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Utahtaxhelp Org

Utahtaxhelp org Publication 15-A - Main Content Table of Contents 1. Utahtaxhelp org Who Are Employees?Independent Contractors Common-Law Employees Statutory Employees Statutory Nonemployees Misclassification of Employees 2. Utahtaxhelp org Employee or Independent Contractor?Common-Law Rules Industry Examples 3. Utahtaxhelp org Employees of Exempt OrganizationsSocial security and Medicare taxes. Utahtaxhelp org FUTA tax. Utahtaxhelp org 4. Utahtaxhelp org Religious Exemptions and Special Rules for MinistersForm W-2. Utahtaxhelp org Self-employed. Utahtaxhelp org Employees. Utahtaxhelp org 5. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org Special Rules for Paying TaxesCommon Paymaster Agents Reporting Agents Employee's Portion of Taxes Paid by Employer International Social Security Agreements 8. Utahtaxhelp org Pensions and AnnuitiesFederal Income Tax Withholding 9. Utahtaxhelp org Alternative Methods for Figuring WithholdingTerm of continuous employment. Utahtaxhelp org 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. Utahtaxhelp org Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersWithholding Tables How To Get Tax Help 1. Utahtaxhelp org 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. Utahtaxhelp org The person performing the services may be: An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee. Utahtaxhelp org This discussion explains these four categories. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org However, in some cases you may be required to withhold under the backup withholding requirements on these payments. Utahtaxhelp org See Publication 15 (Circular E) for information on backup withholding. Utahtaxhelp org 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. Utahtaxhelp org However, whether such people are employees or independent contractors depends on the facts in each case. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org This is so even when you give the employee freedom of action. Utahtaxhelp org What matters is that you have the right to control the details of how the services are performed. Utahtaxhelp org For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2. Utahtaxhelp org If you have an employer-employee relationship, it makes no difference how it is labeled. Utahtaxhelp org The substance of the relationship, not the label, governs the worker's status. Utahtaxhelp org It does not matter whether the individual is employed full time or part time. Utahtaxhelp org For employment tax purposes, no distinction is made between classes of employees. Utahtaxhelp org Superintendents, managers, and other supervisory personnel are all employees. Utahtaxhelp org 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. Utahtaxhelp org A director of a corporation is not an employee with respect to services performed as a director. Utahtaxhelp org You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. Utahtaxhelp org However, the wages of certain employees may be exempt from one or more of these taxes. Utahtaxhelp org See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4). Utahtaxhelp org Leased employees. Utahtaxhelp org   Under certain circumstances, a firm that furnishes workers to other firms is the employer of those workers for employment tax purposes. Utahtaxhelp org 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. Utahtaxhelp org   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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org For information on employee leasing as it relates to pension plan qualification requirements, see Leased employee in Publication 560, Retirement Plans for Small Business. Utahtaxhelp org Additional information. Utahtaxhelp org   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. Utahtaxhelp org 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. Utahtaxhelp org 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 . Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. Utahtaxhelp org The work performed for you must be the salesperson's principal business activity. Utahtaxhelp org See Salesperson in section 2. Utahtaxhelp org Social security and Medicare taxes. Utahtaxhelp org   You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. Utahtaxhelp org The service contract states or implies that substantially all the services are to be performed personally by them. Utahtaxhelp org 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). Utahtaxhelp org The services are performed on a continuing basis for the same payer. Utahtaxhelp org Federal unemployment (FUTA) tax. Utahtaxhelp org   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. Utahtaxhelp org 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. Utahtaxhelp org Income tax. Utahtaxhelp org   Do not withhold federal income tax from the wages of statutory employees. Utahtaxhelp org Reporting payments to statutory employees. Utahtaxhelp org   Furnish Form W-2 to a statutory employee, and check “Statutory employee” in box 13. Utahtaxhelp org Show your payments to the employee as “other compensation” in box 1. Utahtaxhelp org 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. Utahtaxhelp org The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org H-2A agricultural workers. Utahtaxhelp org   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Utahtaxhelp org Statutory Nonemployees There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Utahtaxhelp org 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. Utahtaxhelp org Direct sellers. Utahtaxhelp org   Direct sellers include persons falling within any of the following three groups. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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). Utahtaxhelp org   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. Utahtaxhelp org Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. Utahtaxhelp org Licensed real estate agents. Utahtaxhelp org   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. Utahtaxhelp org Companion sitters. Utahtaxhelp org   Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. Utahtaxhelp org 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. Utahtaxhelp org Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. Utahtaxhelp org Misclassification of Employees Consequences of treating an employee as an independent contractor. Utahtaxhelp org   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. Utahtaxhelp org See section 2 in Publication 15 (Circular E) for more information. Utahtaxhelp org Relief provision. Utahtaxhelp org   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. Utahtaxhelp org To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. Utahtaxhelp org You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. Utahtaxhelp org Technical service specialists. Utahtaxhelp org   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. Utahtaxhelp org 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. Utahtaxhelp org   This limit on the application of the rule does not affect the determination of whether such workers are employees under the common-law rules. Utahtaxhelp org The common-law rules control whether the specialist is treated as an employee or an independent contractor. Utahtaxhelp org 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. Utahtaxhelp org Test proctors and room supervisors. Utahtaxhelp org   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. Utahtaxhelp org Voluntary Classification Settlement Program (VCSP). Utahtaxhelp org   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. Utahtaxhelp org To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Utahtaxhelp org For more information, visit IRS. Utahtaxhelp org gov and enter “VCSP” in the search box. Utahtaxhelp org 2. Utahtaxhelp org 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. Utahtaxhelp org An employer does not generally have to withhold or pay over any federal taxes on payments to independent contractors. Utahtaxhelp org 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. Utahtaxhelp org In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Utahtaxhelp org 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. Utahtaxhelp org These facts are discussed next. Utahtaxhelp org Behavioral control. Utahtaxhelp org   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. Utahtaxhelp org   An employee is generally subject to the business' instructions about when, where, and how to work. Utahtaxhelp org All of the following are examples of types of instructions about how to do work. Utahtaxhelp org When and where to do the work. Utahtaxhelp org What tools or equipment to use. Utahtaxhelp org What workers to hire or to assist with the work. Utahtaxhelp org Where to purchase supplies and services. Utahtaxhelp org What work must be performed by a specified  individual. Utahtaxhelp org What order or sequence to follow. Utahtaxhelp org   The amount of instruction needed varies among different jobs. Utahtaxhelp org 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. Utahtaxhelp org A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. Utahtaxhelp org 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. Utahtaxhelp org Training that the business gives to the worker. Utahtaxhelp org   An employee may be trained to perform services in a particular manner. Utahtaxhelp org Independent contractors ordinarily use their own methods. Utahtaxhelp org Financial control. Utahtaxhelp org   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. Utahtaxhelp org   Independent contractors are more likely to have unreimbursed expenses than are employees. Utahtaxhelp org Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. Utahtaxhelp org However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer. Utahtaxhelp org The extent of the worker's investment. Utahtaxhelp org   An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. Utahtaxhelp org However, a significant investment is not necessary for independent contractor status. Utahtaxhelp org The extent to which the worker makes his or her services available to the relevant market. Utahtaxhelp org   An independent contractor is generally free to seek out business opportunities. Utahtaxhelp org Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. Utahtaxhelp org How the business pays the worker. Utahtaxhelp org   An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. Utahtaxhelp org This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. Utahtaxhelp org An independent contractor is often paid a flat fee or on a time and materials basis for the job. Utahtaxhelp org However, it is common in some professions, such as law, to pay independent contractors hourly. Utahtaxhelp org The extent to which the worker can realize a profit or loss. Utahtaxhelp org   An independent contractor can make a profit or loss. Utahtaxhelp org Type of relationship. Utahtaxhelp org   Facts that show the parties' type of relationship include: Written contracts describing the relationship the parties intended to create. Utahtaxhelp org Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. Utahtaxhelp org The permanency of the relationship. Utahtaxhelp org 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. Utahtaxhelp org The extent to which services performed by the worker are a key aspect of the regular business of the company. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org This would indicate an employer-employee relationship. Utahtaxhelp org IRS help. Utahtaxhelp org   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. Utahtaxhelp org Industry Examples The following examples may help you properly classify your workers. Utahtaxhelp org Building and Construction Industry Example 1. Utahtaxhelp org Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. Utahtaxhelp org She did not advance funds to help him carry on the work. Utahtaxhelp org She makes direct payments to the suppliers for all necessary materials. Utahtaxhelp org She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. Utahtaxhelp org She pays them an hourly rate and exercises almost constant supervision over the work. Utahtaxhelp org Jerry is not free to transfer his assistants to other jobs. Utahtaxhelp org He may not work on other jobs while working for Wilma. Utahtaxhelp org He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. Utahtaxhelp org He and his assistants perform personal services for hourly wages. Utahtaxhelp org Jerry Jones and his assistants are employees of Wilma White. Utahtaxhelp org Example 2. Utahtaxhelp org Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. Utahtaxhelp org He uses his own tools and performs services in the order designated by the corporation and according to its specifications. Utahtaxhelp org The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. Utahtaxhelp org He does not have a place of business or hold himself out to perform similar services for others. Utahtaxhelp org Either party can end the services at any time. Utahtaxhelp org Milton Manning is an employee of the corporation. Utahtaxhelp org Example 3. Utahtaxhelp org Wallace Black agreed with the Sawdust Co. Utahtaxhelp org to supply the construction labor for a group of houses. Utahtaxhelp org The company agreed to pay all construction costs. Utahtaxhelp org However, he supplies all the tools and equipment. Utahtaxhelp org He performs personal services as a carpenter and mechanic for an hourly wage. Utahtaxhelp org He also acts as superintendent and foreman and engages other individuals to assist him. Utahtaxhelp org The company has the right to select, approve, or discharge any helper. Utahtaxhelp org A company representative makes frequent inspections of the construction site. Utahtaxhelp org When a house is finished, Wallace is paid a certain percentage of its costs. Utahtaxhelp org He is not responsible for faults, defects of construction, or wasteful operation. Utahtaxhelp org At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. Utahtaxhelp org The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages. Utahtaxhelp org Wallace Black and his assistants are employees of the Sawdust Co. Utahtaxhelp org Example 4. Utahtaxhelp org Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. Utahtaxhelp org A signed contract established a flat amount for the services rendered by Bill Plum. Utahtaxhelp org Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. Utahtaxhelp org He hires his own roofers who are treated as employees for federal employment tax purposes. Utahtaxhelp org If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. Utahtaxhelp org Bill Plum, doing business as Plum Roofing, is an independent contractor. Utahtaxhelp org Example 5. Utahtaxhelp org Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. Utahtaxhelp org She is to receive $1,280 every 2 weeks for the next 10 weeks. Utahtaxhelp org This is not considered payment by the hour. Utahtaxhelp org Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. Utahtaxhelp org She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. Utahtaxhelp org Vera is an independent contractor. Utahtaxhelp org Trucking Industry Example. Utahtaxhelp org Rose Trucking contracts to deliver material for Forest, Inc. Utahtaxhelp org , at $140 per ton. Utahtaxhelp org Rose Trucking is not paid for any articles that are not delivered. Utahtaxhelp org At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. Utahtaxhelp org All operating expenses, including insurance coverage, are paid by Jan Rose. Utahtaxhelp org All equipment is owned or rented by Jan and she is responsible for all maintenance. Utahtaxhelp org None of the drivers are provided by Forest, Inc. Utahtaxhelp org Jan Rose, operating as Rose Trucking, is an independent contractor. Utahtaxhelp org Computer Industry Example. Utahtaxhelp org Steve Smith, a computer programmer, is laid off when Megabyte, Inc. Utahtaxhelp org , downsizes. Utahtaxhelp org Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. Utahtaxhelp org 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. Utahtaxhelp org Megabyte provides Steve with no instructions beyond the specifications for the product itself. Utahtaxhelp org 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. Utahtaxhelp org Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. Utahtaxhelp org Steve works at home and is not expected or allowed to attend meetings of the software development group. Utahtaxhelp org Steve is an independent contractor. Utahtaxhelp org Automobile Industry Example 1. Utahtaxhelp org Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. Utahtaxhelp org She works six days a week and is on duty in Bob's showroom on certain assigned days and times. Utahtaxhelp org She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Utahtaxhelp org Lists of prospective customers belong to the dealer. Utahtaxhelp org She is required to develop leads and report results to the sales manager. Utahtaxhelp org Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. Utahtaxhelp org She is paid a commission and is eligible for prizes and bonuses offered by Bob. Utahtaxhelp org Bob also pays the cost of health insurance and group-term life insurance for Donna. Utahtaxhelp org Donna is an employee of Bob Blue. Utahtaxhelp org Example 2. Utahtaxhelp org Sam Sparks performs auto repair services in the repair department of an auto sales company. Utahtaxhelp org He works regular hours and is paid on a percentage basis. Utahtaxhelp org He has no investment in the repair department. Utahtaxhelp org 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. Utahtaxhelp org Sam is an employee of the sales company. Utahtaxhelp org Example 3. Utahtaxhelp org An auto sales agency furnishes space for Helen Bach to perform auto repair services. Utahtaxhelp org She provides her own tools, equipment, and supplies. Utahtaxhelp org She seeks out business from insurance adjusters and other individuals and does all of the body and paint work that comes to the agency. Utahtaxhelp org 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. Utahtaxhelp org Helen is an independent contractor and the helpers are her employees. Utahtaxhelp org Attorney Example. Utahtaxhelp org 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. Utahtaxhelp org Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. Utahtaxhelp org Donna has a part-time receptionist who also does the bookkeeping. Utahtaxhelp org She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. Utahtaxhelp org For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. Utahtaxhelp org Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. Utahtaxhelp org 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. Utahtaxhelp org Donna is an independent contractor. Utahtaxhelp org Taxicab Driver Example. Utahtaxhelp org Tom Spruce rents a cab from Taft Cab Co. Utahtaxhelp org for $150 per day. Utahtaxhelp org He pays the costs of maintaining and operating the cab. Utahtaxhelp org Tom Spruce keeps all fares that he receives from customers. Utahtaxhelp org Although he receives the benefit of Taft's two-way radio communication equipment, dispatcher, and advertising, these items benefit both Taft and Tom Spruce. Utahtaxhelp org Tom Spruce is an independent contractor. Utahtaxhelp org Salesperson To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. Utahtaxhelp org 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). Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 3. Utahtaxhelp org Employees of Exempt Organizations Many nonprofit organizations are exempt from federal income tax. Utahtaxhelp org Although they do not have to pay federal income tax themselves, they must still withhold federal income tax from the pay of their employees. Utahtaxhelp org However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees. Utahtaxhelp org Section 501(c)(3) organizations. Utahtaxhelp org   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. Utahtaxhelp org These organizations are usually corporations and are exempt from federal income tax under section 501(a). Utahtaxhelp org Social security and Medicare taxes. Utahtaxhelp org   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. Utahtaxhelp org The organization pays an employee less than $100 in a calendar year. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org   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. Utahtaxhelp org 28 or more in a year. Utahtaxhelp org 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. Utahtaxhelp org See Members of recognized religious sects opposed to insurance in section 4. Utahtaxhelp org FUTA tax. Utahtaxhelp org   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. Utahtaxhelp org This exemption cannot be waived. Utahtaxhelp org Do not file Form 940 to report wages paid by these organizations or pay the tax. Utahtaxhelp org Note. Utahtaxhelp org 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. Utahtaxhelp org Other than section 501(c)(3) organizations. Utahtaxhelp org   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. Utahtaxhelp org However, these organizations are not exempt from withholding federal income, social security, or Medicare tax from their employees' pay, or from paying FUTA tax. Utahtaxhelp org Two special rules for social security, Medicare, and FUTA taxes apply. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org The above rules do not apply to employees who work for pension plans and other similar organizations described in section 401(a). Utahtaxhelp org 4. Utahtaxhelp org Religious Exemptions and Special Rules for Ministers Special rules apply to the treatment of ministers for social security and Medicare tax purposes. Utahtaxhelp org An exemption from social security and Medicare taxes is available for ministers and certain other religious workers and members of certain recognized religious sects. Utahtaxhelp org For more information on getting an exemption, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Utahtaxhelp org Ministers. Utahtaxhelp org   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Utahtaxhelp org 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. Utahtaxhelp org   Ministers are employees if they perform services in the exercise of ministry and are subject to your will and control. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org For more information, see Publication 517. Utahtaxhelp org Form W-2. Utahtaxhelp org   If your minister is an employee, report all taxable compensation as wages in box 1 on Form W-2. Utahtaxhelp org Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Publication 15 (Circular E). Utahtaxhelp org Do not include a parsonage allowance (excludable housing allowance) in this amount. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org For more information on ministers, see Publication 517. Utahtaxhelp org Exemptions for ministers and others. Utahtaxhelp org   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. Utahtaxhelp org 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. Utahtaxhelp org The exemption applies only to qualified services performed for the religious organization. Utahtaxhelp org See Revenue Procedure 91-20, 1991-1 C. Utahtaxhelp org B. Utahtaxhelp org 524, for guidelines to determine whether an organization is a religious order or whether an individual is a member of a religious order. Utahtaxhelp org   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. Utahtaxhelp org See Publication 517 for more information about claiming an exemption from self-employment tax using Form 4361. Utahtaxhelp org Members of recognized religious sects opposed to insurance. Utahtaxhelp org   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. Utahtaxhelp org 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). Utahtaxhelp org If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. Utahtaxhelp org Religious opposition based on the teachings of the sect is the only legal basis for the exemption. Utahtaxhelp org In addition, your religious sect (or division) must have existed since December 31, 1950. Utahtaxhelp org Self-employed. Utahtaxhelp org   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. Utahtaxhelp org Employees. Utahtaxhelp org   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. Utahtaxhelp org This applies to partnerships only if each partner is a member of the sect. Utahtaxhelp org 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. Utahtaxhelp org To get the exemption, the employee must file Form 4029. Utahtaxhelp org   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. Utahtaxhelp org 5. Utahtaxhelp org Wages and Other Compensation Publication 15 (Circular E) provides a general discussion of taxable wages. Utahtaxhelp org Publication 15-B discusses fringe benefits. Utahtaxhelp org The following topics supplement those discussions. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org See chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Publication 15 (Circular E), for more information. Utahtaxhelp org These rules generally apply to temporary work assignments both inside and outside the U. Utahtaxhelp org S. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org Excludable employee achievement awards also are not subject to FUTA tax. Utahtaxhelp org Limits. Utahtaxhelp org   The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. Utahtaxhelp org A higher limit of $1,600 applies to qualified plan awards. Utahtaxhelp org Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. Utahtaxhelp org 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. Utahtaxhelp org   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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org These amounts are reportable on Form W-2. Utahtaxhelp org 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. Utahtaxhelp org Any amounts that you pay for room and board are not excludable from the recipient's gross income. Utahtaxhelp org A qualified scholarship is not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Utahtaxhelp org For more information, see Publication 970, Tax Benefits for Education. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org Back Pay Treat back pay as wages in the year paid and withhold and pay employment taxes as required. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org Amounts that represent a return to the employee of amounts previously subject to tax are not taxable and are not subject to withholding. Utahtaxhelp org 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. Utahtaxhelp org It does not matter whether the separation is temporary or permanent. Utahtaxhelp org 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. Utahtaxhelp org To qualify as supplemental unemployment benefits for these purposes, the benefits must meet the following requirements. Utahtaxhelp org Benefits are paid only to unemployed former employees who are laid off by the employer. Utahtaxhelp org Eligibility for benefits depends on meeting prescribed conditions after termination. Utahtaxhelp org 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. Utahtaxhelp org The right to benefits does not accrue until a prescribed period after termination. Utahtaxhelp org Benefits are not attributable to the performance of particular services. Utahtaxhelp org No employee has any right to the benefits until qualified and eligible to receive benefits. Utahtaxhelp org Benefits may not be paid in a lump sum. Utahtaxhelp org Withholding on taxable supplemental unemployment benefits must be based on the withholding certificate (Form W-4) that the employee gave to you. Utahtaxhelp org Golden Parachute Payments A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. Utahtaxhelp org 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. Utahtaxhelp org Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. Utahtaxhelp org See Regulations section 1. Utahtaxhelp org 280G-1 for more information. Utahtaxhelp org No deduction is allowed to the corporation for any excess parachute payment. Utahtaxhelp org To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. Utahtaxhelp org A parachute payment for purposes of section 280G is any payment that meets all of the following. Utahtaxhelp org The payment is in the nature of compensation. Utahtaxhelp org The payment is to, or for the benefit of, a disqualified individual. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org The payment has an aggregate present value of at least three times the individual's base amount. Utahtaxhelp org The base amount is the average annual compensation for service includible in the individual's gross income over the most recent 5 taxable years. Utahtaxhelp org An excess parachute payment amount is the excess of any parachute payment over the base amount. Utahtaxhelp org For more information, see Regulations section 1. Utahtaxhelp org 280G-1. Utahtaxhelp org The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. Utahtaxhelp org If the recipient is an employee, the 20% excise tax is to be withheld by the corporation. Utahtaxhelp org Example. Utahtaxhelp org An officer of a corporation receives a golden parachute payment of $400,000. Utahtaxhelp org This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. Utahtaxhelp org The excess parachute payment is $300,000 ($400,000 minus $100,000). Utahtaxhelp org The corporation cannot deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). Utahtaxhelp org Reporting golden parachute payments. Utahtaxhelp org   Golden parachute payments to employees must be reported on Form W-2. Utahtaxhelp org See the General Instructions for Forms W-2 and W-3 for details. Utahtaxhelp org For nonemployee reporting of these payments, see Box 7. Utahtaxhelp org Nonemployee Compensation in the Instructions for Form 1099-MISC. Utahtaxhelp org Exempt payments. Utahtaxhelp org   Payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules. Utahtaxhelp org See section 280G(b)(5) and (6) for more information. Utahtaxhelp org 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. Utahtaxhelp org This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. Utahtaxhelp org This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. Utahtaxhelp org Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). Utahtaxhelp org The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. Utahtaxhelp org You can get these rates by calling 1-800-829-4933 or by visiting IRS. Utahtaxhelp org gov. Utahtaxhelp org For more information, see section 7872 and its related regulations. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org Do not include these amounts in the income of the transferors. Utahtaxhelp org These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. Utahtaxhelp org 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. Utahtaxhelp org Specific rules for reporting are provided in the instructions to the forms. Utahtaxhelp org The provisions do not affect the application or reporting of social security, Medicare, or FUTA taxes. Utahtaxhelp org 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. Utahtaxhelp org For more information about nonqualified deferred compensation plans, see Regulations sections 1. Utahtaxhelp org 409A-1 through 1. Utahtaxhelp org 409A-6. Utahtaxhelp org Notice 2008-113 provides guidance on the correction of certain operation failures of a NQDC plan. Utahtaxhelp org Notice 2008-113, 2008-51 I. Utahtaxhelp org R. Utahtaxhelp org B. Utahtaxhelp org 1305, is available at www. Utahtaxhelp org irs. Utahtaxhelp org gov/irb/2008-51_IRB/ar12. Utahtaxhelp org html. Utahtaxhelp org Also see Notice 2010-6, 2010-3 I. Utahtaxhelp org R. Utahtaxhelp org B. Utahtaxhelp org 275, available at www. Utahtaxhelp org irs. Utahtaxhelp org gov/irb/2010-03_IRB/ar08. Utahtaxhelp org html and Notice 2010-80, 2010-51 I. Utahtaxhelp org R. Utahtaxhelp org B. Utahtaxhelp org 853, available at www. Utahtaxhelp org irs. Utahtaxhelp org gov/irb/2010-51_IRB/ar08. Utahtaxhelp org html. Utahtaxhelp org Social security, Medicare, and FUTA taxes. Utahtaxhelp org   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. Utahtaxhelp org   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. Utahtaxhelp org 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. Utahtaxhelp org You will have to determine later, when the amount is reasonably ascertainable, whether any additional taxes are required. Utahtaxhelp org 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. Utahtaxhelp org For more information, see Regulations sections 31. Utahtaxhelp org 3121(v)(2)-1 and 31. Utahtaxhelp org 3306(r)(2)-1. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org See Regulations section 31. Utahtaxhelp org 3121(a)(5)-2 for the definition of a salary reduction agreement. Utahtaxhelp org 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. Utahtaxhelp org These excluded amounts are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. Utahtaxhelp org However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. Utahtaxhelp org See Publication 560 for more information about SEPs. Utahtaxhelp org Salary reduction simplified employee pensions (SARSEP) repealed. Utahtaxhelp org   You may not establish a SARSEP after 1996. Utahtaxhelp org However, SARSEPs established before January 1, 1997, may continue to receive contributions. Utahtaxhelp org 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. Utahtaxhelp org An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. Utahtaxhelp org However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. Utahtaxhelp org For more information about SIMPLE retirement plans, see Publication 560. Utahtaxhelp org 6. Utahtaxhelp org Sick Pay Reporting The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014. Utahtaxhelp org Information about this change will be included in the revision of Publication 15-A that is expected to post to IRS. Utahtaxhelp org gov in December 2014. Utahtaxhelp org Special rules apply to the reporting of sick pay payments to employees. Utahtaxhelp org How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company. Utahtaxhelp org Sick pay is usually subject to social security, Medicare, and FUTA taxes. Utahtaxhelp org For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. Utahtaxhelp org Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. Utahtaxhelp org 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. Utahtaxhelp org It may be paid by either the employer or a third party, such as an insurance company. Utahtaxhelp org Sick pay includes both short- and long-term benefits. Utahtaxhelp org It is often expressed as a percentage of the employee's regular wages. Utahtaxhelp org Payments That Are Not Sick Pay Sick pay does not include the following payments. Utahtaxhelp org Disability retirement payments. Utahtaxhelp org Disability retirement payments are not sick pay and are not discussed in this section. Utahtaxhelp org Those payments are subject to the rules for federal income tax withholding from pensions and annuities. Utahtaxhelp org See section 8. Utahtaxhelp org Workers' compensation. Utahtaxhelp org 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. Utahtaxhelp org But see Payments in the nature of workers' compensation—public employees next. Utahtaxhelp org Payments in the nature of workers' compensation—public employees. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org Payments under a statute in the nature of a workers' compensation law are not sick pay and are not subject to employment taxes. Utahtaxhelp org For more information, see Regulations section 31. Utahtaxhelp org 3121(a)(2)-1. Utahtaxhelp org Medical expense payments. Utahtaxhelp org 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. Utahtaxhelp org Payments unrelated to absence from work. Utahtaxhelp org Accident or health insurance payments unrelated to absence from work are not sick pay and are not subject to employment taxes. Utahtaxhelp org 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. Utahtaxhelp org Example. Utahtaxhelp org Donald was injured in a car accident and lost an eye. Utahtaxhelp org Under a policy paid for by Donald's employer, Delta Insurance Co. Utahtaxhelp org paid Donald $20,000 as compensation for the loss of his eye. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org Definition of employer. Utahtaxhelp org   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. Utahtaxhelp org Note. Utahtaxhelp org 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). Utahtaxhelp org Third-Party Payers of Sick Pay Employer's agent. Utahtaxhelp org   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. Utahtaxhelp org A third party may be your agent even if the third party is responsible for determining which employees are eligible to receive payments. Utahtaxhelp org For example, if a third party provides administrative services only, the third party is your agent. Utahtaxhelp org 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. Utahtaxhelp org Whether an insurance company or other third party is your agent depends on the terms of their agreement with you. Utahtaxhelp org   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. Utahtaxhelp org This responsibility remains with you. Utahtaxhelp org However, under an exception to this rule, the parties may enter into an agreement that makes the third-party agent responsible for employment taxes. Utahtaxhelp org 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. Utahtaxhelp org Third party not employer's agent. Utahtaxhelp org   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. Utahtaxhelp org   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. Utahtaxhelp org This liability is transferred if the third party takes the following steps. Utahtaxhelp org Withholds the employee social security and Medicare taxes from the sick pay payments. Utahtaxhelp org Makes timely deposits of the employee social security and Medicare taxes. Utahtaxhelp org Notifies the employer for whom the employee normally works of the payments on which employee taxes were withheld and deposited. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org 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. Utahtaxhelp org For multi-employer plans, see the special rule discussed next. Utahtaxhelp org Multi-employer plan timing rule. Utahtaxhelp org   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. Utahtaxhelp org If the third-party insurer making the payments complies wi
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Utahtaxhelp org 9. Utahtaxhelp org   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Utahtaxhelp org Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. Utahtaxhelp org Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Utahtaxhelp org Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. Utahtaxhelp org It also covers the following topics. Utahtaxhelp org Personal use of dwelling unit (including vacation home). Utahtaxhelp org Depreciation. Utahtaxhelp org Limits on rental losses. Utahtaxhelp org How to report your rental income and expenses. Utahtaxhelp org If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Utahtaxhelp org If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Utahtaxhelp org If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. Utahtaxhelp org See Publication 527, Residential Rental Property, for more information. Utahtaxhelp org Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Utahtaxhelp org Rental income is any payment you receive for the use or occupation of property. Utahtaxhelp org In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Utahtaxhelp org When to report. Utahtaxhelp org   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Utahtaxhelp org You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Utahtaxhelp org You constructively receive income when it is made available to you, for example, by being credited to your bank account. Utahtaxhelp org   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Utahtaxhelp org Advance rent. Utahtaxhelp org   Advance rent is any amount you receive before the period that it covers. Utahtaxhelp org Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Utahtaxhelp org Example. Utahtaxhelp org You sign a 10-year lease to rent your property. Utahtaxhelp org In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. Utahtaxhelp org You must include $10,000 in your income in the first year. Utahtaxhelp org Canceling a lease. Utahtaxhelp org   If your tenant pays you to cancel a lease, the amount you receive is rent. Utahtaxhelp org Include the payment in your income in the year you receive it regardless of your method of accounting. Utahtaxhelp org Expenses paid by tenant. Utahtaxhelp org   If your tenant pays any of your expenses, the payments are rental income. Utahtaxhelp org Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Utahtaxhelp org See Rental Expenses , later, for more information. Utahtaxhelp org Property or services. Utahtaxhelp org   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. Utahtaxhelp org   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Utahtaxhelp org Security deposits. Utahtaxhelp org   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Utahtaxhelp org But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Utahtaxhelp org   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Utahtaxhelp org Include it in your income when you receive it. Utahtaxhelp org Part interest. Utahtaxhelp org   If you own a part interest in rental property, you must report your part of the rental income from the property. Utahtaxhelp org Rental of property also used as your home. Utahtaxhelp org   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Utahtaxhelp org However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Utahtaxhelp org See Personal Use of Dwelling Unit (Including Vacation Home) , later. Utahtaxhelp org Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Utahtaxhelp org It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Utahtaxhelp org Depreciation , which you can also deduct from your rental income, is discussed later. Utahtaxhelp org Personal use of rental property. Utahtaxhelp org   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Utahtaxhelp org Also, your rental expense deductions may be limited. Utahtaxhelp org See Personal Use of Dwelling Unit (Including Vacation Home) , later. Utahtaxhelp org Part interest. Utahtaxhelp org   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Utahtaxhelp org When to deduct. Utahtaxhelp org   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Utahtaxhelp org Depreciation. Utahtaxhelp org   You can begin to depreciate rental property when it is ready and available for rent. Utahtaxhelp org See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Utahtaxhelp org Pre-rental expenses. Utahtaxhelp org   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Utahtaxhelp org Uncollected rent. Utahtaxhelp org   If you are a cash-basis taxpayer, do not deduct uncollected rent. Utahtaxhelp org Because you have not included it in your income, it is not deductible. Utahtaxhelp org Vacant rental property. Utahtaxhelp org   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Utahtaxhelp org However, you cannot deduct any loss of rental income for the period the property is vacant. Utahtaxhelp org Vacant while listed for sale. Utahtaxhelp org   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Utahtaxhelp org If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Utahtaxhelp org Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Utahtaxhelp org Improvements. Utahtaxhelp org   You must capitalize any expense you pay to improve your rental property. Utahtaxhelp org An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Utahtaxhelp org Betterments. Utahtaxhelp org   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Utahtaxhelp org Restoration. Utahtaxhelp org   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Utahtaxhelp org Adaptation. Utahtaxhelp org   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Utahtaxhelp org Separate the costs of repairs and improvements, and keep accurate records. Utahtaxhelp org You will need to know the cost of improvements when you sell or depreciate your property. Utahtaxhelp org The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Utahtaxhelp org Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. Utahtaxhelp org Insurance premiums paid in advance. Utahtaxhelp org   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Utahtaxhelp org You cannot deduct the total premium in the year you pay it. Utahtaxhelp org Legal and other professional fees. Utahtaxhelp org   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. Utahtaxhelp org For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Utahtaxhelp org You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Utahtaxhelp org Local benefit taxes. Utahtaxhelp org   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Utahtaxhelp org These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Utahtaxhelp org However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Utahtaxhelp org Local transportation expenses. Utahtaxhelp org    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Utahtaxhelp org However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Utahtaxhelp org See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Utahtaxhelp org   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Utahtaxhelp org For 2013, the standard mileage rate for business use is 56. Utahtaxhelp org 5 cents per mile. Utahtaxhelp org For more information, see chapter 26. Utahtaxhelp org    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Utahtaxhelp org In addition, you must complete Form 4562, Part V, and attach it to your tax return. Utahtaxhelp org Rental of equipment. Utahtaxhelp org   You can deduct the rent you pay for equipment that you use for rental purposes. Utahtaxhelp org However, in some cases, lease contracts are actually purchase contracts. Utahtaxhelp org If so, you cannot deduct these payments. Utahtaxhelp org You can recover the cost of purchased equipment through depreciation. Utahtaxhelp org Rental of property. Utahtaxhelp org   You can deduct the rent you pay for property that you use for rental purposes. Utahtaxhelp org If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Utahtaxhelp org Travel expenses. Utahtaxhelp org   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Utahtaxhelp org You must properly allocate your expenses between rental and nonrental activities. Utahtaxhelp org You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Utahtaxhelp org You recover the cost of improvements by taking depreciation. Utahtaxhelp org For information on travel expenses, see chapter 26. Utahtaxhelp org    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Utahtaxhelp org   See Rental Expenses in Publication 527 for more information. Utahtaxhelp org Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Utahtaxhelp org You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Utahtaxhelp org You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Utahtaxhelp org However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Utahtaxhelp org Example. Utahtaxhelp org Your tax year is the calendar year. Utahtaxhelp org You moved from your home in May and started renting it out on June 1. Utahtaxhelp org You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Utahtaxhelp org Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Utahtaxhelp org Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Utahtaxhelp org You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Utahtaxhelp org You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. Utahtaxhelp org There is no change in the types of expenses deductible for the personal-use part of your property. Utahtaxhelp org Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Utahtaxhelp org You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Utahtaxhelp org You do not have to divide the expenses that belong only to the rental part of your property. Utahtaxhelp org For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Utahtaxhelp org If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. Utahtaxhelp org You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Utahtaxhelp org How to divide expenses. Utahtaxhelp org   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. Utahtaxhelp org You can use any reasonable method for dividing the expense. Utahtaxhelp org It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Utahtaxhelp org The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. Utahtaxhelp org Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Utahtaxhelp org You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Utahtaxhelp org For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Utahtaxhelp org Where to report. Utahtaxhelp org   Report your not-for-profit rental income on Form 1040, line 21. Utahtaxhelp org For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Utahtaxhelp org   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. Utahtaxhelp org You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Utahtaxhelp org Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Utahtaxhelp org In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Utahtaxhelp org Only your rental expenses may be deducted on Schedule E (Form 1040). Utahtaxhelp org Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Utahtaxhelp org You must also determine if the dwelling unit is considered a home. Utahtaxhelp org The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Utahtaxhelp org Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Utahtaxhelp org There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Utahtaxhelp org Dwelling unit. Utahtaxhelp org   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Utahtaxhelp org It also includes all structures or other property belonging to the dwelling unit. Utahtaxhelp org A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Utahtaxhelp org   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Utahtaxhelp org Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Utahtaxhelp org Example. Utahtaxhelp org   You rent a room in your home that is always available for short-term occupancy by paying customers. Utahtaxhelp org You do not use the room yourself, and you allow only paying customers to use the room. Utahtaxhelp org The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Utahtaxhelp org Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Utahtaxhelp org When dividing your expenses, follow these rules. Utahtaxhelp org Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Utahtaxhelp org This rule does not apply when determining whether you used the unit as a home. Utahtaxhelp org Any day that the unit is available for rent but not actually rented is not a day of rental use. Utahtaxhelp org Example. Utahtaxhelp org Your beach cottage was available for rent from June 1 through August 31 (92 days). Utahtaxhelp org During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. Utahtaxhelp org The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Utahtaxhelp org Your family also used the cottage during the last 2 weeks of May (14 days). Utahtaxhelp org The cottage was not used at all before May 17 or after August 31. Utahtaxhelp org You figure the part of the cottage expenses to treat as rental expenses as follows. Utahtaxhelp org The cottage was used for rental a total of 85 days (92 − 7). Utahtaxhelp org The days it was available for rent but not rented (7 days) are not days of rental use. Utahtaxhelp org The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Utahtaxhelp org You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Utahtaxhelp org The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Utahtaxhelp org Your rental expenses are 85/99 (86%) of the cottage expenses. Utahtaxhelp org Note. Utahtaxhelp org When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Utahtaxhelp org Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Utahtaxhelp org Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Utahtaxhelp org If you have a net loss, you may not be able to deduct all of the rental expenses. Utahtaxhelp org See Dwelling Unit Used as a Home, next. Utahtaxhelp org Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Utahtaxhelp org You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Utahtaxhelp org See What is a day of personal use , later. Utahtaxhelp org Fair rental price. Utahtaxhelp org   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Utahtaxhelp org The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Utahtaxhelp org   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Utahtaxhelp org Instead, count it as a day of personal use in applying both (1) and (2) above. Utahtaxhelp org What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Utahtaxhelp org You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Utahtaxhelp org However, see Days used as a main home before or after renting , later. Utahtaxhelp org A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Utahtaxhelp org Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Utahtaxhelp org ), and lineal descendants (children, grandchildren, etc. Utahtaxhelp org ). Utahtaxhelp org Anyone under an arrangement that lets you use some other dwelling unit. Utahtaxhelp org Anyone at less than a fair rental price. Utahtaxhelp org Main home. Utahtaxhelp org   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Utahtaxhelp org Shared equity financing agreement. Utahtaxhelp org   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Utahtaxhelp org Donation of use of property. Utahtaxhelp org   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Utahtaxhelp org Examples. Utahtaxhelp org   The following examples show how to determine days of personal use. Utahtaxhelp org Example 1. Utahtaxhelp org You and your neighbor are co-owners of a condominium at the beach. Utahtaxhelp org Last year, you rented the unit to vacationers whenever possible. Utahtaxhelp org The unit was not used as a main home by anyone. Utahtaxhelp org Your neighbor used the unit for 2 weeks last year; you did not use it at all. Utahtaxhelp org Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Utahtaxhelp org Example 2. Utahtaxhelp org You and your neighbors are co-owners of a house under a shared equity financing agreement. Utahtaxhelp org Your neighbors live in the house and pay you a fair rental price. Utahtaxhelp org Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Utahtaxhelp org This is because your neighbors rent the house as their main home under a shared equity financing agreement. Utahtaxhelp org Example 3. Utahtaxhelp org You own a rental property that you rent to your son. Utahtaxhelp org Your son does not own any interest in this property. Utahtaxhelp org He uses it as his main home and pays you a fair rental price. Utahtaxhelp org Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Utahtaxhelp org Example 4. Utahtaxhelp org You rent your beach house to Joshua. Utahtaxhelp org Joshua rents his cabin in the mountains to you. Utahtaxhelp org You each pay a fair rental price. Utahtaxhelp org You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. Utahtaxhelp org Days used for repairs and maintenance. Utahtaxhelp org   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Utahtaxhelp org Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Utahtaxhelp org Days used as a main home before or after renting. Utahtaxhelp org   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Utahtaxhelp org Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Utahtaxhelp org You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Utahtaxhelp org However, this special rule does not apply when dividing expenses between rental and personal use. Utahtaxhelp org Examples. Utahtaxhelp org   The following examples show how to determine whether you used your rental property as a home. Utahtaxhelp org Example 1. Utahtaxhelp org You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Utahtaxhelp org You rented the basement apartment at a fair rental price to college students during the regular school year. Utahtaxhelp org You rented to them on a 9-month lease (273 days). Utahtaxhelp org You figured 10% of the total days rented to others at a fair rental price is 27 days. Utahtaxhelp org During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Utahtaxhelp org Your basement apartment was used as a home because you used it for personal purposes for 30 days. Utahtaxhelp org Rent-free use by your brothers is considered personal use. Utahtaxhelp org Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Utahtaxhelp org Example 2. Utahtaxhelp org You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Utahtaxhelp org Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Utahtaxhelp org You figured 10% of the total days rented to others at a fair rental price is 3 days. Utahtaxhelp org The room was used as a home because you used it for personal purposes for 21 days. Utahtaxhelp org That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Utahtaxhelp org Example 3. Utahtaxhelp org You own a condominium apartment in a resort area. Utahtaxhelp org You rented it at a fair rental price for a total of 170 days during the year. Utahtaxhelp org For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Utahtaxhelp org Your family actually used the apartment for 10 of those days. Utahtaxhelp org Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Utahtaxhelp org You figured 10% of the total days rented to others at a fair rental price is 16 days. Utahtaxhelp org Your family also used the apartment for 7 other days during the year. Utahtaxhelp org You used the apartment as a home because you used it for personal purposes for 17 days. Utahtaxhelp org That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Utahtaxhelp org Minimal rental use. Utahtaxhelp org   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Utahtaxhelp org See Used as a home but rented less than 15 days , later, for more information. Utahtaxhelp org Limit on deductions. Utahtaxhelp org   Renting a dwelling unit that is considered a home is not a passive activity. Utahtaxhelp org Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Utahtaxhelp org The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Utahtaxhelp org Any expenses carried forward to the next year will be subject to any limits that apply for that year. Utahtaxhelp org This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Utahtaxhelp org   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Utahtaxhelp org Reporting Income and Deductions Property not used for personal purposes. Utahtaxhelp org   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. Utahtaxhelp org Property used for personal purposes. Utahtaxhelp org   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Utahtaxhelp org Not used as a home. Utahtaxhelp org   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Utahtaxhelp org Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Utahtaxhelp org The expenses for personal use are not deductible as rental expenses. Utahtaxhelp org   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Utahtaxhelp org Used as a home but rented less than 15 days. Utahtaxhelp org   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Utahtaxhelp org You are not required to report the rental income and rental expenses from this activity. Utahtaxhelp org The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Utahtaxhelp org See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Utahtaxhelp org Used as a home and rented 15 days or more. Utahtaxhelp org   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Utahtaxhelp org Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Utahtaxhelp org The expenses for personal use are not deductible as rental expenses. Utahtaxhelp org   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Utahtaxhelp org You do not need to use Worksheet 9-1. Utahtaxhelp org   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Utahtaxhelp org To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Utahtaxhelp org Depreciation You recover the cost of income-producing property through yearly tax deductions. Utahtaxhelp org You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Utahtaxhelp org Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Utahtaxhelp org You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Utahtaxhelp org You can deduct depreciation only on the part of your property used for rental purposes. Utahtaxhelp org Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Utahtaxhelp org You may have to use Form 4562 to figure and report your depreciation. Utahtaxhelp org See How To Report Rental Income and Expenses , later. Utahtaxhelp org Alternative minimum tax (AMT). Utahtaxhelp org    If you use accelerated depreciation, you may be subject to the AMT. Utahtaxhelp org Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Utahtaxhelp org Claiming the correct amount of depreciation. Utahtaxhelp org   You should claim the correct amount of depreciation each tax year. Utahtaxhelp org If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Utahtaxhelp org   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Utahtaxhelp org S Individual Income Tax Return. Utahtaxhelp org If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Utahtaxhelp org See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Utahtaxhelp org Changing your accounting method to deduct unclaimed depreciation. Utahtaxhelp org   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Utahtaxhelp org In some instances, that consent is automatic. Utahtaxhelp org For more information, see chapter 1 of Publication 946. Utahtaxhelp org Land. Utahtaxhelp org   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Utahtaxhelp org The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Utahtaxhelp org More information. Utahtaxhelp org   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Utahtaxhelp org Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Utahtaxhelp org You must consider these rules in the order shown below. Utahtaxhelp org At-risk rules. Utahtaxhelp org These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Utahtaxhelp org This applies only if the real property was placed in service after 1986. Utahtaxhelp org Passive activity limits. Utahtaxhelp org Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Utahtaxhelp org However, there are exceptions. Utahtaxhelp org At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Utahtaxhelp org Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Utahtaxhelp org In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Utahtaxhelp org You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Utahtaxhelp org See Publication 925 for more information. Utahtaxhelp org Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Utahtaxhelp org For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Utahtaxhelp org Limits on passive activity deductions and credits. Utahtaxhelp org    Deductions or losses from passive activities are limited. Utahtaxhelp org You generally cannot offset income, other than passive income, with losses from passive activities. Utahtaxhelp org Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Utahtaxhelp org Any excess loss or credit is carried forward to the next tax year. Utahtaxhelp org   For a detailed discussion of these rules, see Publication 925. Utahtaxhelp org    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Utahtaxhelp org Real estate professionals. Utahtaxhelp org   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Utahtaxhelp org For a detailed discussion of the requirements, see Publication 527. Utahtaxhelp org For a detailed discussion of material participation, see Publication 925. Utahtaxhelp org Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Utahtaxhelp org Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Utahtaxhelp org Exception for Rental Real Estate Activities With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Utahtaxhelp org This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Utahtaxhelp org Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Utahtaxhelp org Active participation. Utahtaxhelp org   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Utahtaxhelp org Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Utahtaxhelp org Maximum special allowance. Utahtaxhelp org   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Utahtaxhelp org   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Utahtaxhelp org If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Utahtaxhelp org   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Utahtaxhelp org More information. Utahtaxhelp org   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. Utahtaxhelp org How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Utahtaxhelp org However, do not use that schedule to report a not-for-profit activity. Utahtaxhelp org See Not Rented for Profit, earlier. Utahtaxhelp org Providing substantial services. Utahtaxhelp org   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Utahtaxhelp org Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Utahtaxhelp org For information, see Publication 334, Tax Guide for Small Business. Utahtaxhelp org You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Utahtaxhelp org   Use Form 1065, U. Utahtaxhelp org S. Utahtaxhelp org Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Utahtaxhelp org Qualified joint venture. Utahtaxhelp org   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Utahtaxhelp org This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Utahtaxhelp org For more information, see Publication 527. Utahtaxhelp org Form 1098, Mortgage Interest Statement. Utahtaxhelp org    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. Utahtaxhelp org If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Utahtaxhelp org Attach a statement to your return showing the name and address of the other person. Utahtaxhelp org In the left margin of Schedule E, next to line 13, enter “See attached. Utahtaxhelp org ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Utahtaxhelp org , you normally report your rental income and expenses on Schedule E, Part I. Utahtaxhelp org List your total income, expenses, and depreciation for each rental property. Utahtaxhelp org Be sure to enter the number of fair rental and personal use days on line 2. Utahtaxhelp org If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Utahtaxhelp org Complete lines 1 and 2 for each property. Utahtaxhelp org However, fill in lines 23a through 26 on only one Schedule E. Utahtaxhelp org On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Utahtaxhelp org To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Utahtaxhelp org If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Utahtaxhelp org Form 6198, At-Risk Limitations. Utahtaxhelp org See At-Risk Rules , earlier. Utahtaxhelp org Also see Publication 925. Utahtaxhelp org Form 8582, Passive Activity Loss Limitations. Utahtaxhelp org See Passive Activity Limits , earlier. Utahtaxhelp org Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Utahtaxhelp org If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Utahtaxhelp org Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Utahtaxhelp org Worksheet 9-1. Utahtaxhelp org Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Utahtaxhelp org Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Utahtaxhelp org ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Utahtaxhelp org Rental Use Percentage A. Utahtaxhelp org Total days available for rent at fair rental price A. Utahtaxhelp org       B. Utahtaxhelp org Total days available for rent (line A) but not rented B. Utahtaxhelp org       C. Utahtaxhelp org Total days of rental use. Utahtaxhelp org Subtract line B from line A C. Utahtaxhelp org       D. Utahtaxhelp org Total days of personal use (including days rented at less than fair rental price) D. Utahtaxhelp org       E. Utahtaxhelp org Total days of rental and personal use. Utahtaxhelp org Add lines C and D E. Utahtaxhelp org       F. Utahtaxhelp org Percentage of expenses allowed for rental. Utahtaxhelp org Divide line C by line E     F. Utahtaxhelp org   PART II. Utahtaxhelp org Allowable Rental Expenses 1. Utahtaxhelp org Enter rents received 1. Utahtaxhelp org   2a. Utahtaxhelp org Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Utahtaxhelp org       b. Utahtaxhelp org Enter the rental portion of real estate taxes b. Utahtaxhelp org       c. Utahtaxhelp org Enter the rental portion of deductible casualty and theft losses (see instructions) c. Utahtaxhelp org       d. Utahtaxhelp org Enter direct rental expenses (see instructions) d. Utahtaxhelp org       e. Utahtaxhelp org Fully deductible rental expenses. Utahtaxhelp org Add lines 2a–2d. Utahtaxhelp org Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Utahtaxhelp org   3. Utahtaxhelp org Subtract line 2e from line 1. Utahtaxhelp org If zero or less, enter -0- 3. Utahtaxhelp org   4a. Utahtaxhelp org Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Utahtaxhelp org       b. Utahtaxhelp org Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Utahtaxhelp org       c. Utahtaxhelp org Carryover of operating expenses from 2012 worksheet c. Utahtaxhelp org       d. Utahtaxhelp org Add lines 4a–4c d. Utahtaxhelp org       e. Utahtaxhelp org Allowable expenses. Utahtaxhelp org Enter the smaller of line 3 or line 4d (see instructions) 4e. Utahtaxhelp org   5. Utahtaxhelp org Subtract line 4e from line 3. Utahtaxhelp org If zero or less, enter -0- 5. Utahtaxhelp org   6a. Utahtaxhelp org Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Utahtaxhelp org       b. Utahtaxhelp org Enter the rental portion of depreciation of the dwelling unit b. Utahtaxhelp org       c. Utahtaxhelp org Carryover of excess casualty losses and depreciation from 2012 worksheet c. Utahtaxhelp org       d. Utahtaxhelp org Add lines 6a–6c d. Utahtaxhelp org       e. Utahtaxhelp org Allowable excess casualty and theft losses and depreciation. Utahtaxhelp org Enter the smaller of  line 5 or line 6d (see instructions) 6e. Utahtaxhelp org   PART III. Utahtaxhelp org Carryover of Unallowed Expenses to Next Year 7a. Utahtaxhelp org Operating expenses to be carried over to next year. Utahtaxhelp org Subtract line 4e from line 4d 7a. Utahtaxhelp org   b. Utahtaxhelp org Excess casualty and theft losses and depreciation to be carried over to next year. Utahtaxhelp org  Subtract line 6e from line 6d b. Utahtaxhelp org   Worksheet 9-1 Instructions. Utahtaxhelp org Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Utahtaxhelp org Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Utahtaxhelp org Line 2a. Utahtaxhelp org Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Utahtaxhelp org Do not include interest on a loan that did not benefit the dwelling unit. Utahtaxhelp org For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Utahtaxhelp org Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Utahtaxhelp org Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Utahtaxhelp org   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Utahtaxhelp org See the Schedule A instructions. Utahtaxhelp org However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Utahtaxhelp org See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Utahtaxhelp org Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Utahtaxhelp org   Note. Utahtaxhelp org Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Utahtaxhelp org Instead, figure the personal portion on a separate Schedule A. Utahtaxhelp org If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Utahtaxhelp org           Line 2c. Utahtaxhelp org Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Utahtaxhelp org To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Utahtaxhelp org If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Utahtaxhelp org On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Utahtaxhelp org Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Utahtaxhelp org   Note. Utahtaxhelp org Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Utahtaxhelp org Instead, figure the personal portion on a separate Form 4684. Utahtaxhelp org           Line 2d. Utahtaxhelp org Enter the total of your rental expenses that are directly related only to the rental activity. Utahtaxhelp org These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Utahtaxhelp org Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Utahtaxhelp org           Line 2e. Utahtaxhelp org You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Utahtaxhelp org Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Utahtaxhelp org           Line 4b. Utahtaxhelp org On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Utahtaxhelp org If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Utahtaxhelp org Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Utahtaxhelp org           Line 4e. Utahtaxhelp org You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Utahtaxhelp org *           Line 6a. Utahtaxhelp org To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Utahtaxhelp org   A. Utahtaxhelp org Enter the amount from Form 4684, line 10       B. Utahtaxhelp org Enter the rental portion of line A       C. Utahtaxhelp org Enter the amount from line 2c of this worksheet       D. Utahtaxhelp org Subtract line C from line B. Utahtaxhelp org Enter the result here and on line 6a of this worksheet               Line 6e. Utahtaxhelp org You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Utahtaxhelp org * *Allocating the limited deduction. Utahtaxhelp org If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Utahtaxhelp org Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Utahtaxhelp org Prev  Up  Next   Home   More Online Publications