to file self employed taxes R. How to file self employed taxes B. How to file self employed taxes 123, questions 23 through 27, available at www. How to file self employed taxes irs. How to file self employed taxes gov/irb/2008-29_IRB/ar11. How to file self employed taxes html. How to file self employed taxes Comparable contributions. How to file self employed taxes   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' HSAs. How to file self employed taxes Your contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees. How to file self employed taxes The comparability rules do not apply to contributions made through a cafeteria plan. How to file self employed taxes Comparable participating employees. How to file self employed taxes   Comparable participating employees: Are covered by your HDHP and are eligible to establish an HSA, Have the same category of coverage (either self-only or family coverage), and Have the same category of employment (part-time, full-time, or former employees). How to file self employed taxes   To meet the comparability requirements for eligible employees who have not established an HSA by December 31 or have not notified you that they have an HSA, you must meet a notice requirement and a contribution requirement. How to file self employed taxes   You will meet the notice requirement if by January 15 of the following calendar year you provide a written notice to all such employees. How to file self employed taxes The notice must state that each eligible employee who, by the last day of February, establishes an HSA and notifies you that they have established an HSA will receive a comparable contribution to the HSA for the prior year. How to file self employed taxes For a sample of the notice, see Regulation 54. How to file self employed taxes 4980G-4 A-14(c). How to file self employed taxes You will meet the contribution requirement for these employees if by April 15, 2014, you contribute comparable amounts plus reasonable interest to the employee's HSA for the prior year. How to file self employed taxes Note. How to file self employed taxes For purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees. How to file self employed taxes Excise tax. How to file self employed taxes   If you made contributions to your employees' HSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. How to file self employed taxes Employment taxes. How to file self employed taxes   Amounts you contribute to your employees' HSAs are generally not subject to employment taxes. How to file self employed taxes You must report the contributions in box 12 of the Form W-2 you file for each employee. How to file self employed taxes This includes the amounts the employee elected to contribute through a cafeteria plan. How to file self employed taxes Enter code “W” in box 12. How to file self employed taxes Medical Savings Accounts (MSAs) Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder's spouse, or the account holder's dependent(s). How to file self employed taxes After December 31, 2007, you cannot be treated as an eligible individual for Archer MSA purposes unless: You were an active participant for any tax year ending before January 1, 2008, or You became an active participant for a tax year ending after December 31, 2007, by reason of coverage under a high deductible health plan (HDHP) of an Archer MSA participating employer. How to file self employed taxes A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is eligible for Medicare. How to file self employed taxes Archer MSAs An Archer MSA is a tax-exempt trust or custodial account that you set up with a U. How to file self employed taxes S. How to file self employed taxes financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. How to file self employed taxes What are the benefits of an Archer MSA?   You may enjoy several benefits from having an Archer MSA. How to file self employed taxes You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040 or Form 1040NR. How to file self employed taxes The interest or other earnings on the assets in your Archer MSA are tax free. How to file self employed taxes Distributions may be tax free if you pay qualified medical expenses. How to file self employed taxes See Qualified medical expenses , later. How to file self employed taxes The contributions remain in your Archer MSA from year to year until you use them. How to file self employed taxes An Archer MSA is “portable” so it stays with you if you change employers or leave the work force. How to file self employed taxes Qualifying for an Archer MSA To qualify for an Archer MSA, you must be either of the following. How to file self employed taxes An employee (or the spouse of an employee) of a small employer (defined later) that maintains a self-only or family HDHP for you (or your spouse). How to file self employed taxes A self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP. How to file self employed taxes You can have no other health or Medicare coverage except what is permitted under Other health coverage , later. How to file self employed taxes You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month. How to file self employed taxes If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an Archer MSA contribution. How to file self employed taxes This is true even if the other person does not actually claim your exemption. How to file self employed taxes Small employer. How to file self employed taxes   A small employer is generally an employer who had an average of 50 or fewer employees during either of the last 2 calendar years. How to file self employed taxes The definition of small employer is modified for new employers and growing employers. How to file self employed taxes Growing employer. How to file self employed taxes   A small employer may begin HDHPs and Archer MSAs for his or her employees and then grow beyond 50 employees. How to file self employed taxes The employer will continue to meet the requirement for small employers if he or she: Had 50 or fewer employees when the Archer MSAs began, Made a contribution that was excludable or deductible as an Archer MSA for the last year he or she had 50 or fewer employees, and Had an average of 200 or fewer employees each year after 1996. How to file self employed taxes Changing employers. How to file self employed taxes   If you change employers, your Archer MSA moves with you. How to file self employed taxes However, you may not make additional contributions unless you are otherwise eligible. How to file self employed taxes High deductible health plan (HDHP). How to file self employed taxes   To be eligible for an Archer MSA, you must be covered under an HDHP. How to file self employed taxes An HDHP has: A higher annual deductible than typical health plans, and A maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses. How to file self employed taxes Limits. How to file self employed taxes   The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for HDHPs for 2013. How to file self employed taxes   Self-only coverage Family coverage Minimum annual deductible $2,150 $4,300 Maximum annual deductible $3,200 $6,450 Maximum annual out-of-pocket expenses $4,300 $7,850 Family plans that do not meet the high deductible rules. How to file self employed taxes   There are some family plans that have deductibles for both the family as a whole and for individual family members. How to file self employed taxes Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. How to file self employed taxes If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. How to file self employed taxes Example. How to file self employed taxes You have family health insurance coverage in 2013. How to file self employed taxes The annual deductible for the family plan is $5,500. How to file self employed taxes This plan also has an individual deductible of $2,000 for each family member. How to file self employed taxes The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($4,300) for family coverage. How to file self employed taxes Other health coverage. How to file self employed taxes   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. How to file self employed taxes However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. How to file self employed taxes However, you can have additional insurance that provides benefits only for the following items. How to file self employed taxes Liabilities incurred under workers' compensation laws, torts, or ownership or use of property. How to file self employed taxes A specific disease or illness. How to file self employed taxes A fixed amount per day (or other period) of hospitalization. How to file self employed taxes You can also have coverage (whether provided through insurance or otherwise) for the following items. How to file self employed taxes Accidents. How to file self employed taxes Disability. How to file self employed taxes Dental care. How to file self employed taxes Vision care. How to file self employed taxes Long-term care. How to file self employed taxes Contributions to an MSA Contributions to an Archer MSA must be made in cash. How to file self employed taxes You cannot contribute stock or other property to an Archer MSA. How to file self employed taxes Who can contribute to my Archer MSA?   If you are an employee, your employer may make contributions to your Archer MSA. How to file self employed taxes (You do not pay tax on these contributions. How to file self employed taxes ) If your employer does not make contributions to your Archer MSA, or you are self-employed, you can make your own contributions to your Archer MSA. How to file self employed taxes Both you and your employer cannot make contributions to your Archer MSA in the same year. How to file self employed taxes You do not have to make contributions to your Archer MSA every year. How to file self employed taxes    If your spouse is covered by your HDHP and an excludable amount is contributed by your spouse's employer to an Archer MSA belonging to your spouse, you cannot make contributions to your own Archer MSA that year. How to file self employed taxes Limits There are two limits on the amount you or your employer can contribute to your Archer MSA: The annual deductible limit. How to file self employed taxes An income limit. How to file self employed taxes Annual deductible limit. How to file self employed taxes   You (or your employer) can contribute up to 75% of the annual deductible of your HDHP (65% if you have a self-only plan) to your Archer MSA. How to file self employed taxes You must have the HDHP all year to contribute the full amount. How to file self employed taxes If you do not qualify to contribute the full amount for the year, determine your annual deductible limit by using the worksheet in the Instructions for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. How to file self employed taxes Example 1. How to file self employed taxes You have an HDHP for your family all year in 2013. How to file self employed taxes The annual deductible is $5,000. How to file self employed taxes You can contribute up to $3,750 ($5,000 × 75%) to your Archer MSA for the year. How to file self employed taxes Example 2. How to file self employed taxes You have an HDHP for your family for the entire months of July through December 2013 (6 months). How to file self employed taxes The annual deductible is $5,000. How to file self employed taxes You can contribute up to $1,875 ($5,000 × 75% ÷ 12 × 6) to your Archer MSA for the year. How to file self employed taxes If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans. How to file self employed taxes The contribution limit is split equally between you unless you agree on a different division. How to file self employed taxes Income limit. How to file self employed taxes   You cannot contribute more than you earned for the year from the employer through whom you have your HDHP. How to file self employed taxes   If you are self-employed, you cannot contribute more than your net self-employment income. How to file self employed taxes This is your income from self-employment minus expenses (including the deductible part of self-employment tax). How to file self employed taxes Example 1. How to file self employed taxes Noah Paul earned $25,000 from ABC Company in 2013. How to file self employed taxes Through ABC, he had an HDHP for his family for the entire year. How to file self employed taxes The annual deductible was $5,000. How to file self employed taxes He can contribute up to $3,750 to his Archer MSA (75% × $5,000). How to file self employed taxes He can contribute the full amount because he earned more than $3,750 at ABC. How to file self employed taxes Example 2. How to file self employed taxes Westley Lawrence is self-employed. How to file self employed taxes He had an HDHP for his family for the entire year in 2013. How to file self employed taxes The annual deductible was $5,000. How to file self employed taxes Based on the annual deductible, the maximum contribution to his Archer MSA would have been $3,750 (75% × $5,000). How to file self employed taxes However, after deducting his business expenses, Joe's net self-employment income is $2,500 for the year. How to file self employed taxes Therefore, he is limited to a contribution of $2,500. How to file self employed taxes Individuals enrolled in Medicare. How to file self employed taxes   Beginning with the first month you are enrolled in Medicare, you cannot contribute to an Archer MSA. How to file self employed taxes However, you may be eligible for a Medicare Advantage MSA, discussed later. How to file self employed taxes When To Contribute You can make contributions to your Archer MSA for 2013 until April 15, 2014. How to file self employed taxes Reporting Contributions on Your Return Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040 or Form 1040NR. How to file self employed taxes You should include all contributions you, or your employer, made for 2013, including those made by April 15, 2014, that are designated for 2013. How to file self employed taxes You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount you (or your employer) contributed during the year. How to file self employed taxes Your employer's contributions should be shown in box 12 of Form W-2, Wage and Tax Statement, with code R. How to file self employed taxes Follow the instructions for Form 8853 and complete the worksheet in the instructions. How to file self employed taxes Report your Archer MSA deduction on Form 1040 or Form 1040NR. How to file self employed taxes Excess contributions. How to file self employed taxes   You will have excess contributions if the contributions to your Archer MSA for the year are greater than the limits discussed earlier. How to file self employed taxes Excess contributions are not deductible. How to file self employed taxes Excess contributions made by your employer are included in your gross income. How to file self employed taxes If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. How to file self employed taxes   Generally, you must pay a 6% excise tax on excess contributions. How to file self employed taxes See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. How to file self employed taxes The excise tax applies to each tax year the excess contribution remains in the account. How to file self employed taxes   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions. How to file self employed taxes You withdraw the excess contributions by the due date, including extensions, of your tax return. How to file self employed taxes You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings. How to file self employed taxes Deducting an excess contribution in a later year. How to file self employed taxes   You may be able to deduct excess contributions for previous years that are still in your Archer MSA. How to file self employed taxes The excess contribution you can deduct in the current year is the lesser of the following two amounts. How to file self employed taxes Your maximum Archer MSA contribution limit for the year minus any amounts contributed to your Archer MSA for the year. How to file self employed taxes The total excess contributions in your Archer MSA at the beginning of the year. How to file self employed taxes   Any excess contributions remaining at the end of a tax year are subject to the excise tax. How to file self employed taxes See Form 5329. How to file self employed taxes Distributions From an MSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. How to file self employed taxes When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your Archer MSA to send you a distribution from your Archer MSA. How to file self employed taxes You can receive tax-free distributions from your Archer MSA to pay for qualified medical expenses (discussed later). How to file self employed taxes If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an additional 20% tax as well. How to file self employed taxes You do not have to make withdrawals from your Archer MSA each year. How to file self employed taxes If you no longer qualify to make contributions, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. How to file self employed taxes A distribution is money you get from your Archer MSA. How to file self employed taxes The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. How to file self employed taxes Qualified medical expenses. How to file self employed taxes   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. How to file self employed taxes These are explained in Publication 502. How to file self employed taxes   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for MSA purposes. How to file self employed taxes A medicine or drug will be a qualified medical expense for MSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. How to file self employed taxes   Qualified medical expenses are those incurred by the following persons. How to file self employed taxes You and your spouse. How to file self employed taxes All dependents you claim on your tax return. How to file self employed taxes Any person you could have claimed as a dependent on your return except that: The person filed a joint return, The person had gross income of $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. How to file self employed taxes    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. How to file self employed taxes    You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your Archer MSA. How to file self employed taxes Special rules for insurance premiums. How to file self employed taxes   Generally, you cannot treat insurance premiums as qualified medical expenses for Archer MSAs. How to file self employed taxes You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for Archer MSAs. How to file self employed taxes Health coverage tax credit. How to file self employed taxes   You cannot claim this credit for premiums that you pay with a tax-free distribution from your Archer MSA. How to file self employed taxes See Publication 502 for information on this credit. How to file self employed taxes Deemed distributions from Archer MSAs. How to file self employed taxes   The following situations result in deemed taxable distributions from your Archer MSA. How to file self employed taxes You engaged in any transaction prohibited by section 4975 with respect to any of your Archer MSAs at any time in 2013. How to file self employed taxes Your account ceases to be an Archer MSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8853. How to file self employed taxes You used any portion of any of your Archer MSAs as security for a loan at any time in 2013. How to file self employed taxes You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. How to file self employed taxes   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the Archer MSA, Lending of money between you and the Archer MSA, Furnishing goods, services, or facilities between you and the Archer MSA, and Transfer to or use by you, or for your benefit, of any assets of the Archer MSA. How to file self employed taxes   Any deemed distribution will not be treated as used to pay qualified medical expenses. How to file self employed taxes These distributions are included in your income and are subject to the additional 20% tax, discussed later. How to file self employed taxes Recordkeeping. How to file self employed taxes You must keep records sufficient to show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. How to file self employed taxes Do not send these records with your tax return. How to file self employed taxes Keep them with your tax records. How to file self employed taxes Reporting Distributions on Your Return How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier). How to file self employed taxes If you use a distribution from your Archer MSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8853. How to file self employed taxes Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. How to file self employed taxes If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. How to file self employed taxes Report the amount on Form 8853 and file it with your Form 1040 or Form 1040NR. How to file self employed taxes You may have to pay an additional 20% tax, discussed later, on your taxable distribution. How to file self employed taxes If an amount (other than a rollover) is contributed to your Archer MSA this year (by you or your employer), you also must report and pay tax on a distribution you receive from your Archer MSA this year that is used to pay medical expenses of someone who is not covered by an HDHP, or is also covered by another health plan that is not an HDHP, at the time the expenses are incurred. How to file self employed taxes Rollovers. How to file self employed taxes   Generally, any distribution from an Archer MSA that you roll over into another Archer MSA or an HSA is not taxable if you complete the rollover within 60 days. How to file self employed taxes An Archer MSA and an HSA can only receive one rollover contribution during a 1-year period. How to file self employed taxes See the Form 8853 instructions for more information. How to file self employed taxes Additional tax. How to file self employed taxes   There is a 20% additional tax on the part of your distributions not used for qualified medical expenses. How to file self employed taxes Figure the tax on Form 8853 and file it with your Form 1040 or Form 1040NR. How to file self employed taxes Report the additional tax in the total on Form 1040 or Form 1040NR. How to file self employed taxes Exceptions. How to file self employed taxes   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. How to file self employed taxes Balance in an Archer MSA An Archer MSA is generally exempt from tax. How to file self employed taxes You are permitted to take a distribution from your Archer MSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. How to file self employed taxes Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). How to file self employed taxes Earnings on amounts in an Archer MSA are not included in your income while held in the Archer MSA. How to file self employed taxes Death of the Archer MSA Holder You should choose a beneficiary when you set up your Archer MSA. How to file self employed taxes What happens to that Archer MSA when you die depends on whom you designate as the beneficiary. How to file self employed taxes Spouse is the designated beneficiary. How to file self employed taxes   If your spouse is the designated beneficiary of your Archer MSA, it will be treated as your spouse's Archer MSA after your death. How to file self employed taxes Spouse is not the designated beneficiary. How to file self employed taxes   If your spouse is not the designated beneficiary of your Archer MSA: The account stops being an Archer MSA, and The fair market value of the Archer MSA becomes taxable to the beneficiary in the year in which you die. How to file self employed taxes   If your estate is the beneficiary, the fair market value of the Archer MSA will be included on your final income tax return. How to file self employed taxes The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death. How to file self employed taxes Filing Form 8853 You must file Form 8853 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your Archer MSA during the year. How to file self employed taxes You must file the form even if only your employer or your spouse's employer made contributions to the Archer MSA. How to file self employed taxes If, during the tax year, you are the beneficiary of two or more Archer MSAs or you are a beneficiary of an Archer MSA and you have your own Archer MSA, you must complete a separate Form 8853 for each MSA. How to file self employed taxes Enter “statement” at the top of each Form 8853 and complete the form as instructed. How to file self employed taxes Next, complete a controlling Form 8853 combining the amounts shown on each of the statement Forms 8853. How to file self employed taxes Attach the statements to your tax return after the controlling Form 8853. How to file self employed taxes Employer Participation This section contains the rules that employers must follow if they decide to make Archer MSAs available to their employees. How to file self employed taxes Unlike the previous discussions, “you” refers to the employer and not to the employee. How to file self employed taxes Health plan. How to file self employed taxes   If you want your employees to be able to have an Archer MSA, you must make an HDHP available to them. How to file self employed taxes You can provide no additional coverage other than those exceptions listed previously under Other health coverage . How to file self employed taxes Contributions. How to file self employed taxes   You can make contributions to your employees' Archer MSAs. How to file self employed taxes You deduct the contributions on the “Employee benefit programs” line of your business income tax return for the year in which you make the contributions. How to file self employed taxes If you are filing Form 1040, Schedule C, this is Part II, line 14. How to file self employed taxes Comparable contributions. How to file self employed taxes   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' Archer MSAs. How to file self employed taxes Your contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees. How to file self employed taxes Comparable participating employees. How to file self employed taxes   Comparable participating employees: Are covered by your HDHP and are eligible to establish an Archer MSA, Have the same category of coverage (either self-only or family coverage), and Have the same category of employment (either part-time or full-time). How to file self employed taxes Excise tax. How to file self employed taxes   If you made contributions to your employees' Archer MSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. How to file self employed taxes Employment taxes. How to file self employed taxes   Amounts you contribute to your employees' Archer MSAs are generally not subject to employment taxes. How to file self employed taxes You must report the contributions in box 12 of the Form W-2 you file for each employee. How to file self employed taxes Enter code “R” in box 12. How to file self employed taxes Medicare Advantage MSAs A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. How to file self employed taxes To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and have a high deductible health plan (HDHP) that meets the Medicare guidelines. How to file self employed taxes A Medicare Advantage MSA is a tax-exempt trust or custodial savings account that you set up with a financial institution (such as a bank or an insurance company) in which the Medicare program can deposit money for qualified medical expenses. How to file self employed taxes The money in your account is not taxed if it is used for qualified medical expenses, and it may earn interest or dividends. How to file self employed taxes An HDHP is a special health insurance policy that has a high deductible. How to file self employed taxes You choose the policy you want to use as part of your Medicare Advantage MSA plan. How to file self employed taxes However, the policy must be approved by the Medicare program. How to file self employed taxes Medicare Advantage MSAs are administered through the federal Medicare program. How to file self employed taxes You can get information by calling 1-800-Medicare (1-800-633-4227) or through the Internet at www. How to file self employed taxes medicare. How to file self employed taxes gov. How to file self employed taxes Note. How to file self employed taxes You must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your tax return if you have a Medicare Advantage MSA. How to file self employed taxes Flexible Spending Arrangements (FSAs) A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. How to file self employed taxes FSAs are usually funded through voluntary salary reduction agreements with your employer. How to file self employed taxes No employment or federal income taxes are deducted from your contribution. How to file self employed taxes The employer may also contribute. How to file self employed taxes Note. How to file self employed taxes Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for FSAs on your income tax return. How to file self employed taxes For information on the interaction between a health FSA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier. How to file self employed taxes What are the benefits of an FSA?   You may enjoy several benefits from having an FSA. How to file self employed taxes Contributions made by your employer can be excluded from your gross income. How to file self employed taxes No employment or federal income taxes are deducted from the contributions. How to file self employed taxes Withdrawals may be tax free if you pay qualified medical expenses. How to file self employed taxes See Qualified medical expenses , later. How to file self employed taxes You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account. How to file self employed taxes Qualifying for an FSA Health FSAs are employer-established benefit plans. How to file self employed taxes These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. How to file self employed taxes Employers have complete flexibility to offer various combinations of benefits in designing their plan. How to file self employed taxes You do not have to be covered under any other health care plan to participate. How to file self employed taxes Self-employed persons are not eligible for an FSA. How to file self employed taxes Certain limitations may apply if you are a highly compensated participant or a key employee. How to file self employed taxes Contributions to an FSA You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. How to file self employed taxes This is sometimes called a salary reduction agreement. How to file self employed taxes The employer may also contribute to your FSA if specified in the plan. How to file self employed taxes You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. How to file self employed taxes However, contributions made by your employer to provide coverage for long-term care insurance must be included in income. How to file self employed taxes When To Contribute At the
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The How To File Self Employed Taxes

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