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State Tax Forms And Instructions

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State Tax Forms And Instructions

State tax forms and instructions Publication 15-A - Main Content Table of Contents 1. State tax forms and instructions Who Are Employees?Independent Contractors Common-Law Employees Statutory Employees Statutory Nonemployees Misclassification of Employees 2. State tax forms and instructions Employee or Independent Contractor?Common-Law Rules Industry Examples 3. State tax forms and instructions Employees of Exempt OrganizationsSocial security and Medicare taxes. State tax forms and instructions FUTA tax. State tax forms and instructions 4. State tax forms and instructions Religious Exemptions and Special Rules for MinistersForm W-2. State tax forms and instructions Self-employed. State tax forms and instructions Employees. State tax forms and instructions 5. State tax forms and instructions Wages and Other CompensationRelocating for Temporary Work Assignments Employee Achievement Awards Scholarship and Fellowship Payments Outplacement Services Withholding for Idle Time Back Pay Supplemental Unemployment Benefits Golden Parachute Payments Interest-Free and Below-Market-Interest-Rate Loans Leave Sharing Plans Nonqualified Deferred Compensation Plans Tax-Sheltered Annuities Contributions to a Simplified Employee Pension (SEP) SIMPLE Retirement Plans 6. State tax forms and instructions Sick Pay ReportingSick Pay Payments That Are Not Sick Pay Sick Pay Plan Third-Party Payers of Sick Pay Social Security, Medicare, and FUTA Taxes on Sick Pay Income Tax Withholding on Sick Pay Depositing and Reporting Example of Figuring and Reporting Sick Pay 7. State tax forms and instructions Special Rules for Paying TaxesCommon Paymaster Agents Reporting Agents Employee's Portion of Taxes Paid by Employer International Social Security Agreements 8. State tax forms and instructions Pensions and AnnuitiesFederal Income Tax Withholding 9. State tax forms and instructions Alternative Methods for Figuring WithholdingTerm of continuous employment. State tax forms and instructions Formula Tables for Percentage Method Withholding (for Automated Payroll Systems) Wage Bracket Percentage Method Tables (for Automated Payroll Systems) Combined Federal Income Tax, Employee Social Security Tax, and Employee Medicare Tax Withholding Tables 10. State tax forms and instructions Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersWithholding Tables How To Get Tax Help 1. State tax forms and instructions Who Are Employees? Before you can know how to treat payments that you make to workers for services, you must first know the business relationship that exists between you and the person performing the services. State tax forms and instructions The person performing the services may be: An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee. State tax forms and instructions This discussion explains these four categories. State tax forms and instructions A later discussion, Employee or Independent Contractor in section 2, points out the differences between an independent contractor and an employee and gives examples from various types of occupations. State tax forms and instructions If an individual who works for you is not an employee under the common-law rules (see section 2), you generally do not have to withhold federal income tax from that individual's pay. State tax forms and instructions However, in some cases you may be required to withhold under the backup withholding requirements on these payments. State tax forms and instructions See Publication 15 (Circular E) for information on backup withholding. State tax forms and instructions Independent Contractors People such as doctors, veterinarians, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. State tax forms and instructions However, whether such people are employees or independent contractors depends on the facts in each case. State tax forms and instructions The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result. State tax forms and instructions Common-Law Employees Under common-law rules, anyone who performs services for you is generally your employee if you have the right to control what will be done and how it will be done. State tax forms and instructions This is so even when you give the employee freedom of action. State tax forms and instructions What matters is that you have the right to control the details of how the services are performed. State tax forms and instructions For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2. State tax forms and instructions If you have an employer-employee relationship, it makes no difference how it is labeled. State tax forms and instructions The substance of the relationship, not the label, governs the worker's status. State tax forms and instructions It does not matter whether the individual is employed full time or part time. State tax forms and instructions For employment tax purposes, no distinction is made between classes of employees. State tax forms and instructions Superintendents, managers, and other supervisory personnel are all employees. State tax forms and instructions An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. State tax forms and instructions A director of a corporation is not an employee with respect to services performed as a director. State tax forms and instructions You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. State tax forms and instructions However, the wages of certain employees may be exempt from one or more of these taxes. State tax forms and instructions See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4). State tax forms and instructions Leased employees. State tax forms and instructions   Under certain circumstances, a firm that furnishes workers to other firms is the employer of those workers for employment tax purposes. State tax forms and instructions For example, a temporary staffing service may provide the services of secretaries, nurses, and other similarly trained workers to its clients on a temporary basis. State tax forms and instructions   The staffing service enters into contracts with the clients under which the clients specify the services to be provided and a fee is paid to the staffing service for each individual furnished. State tax forms and instructions The staffing service has the right to control and direct the worker's services for the client, including the right to discharge or reassign the worker. State tax forms and instructions The staffing service hires the workers, controls the payment of their wages, provides them with unemployment insurance and other benefits, and is the employer for employment tax purposes. State tax forms and instructions For information on employee leasing as it relates to pension plan qualification requirements, see Leased employee in Publication 560, Retirement Plans for Small Business. State tax forms and instructions Additional information. State tax forms and instructions   For more information about the treatment of special types of employment, the treatment of special types of payments, and similar subjects, see Publication 15 (Circular E) or Publication 51 (Circular A), Agricultural Employer's Tax Guide. State tax forms and instructions Statutory Employees If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute, (also known as “statutory employees”) for certain employment tax purposes. State tax forms and instructions This would happen if they fall within any one of the following four categories and meet the three conditions described next under Social security and Medicare taxes . State tax forms and instructions A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission. State tax forms and instructions A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company. State tax forms and instructions An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done. State tax forms and instructions A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. State tax forms and instructions The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. State tax forms and instructions The work performed for you must be the salesperson's principal business activity. State tax forms and instructions See Salesperson in section 2. State tax forms and instructions Social security and Medicare taxes. State tax forms and instructions   You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. State tax forms and instructions The service contract states or implies that substantially all the services are to be performed personally by them. State tax forms and instructions They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation, such as a car or truck). State tax forms and instructions The services are performed on a continuing basis for the same payer. State tax forms and instructions Federal unemployment (FUTA) tax. State tax forms and instructions   For FUTA tax (the unemployment tax paid under the Federal Unemployment Tax Act), the term “employee” means the same as it does for social security and Medicare taxes, except that it does not include statutory employees defined above in categories 2 and 3. State tax forms and instructions Any individual who is a statutory employee described above under category 1 or 4 is also an employee for FUTA tax purposes and subject to FUTA tax. State tax forms and instructions Income tax. State tax forms and instructions   Do not withhold federal income tax from the wages of statutory employees. State tax forms and instructions Reporting payments to statutory employees. State tax forms and instructions   Furnish Form W-2 to a statutory employee, and check “Statutory employee” in box 13. State tax forms and instructions Show your payments to the employee as “other compensation” in box 1. State tax forms and instructions Also, show social security wages in box 3, social security tax withheld in box 4, Medicare wages in box 5, and Medicare tax withheld in box 6. State tax forms and instructions The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. State tax forms and instructions He or she reports earnings as a statutory employee on line 1 of Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. State tax forms and instructions A statutory employee's business expenses are deductible on Schedule C (Form 1040) or C-EZ (Form 1040) and are not subject to the reduction by 2% of his or her adjusted gross income that applies to common-law employees. State tax forms and instructions H-2A agricultural workers. State tax forms and instructions   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. State tax forms and instructions Statutory Nonemployees There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. State tax forms and instructions Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if: Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked, and Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes. State tax forms and instructions Direct sellers. State tax forms and instructions   Direct sellers include persons falling within any of the following three groups. State tax forms and instructions Persons engaged in selling (or soliciting the sale of) consumer products in the home or place of business other than in a permanent retail establishment. State tax forms and instructions Persons engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment. State tax forms and instructions Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution). State tax forms and instructions   Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. State tax forms and instructions Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. State tax forms and instructions Licensed real estate agents. State tax forms and instructions   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. State tax forms and instructions Companion sitters. State tax forms and instructions   Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. State tax forms and instructions A person engaged in the trade or business of putting the sitters in touch with individuals who wish to employ them (that is, a companion sitting placement service) will not be treated as the employer of the sitters if that person does not receive or pay the salary or wages of the sitters and is compensated by the sitters or the persons who employ them on a fee basis. State tax forms and instructions Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. State tax forms and instructions Misclassification of Employees Consequences of treating an employee as an independent contractor. State tax forms and instructions   If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you are liable for employment taxes for that worker and the relief provision, discussed next, will not apply. State tax forms and instructions See section 2 in Publication 15 (Circular E) for more information. State tax forms and instructions Relief provision. State tax forms and instructions   If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. State tax forms and instructions To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. State tax forms and instructions You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. State tax forms and instructions Technical service specialists. State tax forms and instructions   This relief provision does not apply for a technical services specialist you provide to another business under an arrangement between you and the other business. State tax forms and instructions A technical service specialist is an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. State tax forms and instructions   This limit on the application of the rule does not affect the determination of whether such workers are employees under the common-law rules. State tax forms and instructions The common-law rules control whether the specialist is treated as an employee or an independent contractor. State tax forms and instructions However, if you directly contract with a technical service specialist to provide services for your business and not for another business, you may still be entitled to the relief provision. State tax forms and instructions Test proctors and room supervisors. State tax forms and instructions   The consistent treatment requirement does not apply to services performed after December 31, 2006, by an individual as a test proctor or room supervisor assisting in the administration of college entrance or placement examinations if the individual: Is performing the services for a section 501(c) organization exempt from tax under section 501(a) of the code, and Is not otherwise treated as an employee of the organization for employment taxes. State tax forms and instructions Voluntary Classification Settlement Program (VCSP). State tax forms and instructions   Employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP if certain requirements are met. State tax forms and instructions To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). State tax forms and instructions For more information, visit IRS. State tax forms and instructions gov and enter “VCSP” in the search box. State tax forms and instructions 2. State tax forms and instructions Employee or Independent Contractor? An employer must generally withhold federal income taxes, withhold and pay over social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. State tax forms and instructions An employer does not generally have to withhold or pay over any federal taxes on payments to independent contractors. State tax forms and instructions Common-Law Rules To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. State tax forms and instructions In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. State tax forms and instructions Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. State tax forms and instructions These facts are discussed next. State tax forms and instructions Behavioral control. State tax forms and instructions   Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of: Instructions that the business gives to the worker. State tax forms and instructions   An employee is generally subject to the business' instructions about when, where, and how to work. State tax forms and instructions All of the following are examples of types of instructions about how to do work. State tax forms and instructions When and where to do the work. State tax forms and instructions What tools or equipment to use. State tax forms and instructions What workers to hire or to assist with the work. State tax forms and instructions Where to purchase supplies and services. State tax forms and instructions What work must be performed by a specified  individual. State tax forms and instructions What order or sequence to follow. State tax forms and instructions   The amount of instruction needed varies among different jobs. State tax forms and instructions Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. State tax forms and instructions A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. State tax forms and instructions The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right. State tax forms and instructions Training that the business gives to the worker. State tax forms and instructions   An employee may be trained to perform services in a particular manner. State tax forms and instructions Independent contractors ordinarily use their own methods. State tax forms and instructions Financial control. State tax forms and instructions   Facts that show whether the business has a right to control the business aspects of the worker's job include: The extent to which the worker has unreimbursed business expenses. State tax forms and instructions   Independent contractors are more likely to have unreimbursed expenses than are employees. State tax forms and instructions Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. State tax forms and instructions However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer. State tax forms and instructions The extent of the worker's investment. State tax forms and instructions   An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. State tax forms and instructions However, a significant investment is not necessary for independent contractor status. State tax forms and instructions The extent to which the worker makes his or her services available to the relevant market. State tax forms and instructions   An independent contractor is generally free to seek out business opportunities. State tax forms and instructions Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. State tax forms and instructions How the business pays the worker. State tax forms and instructions   An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. State tax forms and instructions This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. State tax forms and instructions An independent contractor is often paid a flat fee or on a time and materials basis for the job. State tax forms and instructions However, it is common in some professions, such as law, to pay independent contractors hourly. State tax forms and instructions The extent to which the worker can realize a profit or loss. State tax forms and instructions   An independent contractor can make a profit or loss. State tax forms and instructions Type of relationship. State tax forms and instructions   Facts that show the parties' type of relationship include: Written contracts describing the relationship the parties intended to create. State tax forms and instructions Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. State tax forms and instructions The permanency of the relationship. State tax forms and instructions If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship. State tax forms and instructions The extent to which services performed by the worker are a key aspect of the regular business of the company. State tax forms and instructions If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. State tax forms and instructions For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. State tax forms and instructions This would indicate an employer-employee relationship. State tax forms and instructions IRS help. State tax forms and instructions   If you want the IRS to determine whether or not a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. State tax forms and instructions Industry Examples The following examples may help you properly classify your workers. State tax forms and instructions Building and Construction Industry Example 1. State tax forms and instructions Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. State tax forms and instructions She did not advance funds to help him carry on the work. State tax forms and instructions She makes direct payments to the suppliers for all necessary materials. State tax forms and instructions She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. State tax forms and instructions She pays them an hourly rate and exercises almost constant supervision over the work. State tax forms and instructions Jerry is not free to transfer his assistants to other jobs. State tax forms and instructions He may not work on other jobs while working for Wilma. State tax forms and instructions He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. State tax forms and instructions He and his assistants perform personal services for hourly wages. State tax forms and instructions Jerry Jones and his assistants are employees of Wilma White. State tax forms and instructions Example 2. State tax forms and instructions Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. State tax forms and instructions He uses his own tools and performs services in the order designated by the corporation and according to its specifications. State tax forms and instructions The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. State tax forms and instructions He does not have a place of business or hold himself out to perform similar services for others. State tax forms and instructions Either party can end the services at any time. State tax forms and instructions Milton Manning is an employee of the corporation. State tax forms and instructions Example 3. State tax forms and instructions Wallace Black agreed with the Sawdust Co. State tax forms and instructions to supply the construction labor for a group of houses. State tax forms and instructions The company agreed to pay all construction costs. State tax forms and instructions However, he supplies all the tools and equipment. State tax forms and instructions He performs personal services as a carpenter and mechanic for an hourly wage. State tax forms and instructions He also acts as superintendent and foreman and engages other individuals to assist him. State tax forms and instructions The company has the right to select, approve, or discharge any helper. State tax forms and instructions A company representative makes frequent inspections of the construction site. State tax forms and instructions When a house is finished, Wallace is paid a certain percentage of its costs. State tax forms and instructions He is not responsible for faults, defects of construction, or wasteful operation. State tax forms and instructions At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. State tax forms and instructions The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages. State tax forms and instructions Wallace Black and his assistants are employees of the Sawdust Co. State tax forms and instructions Example 4. State tax forms and instructions Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. State tax forms and instructions A signed contract established a flat amount for the services rendered by Bill Plum. State tax forms and instructions Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. State tax forms and instructions He hires his own roofers who are treated as employees for federal employment tax purposes. State tax forms and instructions If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. State tax forms and instructions Bill Plum, doing business as Plum Roofing, is an independent contractor. State tax forms and instructions Example 5. State tax forms and instructions Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. State tax forms and instructions She is to receive $1,280 every 2 weeks for the next 10 weeks. State tax forms and instructions This is not considered payment by the hour. State tax forms and instructions Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. State tax forms and instructions She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. State tax forms and instructions Vera is an independent contractor. State tax forms and instructions Trucking Industry Example. State tax forms and instructions Rose Trucking contracts to deliver material for Forest, Inc. State tax forms and instructions , at $140 per ton. State tax forms and instructions Rose Trucking is not paid for any articles that are not delivered. State tax forms and instructions At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. State tax forms and instructions All operating expenses, including insurance coverage, are paid by Jan Rose. State tax forms and instructions All equipment is owned or rented by Jan and she is responsible for all maintenance. State tax forms and instructions None of the drivers are provided by Forest, Inc. State tax forms and instructions Jan Rose, operating as Rose Trucking, is an independent contractor. State tax forms and instructions Computer Industry Example. State tax forms and instructions Steve Smith, a computer programmer, is laid off when Megabyte, Inc. State tax forms and instructions , downsizes. State tax forms and instructions Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. State tax forms and instructions It is not clear how long that it will take to complete the project, and Steve is not guaranteed any minimum payment for the hours spent on the program. State tax forms and instructions Megabyte provides Steve with no instructions beyond the specifications for the product itself. State tax forms and instructions Steve and Megabyte have a written contract, which provides that Steve is considered to be an independent contractor, is required to pay federal and state taxes, and receives no benefits from Megabyte. State tax forms and instructions Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. State tax forms and instructions Steve works at home and is not expected or allowed to attend meetings of the software development group. State tax forms and instructions Steve is an independent contractor. State tax forms and instructions Automobile Industry Example 1. State tax forms and instructions Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. State tax forms and instructions She works six days a week and is on duty in Bob's showroom on certain assigned days and times. State tax forms and instructions She appraises trade-ins, but her appraisals are subject to the sales manager's approval. State tax forms and instructions Lists of prospective customers belong to the dealer. State tax forms and instructions She is required to develop leads and report results to the sales manager. State tax forms and instructions Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. State tax forms and instructions She is paid a commission and is eligible for prizes and bonuses offered by Bob. State tax forms and instructions Bob also pays the cost of health insurance and group-term life insurance for Donna. State tax forms and instructions Donna is an employee of Bob Blue. State tax forms and instructions Example 2. State tax forms and instructions Sam Sparks performs auto repair services in the repair department of an auto sales company. State tax forms and instructions He works regular hours and is paid on a percentage basis. State tax forms and instructions He has no investment in the repair department. State tax forms and instructions The sales company supplies all facilities, repair parts, and supplies; issues instructions on the amounts to be charged, parts to be used, and the time for completion of each job; and checks all estimates and repair orders. State tax forms and instructions Sam is an employee of the sales company. State tax forms and instructions Example 3. State tax forms and instructions An auto sales agency furnishes space for Helen Bach to perform auto repair services. State tax forms and instructions She provides her own tools, equipment, and supplies. State tax forms and instructions She seeks out business from insurance adjusters and other individuals and does all of the body and paint work that comes to the agency. State tax forms and instructions She hires and discharges her own helpers, determines her own and her helpers' working hours, quotes prices for repair work, makes all necessary adjustments, assumes all losses from uncollectible accounts, and receives, as compensation for her services, a large percentage of the gross collections from the auto repair shop. State tax forms and instructions Helen is an independent contractor and the helpers are her employees. State tax forms and instructions Attorney Example. State tax forms and instructions Donna Yuma is a sole practitioner who rents office space and pays for the following items: telephone, computer, on-line legal research linkup, fax machine, and photocopier. State tax forms and instructions Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. State tax forms and instructions Donna has a part-time receptionist who also does the bookkeeping. State tax forms and instructions She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. State tax forms and instructions For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. State tax forms and instructions Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. State tax forms and instructions The bills include charges for long distance calls, on-line research time, fax charges, photocopies, postage, and travel, costs for which the corporations have agreed to reimburse her. State tax forms and instructions Donna is an independent contractor. State tax forms and instructions Taxicab Driver Example. State tax forms and instructions Tom Spruce rents a cab from Taft Cab Co. State tax forms and instructions for $150 per day. State tax forms and instructions He pays the costs of maintaining and operating the cab. State tax forms and instructions Tom Spruce keeps all fares that he receives from customers. State tax forms and instructions Although he receives the benefit of Taft's two-way radio communication equipment, dispatcher, and advertising, these items benefit both Taft and Tom Spruce. State tax forms and instructions Tom Spruce is an independent contractor. State tax forms and instructions Salesperson To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. State tax forms and instructions If a salesperson who works for you does not meet the tests for a common-law employee, discussed earlier in this section, you do not have to withhold federal income tax from his or her pay (see Statutory Employees in section 1). State tax forms and instructions However, even if a salesperson is not an employee under the usual common-law rules for income tax withholding, his or her pay may still be subject to social security, Medicare, and FUTA taxes as a statutory employee. State tax forms and instructions To determine whether a salesperson is an employee for social security, Medicare, and FUTA tax purposes, the salesperson must meet all eight elements of the statutory employee test. State tax forms and instructions A salesperson is a statutory employee for social security, Medicare, and FUTA tax purposes if he or she: Works full time for one person or company except, possibly, for sideline sales activities on behalf of some other person, Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works, Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments, Sells merchandise for resale, or supplies for use in the customer's business, Agrees to do substantially all of this work personally, Has no substantial investment in the facilities used to do the work, other than in facilities for transportation, Maintains a continuing relationship with the person or company for which he or she works, and Is not an employee under common-law rules. State tax forms and instructions 3. State tax forms and instructions Employees of Exempt Organizations Many nonprofit organizations are exempt from federal income tax. State tax forms and instructions Although they do not have to pay federal income tax themselves, they must still withhold federal income tax from the pay of their employees. State tax forms and instructions However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees. State tax forms and instructions Section 501(c)(3) organizations. State tax forms and instructions   Nonprofit organizations that are exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code include any community chest, fund, or foundation organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals. State tax forms and instructions These organizations are usually corporations and are exempt from federal income tax under section 501(a). State tax forms and instructions Social security and Medicare taxes. State tax forms and instructions   Wages paid to employees of section 501(c)(3) organizations are subject to social security and Medicare taxes unless one of the following situations applies. State tax forms and instructions The organization pays an employee less than $100 in a calendar year. State tax forms and instructions The organization is a church or church-controlled organization opposed for religious reasons to the payment of social security and Medicare taxes and has filed Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption From Employer Social Security and Medicare Taxes, to elect exemption from social security and Medicare taxes. State tax forms and instructions The organization must have filed for exemption before the first date on which a quarterly employment tax return (Form 941) or annual employment tax return (Form 944) would otherwise be due. State tax forms and instructions   An employee of a church or church-controlled organization that is exempt from social security and Medicare taxes must pay self-employment tax if the employee is paid $108. State tax forms and instructions 28 or more in a year. State tax forms and instructions However, an employee who is a member of a qualified religious sect can apply for an exemption from the self-employment tax by filing Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits. State tax forms and instructions See Members of recognized religious sects opposed to insurance in section 4. State tax forms and instructions FUTA tax. State tax forms and instructions   An organization that is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from FUTA tax. State tax forms and instructions This exemption cannot be waived. State tax forms and instructions Do not file Form 940 to report wages paid by these organizations or pay the tax. State tax forms and instructions Note. State tax forms and instructions An organization wholly owned by a state or its political subdivision should contact the appropriate state official for information about reporting and getting social security and Medicare coverage for its employees. State tax forms and instructions Other than section 501(c)(3) organizations. State tax forms and instructions   Nonprofit organizations that are not section 501(c)(3) organizations may also be exempt from federal income tax under section 501(a) or section 521. State tax forms and instructions However, these organizations are not exempt from withholding federal income, social security, or Medicare tax from their employees' pay, or from paying FUTA tax. State tax forms and instructions Two special rules for social security, Medicare, and FUTA taxes apply. State tax forms and instructions If an employee is paid less than $100 during a calendar year, his or her wages are not subject to social security and Medicare taxes. State tax forms and instructions If an employee is paid less than $50 in a calendar quarter, his or her wages are not subject to FUTA tax for the quarter. State tax forms and instructions The above rules do not apply to employees who work for pension plans and other similar organizations described in section 401(a). State tax forms and instructions 4. State tax forms and instructions Religious Exemptions and Special Rules for Ministers Special rules apply to the treatment of ministers for social security and Medicare tax purposes. State tax forms and instructions An exemption from social security and Medicare taxes is available for ministers and certain other religious workers and members of certain recognized religious sects. State tax forms and instructions For more information on getting an exemption, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. State tax forms and instructions Ministers. State tax forms and instructions   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. State tax forms and instructions They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances and sacraments according to the prescribed tenets and practices of that religious organization. State tax forms and instructions   Ministers are employees if they perform services in the exercise of ministry and are subject to your will and control. State tax forms and instructions The common-law rules discussed in section 1 and section 2 should be applied to determine whether a minister is your employee or is self-employed. State tax forms and instructions Whether the minister is an employee or self-employed, the earnings of a minister are not subject to federal income, social security, and Medicare tax withholding. State tax forms and instructions However, even if the minister is a common law employee, the earnings as reported on the minister's Form 1040 are subject to self-employment tax and federal income tax. State tax forms and instructions You do not withhold these taxes from wages earned by a minister, but if the minister is your employee, you may agree with the minister to voluntarily withhold tax to cover the minister's liability for self-employment tax and federal income tax. State tax forms and instructions For more information, see Publication 517. State tax forms and instructions Form W-2. State tax forms and instructions   If your minister is an employee, report all taxable compensation as wages in box 1 on Form W-2. State tax forms and instructions Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Publication 15 (Circular E). State tax forms and instructions Do not include a parsonage allowance (excludable housing allowance) in this amount. State tax forms and instructions You may report a designated parsonage or rental allowance (housing allowance) and a utilities allowance, or the rental value of housing provided in a separate statement or in box 14 on Form W-2. State tax forms and instructions Do not show on Form W-2, Form 941, or Form 944 any amount as social security or Medicare wages, or any withholding for social security or Medicare taxes. State tax forms and instructions If you withheld federal income tax from the minister under a voluntary agreement, this amount should be shown in box 2 on Form W-2 as federal income tax withheld. State tax forms and instructions For more information on ministers, see Publication 517. State tax forms and instructions Exemptions for ministers and others. State tax forms and instructions   Certain ordained ministers, Christian Science practitioners, and members of religious orders who have not taken a vow of poverty may apply to exempt their earnings from self-employment tax on religious grounds. State tax forms and instructions The application must be based on conscientious opposition because of personal considerations to public insurance that makes payments in the event of death, disability, old age, or retirement, or that makes payments toward the cost of, or provides services for, medical care, including social security and Medicare benefits. State tax forms and instructions The exemption applies only to qualified services performed for the religious organization. State tax forms and instructions See Revenue Procedure 91-20, 1991-1 C. State tax forms and instructions B. State tax forms and instructions 524, for guidelines to determine whether an organization is a religious order or whether an individual is a member of a religious order. State tax forms and instructions   To apply for the exemption, the employee should file Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners. State tax forms and instructions See Publication 517 for more information about claiming an exemption from self-employment tax using Form 4361. State tax forms and instructions Members of recognized religious sects opposed to insurance. State tax forms and instructions   If you belong to a recognized religious sect or to a division of such sect that is opposed to insurance, you may qualify for an exemption from the self-employment tax. State tax forms and instructions To qualify, you must be conscientiously opposed to accepting the benefits of any public or private insurance that makes payments because of death, disability, old age, or retirement, or makes payments toward the cost of, or provides services for, medical care (including social security and Medicare benefits). State tax forms and instructions If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. State tax forms and instructions Religious opposition based on the teachings of the sect is the only legal basis for the exemption. State tax forms and instructions In addition, your religious sect (or division) must have existed since December 31, 1950. State tax forms and instructions Self-employed. State tax forms and instructions   If you are self-employed and a member of a recognized religious sect opposed to insurance, you can apply for exemption by filing Form 4029 to waive all social security and Medicare benefits. State tax forms and instructions Employees. State tax forms and instructions   The social security and Medicare tax exemption available to the self-employed who are members of a recognized religious sect opposed to insurance is also available to their employees who are members of such a sect. State tax forms and instructions This applies to partnerships only if each partner is a member of the sect. State tax forms and instructions This exemption for employees applies only if both the employee and the employer are members of such a sect, and the employer has an exemption. State tax forms and instructions To get the exemption, the employee must file Form 4029. State tax forms and instructions   An employee of a church or church-controlled organization that is exempt from social security and Medicare taxes can also apply for an exemption on Form 4029. State tax forms and instructions 5. State tax forms and instructions Wages and Other Compensation Publication 15 (Circular E) provides a general discussion of taxable wages. State tax forms and instructions Publication 15-B discusses fringe benefits. State tax forms and instructions The following topics supplement those discussions. State tax forms and instructions Relocating for Temporary Work Assignments If an employee is given a temporary work assignment away from his or her regular place of work, certain travel expenses reimbursed or paid directly by the employer in accordance with an accountable plan (see section 5 in Publication 15 (Circular E)) may be excludable from the employee's wages. State tax forms and instructions Generally, a temporary work assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. State tax forms and instructions If the employee's new work assignment is indefinite, any living expenses reimbursed or paid by the employer (other than qualified moving expenses) must be included in the employee's wages as compensation. State tax forms and instructions For the travel expenses to be excludable: The new work location must be outside of the city or general area of the employee's regular work place or post of duty, The travel expenses must otherwise qualify as deductible by the employee, and The expenses must be for the period during which the employee is at the temporary work location. State tax forms and instructions If you reimburse or pay any personal expenses of an employee during his or her temporary work assignment, such as expenses for home leave for family members or for vacations, these amounts must be included in the employee's wages. State tax forms and instructions See chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Publication 15 (Circular E), for more information. State tax forms and instructions These rules generally apply to temporary work assignments both inside and outside the U. State tax forms and instructions S. State tax forms and instructions Employee Achievement Awards Do not withhold federal income, social security, or Medicare taxes on the fair market value of an employee achievement award if it is excludable from your employee's gross income. State tax forms and instructions To be excludable from your employee's gross income, the award must be tangible personal property (not cash, gift certificates, or securities) given to an employee for length of service or safety achievement, awarded as part of a meaningful presentation, and awarded under circumstances that do not indicate that the payment is disguised compensation. State tax forms and instructions Excludable employee achievement awards also are not subject to FUTA tax. State tax forms and instructions Limits. State tax forms and instructions   The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. State tax forms and instructions A higher limit of $1,600 applies to qualified plan awards. State tax forms and instructions Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. State tax forms and instructions An award cannot be treated as a qualified plan award if the average cost per recipient of all awards under all of your qualified plans is more than $400. State tax forms and instructions   If during the year an employee receives awards not made under a qualified plan and also receives awards under a qualified plan, the exclusion for the total cost of all awards to that employee cannot be more than $1,600. State tax forms and instructions The $400 and $1,600 limits cannot be added together to exclude more than $1,600 for the cost of awards to any one employee during the year. State tax forms and instructions Scholarship and Fellowship Payments Only amounts that you pay as a qualified scholarship to a candidate for a degree may be excluded from the recipient's gross income. State tax forms and instructions A qualified scholarship is any amount granted as a scholarship or fellowship that is used for: Tuition and fees required to enroll in, or to attend, an educational institution, or Fees, books, supplies, and equipment that are required for courses at the educational institution. State tax forms and instructions The exclusion from income does not apply to the portion of any amount received that represents payment for teaching, research, or other services required as a condition of receiving the scholarship or tuition reduction. State tax forms and instructions These amounts are reportable on Form W-2. State tax forms and instructions However, the exclusion will still apply for any amount received under two specific programs—the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program—despite any service condition attached to those amounts. State tax forms and instructions Any amounts that you pay for room and board are not excludable from the recipient's gross income. State tax forms and instructions A qualified scholarship is not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. State tax forms and instructions For more information, see Publication 970, Tax Benefits for Education. State tax forms and instructions Outplacement Services If you provide outplacement services to your employees to help them find new employment (such as career counseling, resume assistance, or skills assessment), the value of these benefits may be income to them and subject to all withholding taxes. State tax forms and instructions However, the value of these services will not be subject to any employment taxes if: You derive a substantial business benefit from providing the services (such as improved employee morale or business image) separate from the benefit that you would receive from the mere payment of additional compensation, and The employee would be able to deduct the cost of the services as employee business expenses if he or she had paid for them. State tax forms and instructions However, if you receive no additional benefit from providing the services, or if the services are not provided on the basis of employee need, then the value of the services is treated as wages and is subject to federal income tax withholding and social security and Medicare taxes. State tax forms and instructions Similarly, if an employee receives the outplacement services in exchange for reduced severance pay (or other taxable compensation), then the amount the severance pay is reduced is treated as wages for employment tax purposes. State tax forms and instructions Withholding for Idle Time Payments made under a voluntary guarantee to employees for idle time (any time during which an employee performs no services) are wages for the purposes of social security, Medicare, and FUTA taxes, and federal income tax withholding. State tax forms and instructions Back Pay Treat back pay as wages in the year paid and withhold and pay employment taxes as required. State tax forms and instructions If back pay was awarded by a court or government agency to enforce a federal or state statute protecting an employee's right to employment or wages, special rules apply for reporting those wages to the Social Security Administration. State tax forms and instructions These rules also apply to litigation actions and settlement agreements or agency directives that are resolved out of court and not under a court decree or order. State tax forms and instructions Examples of pertinent statutes include, but are not limited to, the National Labor Relations Act, Fair Labor Standards Act, Equal Pay Act, and Age Discrimination in Employment Act. State tax forms and instructions See Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, and Form SSA-131, Employer Report of Special Wage Payments, for details. State tax forms and instructions Supplemental Unemployment Benefits If you pay, under a plan, supplemental unemployment benefits to a former employee, all or part of the payments may be taxable and subject to federal income tax withholding, depending on how the plan is funded. State tax forms and instructions Amounts that represent a return to the employee of amounts previously subject to tax are not taxable and are not subject to withholding. State tax forms and instructions You should withhold federal income tax on the taxable part of the payments made, under a plan, to an employee who is involuntarily separated because of a reduction in force, discontinuance of a plant or operation, or other similar condition. State tax forms and instructions It does not matter whether the separation is temporary or permanent. State tax forms and instructions There are special rules that apply in determining whether benefits qualify as supplemental unemployment benefits that are excluded from wages for social security, Medicare, and FUTA tax purposes. State tax forms and instructions To qualify as supplemental unemployment benefits for these purposes, the benefits must meet the following requirements. State tax forms and instructions Benefits are paid only to unemployed former employees who are laid off by the employer. State tax forms and instructions Eligibility for benefits depends on meeting prescribed conditions after termination. State tax forms and instructions The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state law, and the amount of regular weekly pay. State tax forms and instructions The right to benefits does not accrue until a prescribed period after termination. State tax forms and instructions Benefits are not attributable to the performance of particular services. State tax forms and instructions No employee has any right to the benefits until qualified and eligible to receive benefits. State tax forms and instructions Benefits may not be paid in a lump sum. State tax forms and instructions Withholding on taxable supplemental unemployment benefits must be based on the withholding certificate (Form W-4) that the employee gave to you. State tax forms and instructions Golden Parachute Payments A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. State tax forms and instructions Under the agreement, the corporation agrees to pay certain amounts to its key personnel in the event of a change in ownership or control of the corporation. State tax forms and instructions Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. State tax forms and instructions See Regulations section 1. State tax forms and instructions 280G-1 for more information. State tax forms and instructions No deduction is allowed to the corporation for any excess parachute payment. State tax forms and instructions To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. State tax forms and instructions A parachute payment for purposes of section 280G is any payment that meets all of the following. State tax forms and instructions The payment is in the nature of compensation. State tax forms and instructions The payment is to, or for the benefit of, a disqualified individual. State tax forms and instructions A disqualified individual is anyone who at any time during the 12-month period prior to and ending on the date of the change in ownership or control of the corporation (the disqualified individual determination period) was an employee or independent contractor and was, in regard to that corporation, a shareholder, an officer, or highly compensated individual. State tax forms and instructions The payment is contingent on a change in ownership of the corporation, the effective control of the corporation, or the ownership of a substantial portion of the assets of the corporation. State tax forms and instructions The payment has an aggregate present value of at least three times the individual's base amount. State tax forms and instructions The base amount is the average annual compensation for service includible in the individual's gross income over the most recent 5 taxable years. State tax forms and instructions An excess parachute payment amount is the excess of any parachute payment over the base amount. State tax forms and instructions For more information, see Regulations section 1. State tax forms and instructions 280G-1. State tax forms and instructions The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. State tax forms and instructions If the recipient is an employee, the 20% excise tax is to be withheld by the corporation. State tax forms and instructions Example. State tax forms and instructions An officer of a corporation receives a golden parachute payment of $400,000. State tax forms and instructions This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. State tax forms and instructions The excess parachute payment is $300,000 ($400,000 minus $100,000). State tax forms and instructions The corporation cannot deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). State tax forms and instructions Reporting golden parachute payments. State tax forms and instructions   Golden parachute payments to employees must be reported on Form W-2. State tax forms and instructions See the General Instructions for Forms W-2 and W-3 for details. State tax forms and instructions For nonemployee reporting of these payments, see Box 7. State tax forms and instructions Nonemployee Compensation in the Instructions for Form 1099-MISC. State tax forms and instructions Exempt payments. State tax forms and instructions   Payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules. State tax forms and instructions See section 280G(b)(5) and (6) for more information. State tax forms and instructions Interest-Free and Below-Market-Interest-Rate Loans In general, if an employer lends an employee more than $10,000 at an interest rate less than the current applicable federal rate (AFR), the difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee. State tax forms and instructions This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. State tax forms and instructions This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. State tax forms and instructions Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). State tax forms and instructions The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. State tax forms and instructions You can get these rates by calling 1-800-829-4933 or by visiting IRS. State tax forms and instructions gov. State tax forms and instructions For more information, see section 7872 and its related regulations. State tax forms and instructions Leave Sharing Plans If you establish a leave sharing plan for your employees that allows them to transfer leave to other employees for medical emergencies, the amounts paid to the recipients of the leave are considered wages. State tax forms and instructions These amounts are includible in the gross income of the recipients and are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. State tax forms and instructions Do not include these amounts in the income of the transferors. State tax forms and instructions These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies. State tax forms and instructions Nonqualified Deferred Compensation Plans Income Tax and Reporting Section 409A provides that all amounts deferred under a nonqualified deferred compensation (NQDC) plan for all tax years are currently includible in gross income (to the extent not subject to a substantial risk of forfeiture and not previously included in gross income) and subject to additional taxes, unless certain requirements are met pertaining to, among other things, elections to defer compensation and distributions under a NQDC plan. State tax forms and instructions Section 409A also includes rules that apply to certain trusts or similar arrangements associated with NQDC plans if the trusts or arrangements are located outside of the United States, are restricted to the provision of benefits in connection with a decline in the financial health of the plan sponsor, or contributions are made to the trust during certain periods such as when a qualified plan of the service recipient is underfunded. State tax forms and instructions Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. State tax forms and instructions Other changes to the Internal Revenue Code provide that the deferrals under a NQDC plan must be reported separately on Form W-2 or Form 1099-MISC, whichever applies. State tax forms and instructions Specific rules for reporting are provided in the instructions to the forms. State tax forms and instructions The provisions do not affect the application or reporting of social security, Medicare, or FUTA taxes. State tax forms and instructions The provisions do not prevent the inclusion of amounts in income or wages under other provisions of the Internal Revenue Code or common law principles, such as when amounts are actually or constructively received or irrevocably contributed to a separate fund. State tax forms and instructions For more information about nonqualified deferred compensation plans, see Regulations sections 1. State tax forms and instructions 409A-1 through 1. State tax forms and instructions 409A-6. State tax forms and instructions Notice 2008-113 provides guidance on the correction of certain operation failures of a NQDC plan. State tax forms and instructions Notice 2008-113, 2008-51 I. State tax forms and instructions R. State tax forms and instructions B. State tax forms and instructions 1305, is available at www. State tax forms and instructions irs. State tax forms and instructions gov/irb/2008-51_IRB/ar12. State tax forms and instructions html. State tax forms and instructions Also see Notice 2010-6, 2010-3 I. State tax forms and instructions R. State tax forms and instructions B. State tax forms and instructions 275, available at www. State tax forms and instructions irs. State tax forms and instructions gov/irb/2010-03_IRB/ar08. State tax forms and instructions html and Notice 2010-80, 2010-51 I. State tax forms and instructions R. State tax forms and instructions B. State tax forms and instructions 853, available at www. State tax forms and instructions irs. State tax forms and instructions gov/irb/2010-51_IRB/ar08. State tax forms and instructions html. State tax forms and instructions Social security, Medicare, and FUTA taxes. State tax forms and instructions   Employer contributions to nonqualified deferred compensation (NQDC) plans, as defined in the applicable regulations, are treated as wages subject to social security, Medicare, and FUTA taxes when the services are performed or the employee no longer has a substantial risk of forfeiting the right to the deferred compensation, whichever is later. State tax forms and instructions   Amounts deferred are subject to social security, Medicare, and FUTA taxes at that time unless the amount that is deferred cannot be reasonably ascertained; for example, if benefits are based on final pay. State tax forms and instructions If the value of the future benefit is based on any factors that are not yet reasonably ascertainable, you may choose to estimate the value of the future benefit and withhold and pay social security, Medicare, and FUTA taxes on that amount. State tax forms and instructions You will have to determine later, when the amount is reasonably ascertainable, whether any additional taxes are required. State tax forms and instructions If taxes are not paid before the amounts become reasonably ascertainable, when the amounts become reasonably ascertainable they are subject to social security, Medicare, and FUTA taxes on the amounts deferred plus the income attributable to those amounts deferred. State tax forms and instructions For more information, see Regulations sections 31. State tax forms and instructions 3121(v)(2)-1 and 31. State tax forms and instructions 3306(r)(2)-1. State tax forms and instructions Tax-Sheltered Annuities Employer payments made by a public educational institution or a tax-exempt organization to purchase a tax-sheltered annuity for an employee (annual deferrals) are included in the employee's social security and Medicare wages, if the payments are made because of a salary reduction agreement. State tax forms and instructions However, they are not included in box 1 on Form W-2 in the year the deferrals are made and are not subject to federal income tax withholding. State tax forms and instructions See Regulations section 31. State tax forms and instructions 3121(a)(5)-2 for the definition of a salary reduction agreement. State tax forms and instructions Contributions to a Simplified Employee Pension (SEP) An employer's SEP contributions to an employee's individual retirement arrangement (IRA) are excluded from the employee's gross income. State tax forms and instructions These excluded amounts are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. State tax forms and instructions However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. State tax forms and instructions See Publication 560 for more information about SEPs. State tax forms and instructions Salary reduction simplified employee pensions (SARSEP) repealed. State tax forms and instructions   You may not establish a SARSEP after 1996. State tax forms and instructions However, SARSEPs established before January 1, 1997, may continue to receive contributions. State tax forms and instructions SIMPLE Retirement Plans Employer and employee contributions to a savings incentive match plan for employees (SIMPLE) retirement account (subject to limitations) are excludable from the employee's income and are exempt from federal income tax withholding. State tax forms and instructions An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. State tax forms and instructions However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. State tax forms and instructions For more information about SIMPLE retirement plans, see Publication 560. State tax forms and instructions 6. State tax forms and instructions Sick Pay Reporting The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014. State tax forms and instructions Information about this change will be included in the revision of Publication 15-A that is expected to post to IRS. State tax forms and instructions gov in December 2014. State tax forms and instructions Special rules apply to the reporting of sick pay payments to employees. State tax forms and instructions How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company. State tax forms and instructions Sick pay is usually subject to social security, Medicare, and FUTA taxes. State tax forms and instructions For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. State tax forms and instructions Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. State tax forms and instructions Sick Pay Sick pay generally means any amount paid under a plan because of an employee's temporary absence from work due to injury, sickness, or disability. State tax forms and instructions It may be paid by either the employer or a third party, such as an insurance company. State tax forms and instructions Sick pay includes both short- and long-term benefits. State tax forms and instructions It is often expressed as a percentage of the employee's regular wages. State tax forms and instructions Payments That Are Not Sick Pay Sick pay does not include the following payments. State tax forms and instructions Disability retirement payments. State tax forms and instructions Disability retirement payments are not sick pay and are not discussed in this section. State tax forms and instructions Those payments are subject to the rules for federal income tax withholding from pensions and annuities. State tax forms and instructions See section 8. State tax forms and instructions Workers' compensation. State tax forms and instructions Payments because of a work-related injury or sickness that are made under a workers' compensation law are not sick pay and are not subject to employment taxes. State tax forms and instructions But see Payments in the nature of workers' compensation—public employees next. State tax forms and instructions Payments in the nature of workers' compensation—public employees. State tax forms and instructions State and local government employees, such as police officers and firefighters, sometimes receive payments due to an injury in the line of duty under a statute that is not the general workers' compensation law of a state. State tax forms and instructions If the statute limits benefits to work-related injuries or sickness and does not base payments on the employee's age, length of service, or prior contributions, the statute is “in the nature of” a workers' compensation law. State tax forms and instructions Payments under a statute in the nature of a workers' compensation law are not sick pay and are not subject to employment taxes. State tax forms and instructions For more information, see Regulations section 31. State tax forms and instructions 3121(a)(2)-1. State tax forms and instructions Medical expense payments. State tax forms and instructions Payments under a definite plan or system for medical and hospitalization expenses, or for insurance covering these expenses, are not sick pay and are not subject to employment taxes. State tax forms and instructions Payments unrelated to absence from work. State tax forms and instructions Accident or health insurance payments unrelated to absence from work are not sick pay and are not subject to employment taxes. State tax forms and instructions These include payments for: Permanent loss of a member or function of the body, Permanent loss of the use of a member or function of the body, or Permanent disfigurement of the body. State tax forms and instructions Example. State tax forms and instructions Donald was injured in a car accident and lost an eye. State tax forms and instructions Under a policy paid for by Donald's employer, Delta Insurance Co. State tax forms and instructions paid Donald $20,000 as compensation for the loss of his eye. State tax forms and instructions Because the payment was determined by the type of injury and was unrelated to Donald's absence from work, it is not sick pay and is not subject to federal employment taxes. State tax forms and instructions Sick Pay Plan A sick pay plan is a plan or system established by an employer under which sick pay is available to employees generally or to a class or classes of employees. State tax forms and instructions This does not include a situation in which benefits are provided on a discretionary or occasional basis with merely an intention to aid particular employees in time of need. State tax forms and instructions You have a sick pay plan or system if the plan is in writing or is otherwise made known to employees, such as by a bulletin board notice or your long and established practice. State tax forms and instructions Some indications that you have a sick pay plan or system include references to the plan or system in the contract of employment, employer contributions to a plan, or segregated accounts for the payment of benefits. State tax forms and instructions Definition of employer. State tax forms and instructions   The employer for whom the employee normally works, a term used in the following discussion, is either the employer for whom the employee was working at the time that the employee became sick or disabled or the last employer for whom the employee worked before becoming sick or disabled, if that employer made contributions to the sick pay plan on behalf of the sick or disabled employee. State tax forms and instructions Note. State tax forms and instructions Contributions to a sick pay plan through a cafeteria plan (by direct employer contributions or salary reduction) are employer contributions unless they are after-tax employee contributions (that is, included in taxable wages). State tax forms and instructions Third-Party Payers of Sick Pay Employer's agent. State tax forms and instructions   An employer's agent is a third party that bears no insurance risk and is reimbursed on a cost-plus-fee basis for payment of sick pay and similar amounts. State tax forms and instructions A third party may be your agent even if the third party is responsible for determining which employees are eligible to receive payments. State tax forms and instructions For example, if a third party provides administrative services only, the third party is your agent. State tax forms and instructions If the third party is paid an insurance premium and is not reimbursed on a cost-plus-fee basis, the third party is not your agent. State tax forms and instructions Whether an insurance company or other third party is your agent depends on the terms of their agreement with you. State tax forms and instructions   A third party that makes payments of sick pay as your agent is not considered the employer and generally has no responsibility for employment taxes. State tax forms and instructions This responsibility remains with you. State tax forms and instructions However, under an exception to this rule, the parties may enter into an agreement that makes the third-party agent responsible for employment taxes. State tax forms and instructions In this situation, the third-party agent should use its own name and EIN (rather than your name and EIN) for the responsibilities that it has assumed. State tax forms and instructions Third party not employer's agent. State tax forms and instructions   A third party that makes payments of sick pay other than as an agent of the employer is liable for federal income tax withholding (if requested by the employee) and the employee part of the social security and Medicare taxes. State tax forms and instructions   The third party is also liable for the employer part of the social security and Medicare taxes, and the FUTA tax, unless the third party transfers this liability to the employer for whom the employee normally works. State tax forms and instructions This liability is transferred if the third party takes the following steps. State tax forms and instructions Withholds the employee social security and Medicare taxes from the sick pay payments. State tax forms and instructions Makes timely deposits of the employee social security and Medicare taxes. State tax forms and instructions Notifies the employer for whom the employee normally works of the payments on which employee taxes were withheld and deposited. State tax forms and instructions The third party must notify the employer within the time required for the third party's deposit of the employee part of the social security and Medicare taxes. State tax forms and instructions For instance, if the third party is a monthly schedule depositor, it must notify the employer by the 15th day of the month following the month in which the sick pay payment is made because that is the day by which the deposit is required to be made. State tax forms and instructions The third party should notify the employer as soon as information on payments is available so that an employer required to make electronic deposits can make them timely. State tax forms and instructions For multi-employer plans, see the special rule discussed next. State tax forms and instructions Multi-employer plan timing rule. State tax forms and instructions   A special rule applies to sick pay payments made to employees by a third-party insurer under an insurance contract with a multi-employer plan established under a collectively bargained agreement. State tax forms and instructions If the third-party insurer making the payments complies wi
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Account Transcript

Tax Account Transcripts provide any adjustments either you or we made after you filed your return. This transcript shows basic data, including marital status, type of return filed, adjusted gross income and taxable income.

Page Last Reviewed or Updated: 10-Jan-2014

The State Tax Forms And Instructions

State tax forms and instructions 2. State tax forms and instructions   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. State tax forms and instructions 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. State tax forms and instructions Deduction may depend on your type of business. State tax forms and instructions Exception for events that benefit charitable organizations. State tax forms and instructions Food and beverages in skybox seats. State tax forms and instructions What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. State tax forms and instructions You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. State tax forms and instructions The rules and definitions are summarized in Table 2-1 . State tax forms and instructions You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. State tax forms and instructions Directly-related test. State tax forms and instructions Associated test. State tax forms and instructions Both of these tests are explained later. State tax forms and instructions An ordinary expense is one that is common and accepted in your trade or business. State tax forms and instructions A necessary expense is one that is helpful and appropriate for your business. State tax forms and instructions An expense does not have to be required to be considered necessary. State tax forms and instructions The amount you can deduct for entertainment expenses may be limited. State tax forms and instructions Generally, you can deduct only 50% of your unreimbursed entertainment expenses. State tax forms and instructions This limit is discussed later under 50% Limit. State tax forms and instructions Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. State tax forms and instructions Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. State tax forms and instructions Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. State tax forms and instructions See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. State tax forms and instructions You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. State tax forms and instructions It is not necessary to devote more time to business than to entertainment. State tax forms and instructions However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. State tax forms and instructions Table 2-1. State tax forms and instructions When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. State tax forms and instructions Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. State tax forms and instructions An ordinary expense is one that is common and accepted in your trade or business. State tax forms and instructions A necessary expense is one that is helpful and appropriate. State tax forms and instructions Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. State tax forms and instructions   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. State tax forms and instructions Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. State tax forms and instructions You cannot deduct expenses that are lavish or extravagant under the circumstances. State tax forms and instructions You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). State tax forms and instructions You do not have to show that business income or other business benefit actually resulted from each entertainment expense. State tax forms and instructions Clear business setting. State tax forms and instructions   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. State tax forms and instructions The following situations are examples of entertainment in a clear business setting. State tax forms and instructions Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. State tax forms and instructions Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). State tax forms and instructions Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. State tax forms and instructions An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. State tax forms and instructions Expenses not considered directly related. State tax forms and instructions   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. State tax forms and instructions The following are examples of situations where there are substantial distractions. State tax forms and instructions A meeting or discussion at a nightclub, theater, or sporting event. State tax forms and instructions A meeting or discussion during what is essentially a social gathering, such as a cocktail party. State tax forms and instructions A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. State tax forms and instructions Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. State tax forms and instructions To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). State tax forms and instructions Associated with trade or business. State tax forms and instructions   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. State tax forms and instructions The purpose may be to get new business or to encourage the continuation of an existing business relationship. State tax forms and instructions Substantial business discussion. State tax forms and instructions   Whether a business discussion is substantial depends on the facts of each case. State tax forms and instructions A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. State tax forms and instructions   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. State tax forms and instructions It is not necessary that you devote more time to business than to entertainment. State tax forms and instructions You do not have to discuss business during the meal or entertainment. State tax forms and instructions Meetings at conventions. State tax forms and instructions   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. State tax forms and instructions However, your reason for attending the convention or meeting must be to further your trade or business. State tax forms and instructions The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. State tax forms and instructions Directly before or after business discussion. State tax forms and instructions   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. State tax forms and instructions   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. State tax forms and instructions Among the facts to consider are the place, date, and duration of the business discussion. State tax forms and instructions If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. State tax forms and instructions Example. State tax forms and instructions A group of business associates comes from out of town to your place of business to hold a substantial business discussion. State tax forms and instructions If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. State tax forms and instructions The expense meets the associated test. State tax forms and instructions 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. State tax forms and instructions (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. State tax forms and instructions See Individuals subject to “hours of service” limits , later. State tax forms and instructions ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. State tax forms and instructions Figure A summarizes the general rules explained in this section. State tax forms and instructions The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. State tax forms and instructions Included expenses. State tax forms and instructions   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. State tax forms and instructions However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. State tax forms and instructions Figure A. State tax forms and instructions Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. State tax forms and instructions See Exceptions to the 50% Limit . State tax forms and instructions Please click here for the text description of the image. State tax forms and instructions Figure A. State tax forms and instructions Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. State tax forms and instructions   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. State tax forms and instructions   The 50% limit also applies to certain meal and entertainment expenses that are not business related. State tax forms and instructions It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. State tax forms and instructions It also applies to the cost of meals included in deductible educational expenses. State tax forms and instructions When to apply the 50% limit. State tax forms and instructions   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. State tax forms and instructions You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. State tax forms and instructions Example 1. State tax forms and instructions You spend $200 for a business-related meal. State tax forms and instructions If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. State tax forms and instructions Your deduction cannot be more than $45 (50% × $90). State tax forms and instructions Example 2. State tax forms and instructions You purchase two tickets to a concert and give them to a client. State tax forms and instructions You purchased the tickets through a ticket agent. State tax forms and instructions You paid $200 for the two tickets, which had a face value of $80 each ($160 total). State tax forms and instructions Your deduction cannot be more than $80 (50% × $160). State tax forms and instructions Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. State tax forms and instructions Figure A can help you determine if the 50% limit applies to you. State tax forms and instructions Expenses not subject to 50% limit. State tax forms and instructions   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. State tax forms and instructions 1 - Employee's reimbursed expenses. State tax forms and instructions   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. State tax forms and instructions Accountable plans are discussed in chapter 6. State tax forms and instructions 2 - Self-employed. State tax forms and instructions   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. State tax forms and instructions You have these expenses as an independent contractor. State tax forms and instructions Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. State tax forms and instructions You provide adequate records of these expenses to your customer or client. State tax forms and instructions (See chapter 5 . State tax forms and instructions )   In this case, your client or customer is subject to the 50% limit on the expenses. State tax forms and instructions Example. State tax forms and instructions You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. State tax forms and instructions You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. State tax forms and instructions If the client can deduct the expenses, the client is subject to the 50% limit. State tax forms and instructions If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. State tax forms and instructions 3 - Advertising expenses. State tax forms and instructions   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. State tax forms and instructions For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. State tax forms and instructions 4 - Sale of meals or entertainment. State tax forms and instructions   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. State tax forms and instructions For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. State tax forms and instructions 5 - Charitable sports event. State tax forms and instructions   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. State tax forms and instructions For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. State tax forms and instructions Individuals subject to “hours of service” limits. State tax forms and instructions   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. State tax forms and instructions The percentage is 80%. State tax forms and instructions   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. State tax forms and instructions Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. State tax forms and instructions Interstate truck operators and bus drivers who are under Department of Transportation regulations. State tax forms and instructions Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. State tax forms and instructions Certain merchant mariners who are under Coast Guard regulations. State tax forms and instructions What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. State tax forms and instructions Entertainment. State tax forms and instructions   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. State tax forms and instructions Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. State tax forms and instructions   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. State tax forms and instructions A meal as a form of entertainment. State tax forms and instructions   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. State tax forms and instructions A meal expense includes the cost of food, beverages, taxes, and tips for the meal. State tax forms and instructions To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. State tax forms and instructions    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. State tax forms and instructions    Meals sold in the normal course of your business are not considered entertainment. State tax forms and instructions Deduction may depend on your type of business. State tax forms and instructions   Your kind of business may determine if a particular activity is considered entertainment. State tax forms and instructions For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. State tax forms and instructions This is because fashion shows are typical in your business. State tax forms and instructions But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. State tax forms and instructions Separating costs. State tax forms and instructions   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. State tax forms and instructions You must have a reasonable basis for making this allocation. State tax forms and instructions For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. State tax forms and instructions Taking turns paying for meals or entertainment. State tax forms and instructions   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. State tax forms and instructions Lavish or extravagant expenses. State tax forms and instructions   You cannot deduct expenses for entertainment that are lavish or extravagant. State tax forms and instructions An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. State tax forms and instructions Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. State tax forms and instructions Allocating between business and nonbusiness. State tax forms and instructions   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. State tax forms and instructions You can deduct only the business part. State tax forms and instructions If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. State tax forms and instructions Example. State tax forms and instructions You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. State tax forms and instructions Only 4/11 of the expense qualifies as a business entertainment expense. State tax forms and instructions You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. State tax forms and instructions Trade association meetings. State tax forms and instructions   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. State tax forms and instructions These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. State tax forms and instructions Entertainment tickets. State tax forms and instructions   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. State tax forms and instructions For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. State tax forms and instructions Exception for events that benefit charitable organizations. State tax forms and instructions   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. State tax forms and instructions You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. State tax forms and instructions The event's main purpose is to benefit a qualified charitable organization. State tax forms and instructions The entire net proceeds go to the charity. State tax forms and instructions The event uses volunteers to perform substantially all the event's work. State tax forms and instructions    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. State tax forms and instructions Example 1. State tax forms and instructions You purchase tickets to a golf tournament organized by the local volunteer fire company. State tax forms and instructions All net proceeds will be used to buy new fire equipment. State tax forms and instructions The volunteers will run the tournament. State tax forms and instructions You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. State tax forms and instructions Example 2. State tax forms and instructions You purchase tickets to a college football game through a ticket broker. State tax forms and instructions After having a business discussion, you take a client to the game. State tax forms and instructions Net proceeds from the game go to colleges that qualify as charitable organizations. State tax forms and instructions However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. State tax forms and instructions Skyboxes and other private luxury boxes. State tax forms and instructions   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. State tax forms and instructions   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. State tax forms and instructions For example, renting a skybox for a series of playoff games is considered renting it for more than one event. State tax forms and instructions All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. State tax forms and instructions   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. State tax forms and instructions Example. State tax forms and instructions You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. State tax forms and instructions The cost of regular nonluxury box seats at each event is $30 a seat. State tax forms and instructions You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). State tax forms and instructions Food and beverages in skybox seats. State tax forms and instructions   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. State tax forms and instructions The amounts separately stated for food and beverages must be reasonable. State tax forms and instructions You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. State tax forms and instructions What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. State tax forms and instructions Club dues and membership fees. State tax forms and instructions   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. State tax forms and instructions This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. State tax forms and instructions   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. State tax forms and instructions You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. State tax forms and instructions Entertainment facilities. State tax forms and instructions   Generally, you cannot deduct any expense for the use of an entertainment facility. State tax forms and instructions This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. State tax forms and instructions   An entertainment facility is any property you own, rent, or use for entertainment. State tax forms and instructions Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. State tax forms and instructions Out-of-pocket expenses. State tax forms and instructions   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. State tax forms and instructions These are not expenses for the use of an entertainment facility. State tax forms and instructions However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. State tax forms and instructions Expenses for spouses. State tax forms and instructions   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. State tax forms and instructions However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. State tax forms and instructions Example. State tax forms and instructions You entertain a customer. State tax forms and instructions The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. State tax forms and instructions The customer's spouse joins you because it is impractical to entertain the customer without the spouse. State tax forms and instructions You can deduct the cost of entertaining the customer's spouse. State tax forms and instructions If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. State tax forms and instructions Gift or entertainment. State tax forms and instructions   Any item that might be considered either a gift or entertainment generally will be considered entertainment. State tax forms and instructions However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. State tax forms and instructions   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. State tax forms and instructions You can treat the tickets as either a gift or entertainment, whichever is to your advantage. State tax forms and instructions   You can change your treatment of the tickets at a later date by filing an amended return. State tax forms and instructions Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. State tax forms and instructions   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. State tax forms and instructions You cannot choose, in this case, to treat the tickets as a gift. State tax forms and instructions Prev  Up  Next   Home   More Online Publications