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1040ez Tax

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1040ez Tax

1040ez tax Publication 15-A - Main Content Table of Contents 1. 1040ez tax Who Are Employees?Independent Contractors Common-Law Employees Statutory Employees Statutory Nonemployees Misclassification of Employees 2. 1040ez tax Employee or Independent Contractor?Common-Law Rules Industry Examples 3. 1040ez tax Employees of Exempt OrganizationsSocial security and Medicare taxes. 1040ez tax FUTA tax. 1040ez tax 4. 1040ez tax Religious Exemptions and Special Rules for MinistersForm W-2. 1040ez tax Self-employed. 1040ez tax Employees. 1040ez tax 5. 1040ez tax 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. 1040ez tax 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. 1040ez tax Special Rules for Paying TaxesCommon Paymaster Agents Reporting Agents Employee's Portion of Taxes Paid by Employer International Social Security Agreements 8. 1040ez tax Pensions and AnnuitiesFederal Income Tax Withholding 9. 1040ez tax Alternative Methods for Figuring WithholdingTerm of continuous employment. 1040ez tax 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. 1040ez tax Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersWithholding Tables How To Get Tax Help 1. 1040ez tax 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. 1040ez tax The person performing the services may be: An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee. 1040ez tax This discussion explains these four categories. 1040ez tax 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. 1040ez tax 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. 1040ez tax However, in some cases you may be required to withhold under the backup withholding requirements on these payments. 1040ez tax See Publication 15 (Circular E) for information on backup withholding. 1040ez tax 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. 1040ez tax However, whether such people are employees or independent contractors depends on the facts in each case. 1040ez tax 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. 1040ez tax 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. 1040ez tax This is so even when you give the employee freedom of action. 1040ez tax What matters is that you have the right to control the details of how the services are performed. 1040ez tax For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2. 1040ez tax If you have an employer-employee relationship, it makes no difference how it is labeled. 1040ez tax The substance of the relationship, not the label, governs the worker's status. 1040ez tax It does not matter whether the individual is employed full time or part time. 1040ez tax For employment tax purposes, no distinction is made between classes of employees. 1040ez tax Superintendents, managers, and other supervisory personnel are all employees. 1040ez tax 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. 1040ez tax A director of a corporation is not an employee with respect to services performed as a director. 1040ez tax You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. 1040ez tax However, the wages of certain employees may be exempt from one or more of these taxes. 1040ez tax See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4). 1040ez tax Leased employees. 1040ez tax   Under certain circumstances, a firm that furnishes workers to other firms is the employer of those workers for employment tax purposes. 1040ez tax 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. 1040ez tax   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. 1040ez tax 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. 1040ez tax 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. 1040ez tax For information on employee leasing as it relates to pension plan qualification requirements, see Leased employee in Publication 560, Retirement Plans for Small Business. 1040ez tax Additional information. 1040ez tax   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. 1040ez tax 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. 1040ez tax 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 . 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. 1040ez tax The work performed for you must be the salesperson's principal business activity. 1040ez tax See Salesperson in section 2. 1040ez tax Social security and Medicare taxes. 1040ez tax   You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. 1040ez tax The service contract states or implies that substantially all the services are to be performed personally by them. 1040ez tax 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). 1040ez tax The services are performed on a continuing basis for the same payer. 1040ez tax Federal unemployment (FUTA) tax. 1040ez tax   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. 1040ez tax 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. 1040ez tax Income tax. 1040ez tax   Do not withhold federal income tax from the wages of statutory employees. 1040ez tax Reporting payments to statutory employees. 1040ez tax   Furnish Form W-2 to a statutory employee, and check “Statutory employee” in box 13. 1040ez tax Show your payments to the employee as “other compensation” in box 1. 1040ez tax 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. 1040ez tax The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. 1040ez tax 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. 1040ez tax 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. 1040ez tax H-2A agricultural workers. 1040ez tax   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. 1040ez tax Statutory Nonemployees There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. 1040ez tax 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. 1040ez tax Direct sellers. 1040ez tax   Direct sellers include persons falling within any of the following three groups. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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). 1040ez tax   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. 1040ez tax Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. 1040ez tax Licensed real estate agents. 1040ez tax   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. 1040ez tax Companion sitters. 1040ez tax   Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. 1040ez tax 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. 1040ez tax Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. 1040ez tax Misclassification of Employees Consequences of treating an employee as an independent contractor. 1040ez tax   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. 1040ez tax See section 2 in Publication 15 (Circular E) for more information. 1040ez tax Relief provision. 1040ez tax   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. 1040ez tax To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. 1040ez tax You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. 1040ez tax Technical service specialists. 1040ez tax   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. 1040ez tax 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. 1040ez tax   This limit on the application of the rule does not affect the determination of whether such workers are employees under the common-law rules. 1040ez tax The common-law rules control whether the specialist is treated as an employee or an independent contractor. 1040ez tax 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. 1040ez tax Test proctors and room supervisors. 1040ez tax   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. 1040ez tax Voluntary Classification Settlement Program (VCSP). 1040ez tax   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. 1040ez tax To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). 1040ez tax For more information, visit IRS. 1040ez tax gov and enter “VCSP” in the search box. 1040ez tax 2. 1040ez tax 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. 1040ez tax An employer does not generally have to withhold or pay over any federal taxes on payments to independent contractors. 1040ez tax 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. 1040ez tax In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. 1040ez tax 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. 1040ez tax These facts are discussed next. 1040ez tax Behavioral control. 1040ez tax   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. 1040ez tax   An employee is generally subject to the business' instructions about when, where, and how to work. 1040ez tax All of the following are examples of types of instructions about how to do work. 1040ez tax When and where to do the work. 1040ez tax What tools or equipment to use. 1040ez tax What workers to hire or to assist with the work. 1040ez tax Where to purchase supplies and services. 1040ez tax What work must be performed by a specified  individual. 1040ez tax What order or sequence to follow. 1040ez tax   The amount of instruction needed varies among different jobs. 1040ez tax 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. 1040ez tax A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. 1040ez tax 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. 1040ez tax Training that the business gives to the worker. 1040ez tax   An employee may be trained to perform services in a particular manner. 1040ez tax Independent contractors ordinarily use their own methods. 1040ez tax Financial control. 1040ez tax   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. 1040ez tax   Independent contractors are more likely to have unreimbursed expenses than are employees. 1040ez tax Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. 1040ez tax However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer. 1040ez tax The extent of the worker's investment. 1040ez tax   An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. 1040ez tax However, a significant investment is not necessary for independent contractor status. 1040ez tax The extent to which the worker makes his or her services available to the relevant market. 1040ez tax   An independent contractor is generally free to seek out business opportunities. 1040ez tax Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. 1040ez tax How the business pays the worker. 1040ez tax   An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. 1040ez tax This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. 1040ez tax An independent contractor is often paid a flat fee or on a time and materials basis for the job. 1040ez tax However, it is common in some professions, such as law, to pay independent contractors hourly. 1040ez tax The extent to which the worker can realize a profit or loss. 1040ez tax   An independent contractor can make a profit or loss. 1040ez tax Type of relationship. 1040ez tax   Facts that show the parties' type of relationship include: Written contracts describing the relationship the parties intended to create. 1040ez tax Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. 1040ez tax The permanency of the relationship. 1040ez tax 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. 1040ez tax The extent to which services performed by the worker are a key aspect of the regular business of the company. 1040ez tax 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. 1040ez tax 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. 1040ez tax This would indicate an employer-employee relationship. 1040ez tax IRS help. 1040ez tax   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. 1040ez tax Industry Examples The following examples may help you properly classify your workers. 1040ez tax Building and Construction Industry Example 1. 1040ez tax Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. 1040ez tax She did not advance funds to help him carry on the work. 1040ez tax She makes direct payments to the suppliers for all necessary materials. 1040ez tax She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. 1040ez tax She pays them an hourly rate and exercises almost constant supervision over the work. 1040ez tax Jerry is not free to transfer his assistants to other jobs. 1040ez tax He may not work on other jobs while working for Wilma. 1040ez tax He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. 1040ez tax He and his assistants perform personal services for hourly wages. 1040ez tax Jerry Jones and his assistants are employees of Wilma White. 1040ez tax Example 2. 1040ez tax Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. 1040ez tax He uses his own tools and performs services in the order designated by the corporation and according to its specifications. 1040ez tax The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. 1040ez tax He does not have a place of business or hold himself out to perform similar services for others. 1040ez tax Either party can end the services at any time. 1040ez tax Milton Manning is an employee of the corporation. 1040ez tax Example 3. 1040ez tax Wallace Black agreed with the Sawdust Co. 1040ez tax to supply the construction labor for a group of houses. 1040ez tax The company agreed to pay all construction costs. 1040ez tax However, he supplies all the tools and equipment. 1040ez tax He performs personal services as a carpenter and mechanic for an hourly wage. 1040ez tax He also acts as superintendent and foreman and engages other individuals to assist him. 1040ez tax The company has the right to select, approve, or discharge any helper. 1040ez tax A company representative makes frequent inspections of the construction site. 1040ez tax When a house is finished, Wallace is paid a certain percentage of its costs. 1040ez tax He is not responsible for faults, defects of construction, or wasteful operation. 1040ez tax At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. 1040ez tax The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages. 1040ez tax Wallace Black and his assistants are employees of the Sawdust Co. 1040ez tax Example 4. 1040ez tax Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. 1040ez tax A signed contract established a flat amount for the services rendered by Bill Plum. 1040ez tax Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. 1040ez tax He hires his own roofers who are treated as employees for federal employment tax purposes. 1040ez tax If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. 1040ez tax Bill Plum, doing business as Plum Roofing, is an independent contractor. 1040ez tax Example 5. 1040ez tax Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. 1040ez tax She is to receive $1,280 every 2 weeks for the next 10 weeks. 1040ez tax This is not considered payment by the hour. 1040ez tax Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. 1040ez tax She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. 1040ez tax Vera is an independent contractor. 1040ez tax Trucking Industry Example. 1040ez tax Rose Trucking contracts to deliver material for Forest, Inc. 1040ez tax , at $140 per ton. 1040ez tax Rose Trucking is not paid for any articles that are not delivered. 1040ez tax At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. 1040ez tax All operating expenses, including insurance coverage, are paid by Jan Rose. 1040ez tax All equipment is owned or rented by Jan and she is responsible for all maintenance. 1040ez tax None of the drivers are provided by Forest, Inc. 1040ez tax Jan Rose, operating as Rose Trucking, is an independent contractor. 1040ez tax Computer Industry Example. 1040ez tax Steve Smith, a computer programmer, is laid off when Megabyte, Inc. 1040ez tax , downsizes. 1040ez tax Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. 1040ez tax 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. 1040ez tax Megabyte provides Steve with no instructions beyond the specifications for the product itself. 1040ez tax 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. 1040ez tax Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. 1040ez tax Steve works at home and is not expected or allowed to attend meetings of the software development group. 1040ez tax Steve is an independent contractor. 1040ez tax Automobile Industry Example 1. 1040ez tax Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. 1040ez tax She works six days a week and is on duty in Bob's showroom on certain assigned days and times. 1040ez tax She appraises trade-ins, but her appraisals are subject to the sales manager's approval. 1040ez tax Lists of prospective customers belong to the dealer. 1040ez tax She is required to develop leads and report results to the sales manager. 1040ez tax Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. 1040ez tax She is paid a commission and is eligible for prizes and bonuses offered by Bob. 1040ez tax Bob also pays the cost of health insurance and group-term life insurance for Donna. 1040ez tax Donna is an employee of Bob Blue. 1040ez tax Example 2. 1040ez tax Sam Sparks performs auto repair services in the repair department of an auto sales company. 1040ez tax He works regular hours and is paid on a percentage basis. 1040ez tax He has no investment in the repair department. 1040ez tax 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. 1040ez tax Sam is an employee of the sales company. 1040ez tax Example 3. 1040ez tax An auto sales agency furnishes space for Helen Bach to perform auto repair services. 1040ez tax She provides her own tools, equipment, and supplies. 1040ez tax She seeks out business from insurance adjusters and other individuals and does all of the body and paint work that comes to the agency. 1040ez tax 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. 1040ez tax Helen is an independent contractor and the helpers are her employees. 1040ez tax Attorney Example. 1040ez tax 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. 1040ez tax Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. 1040ez tax Donna has a part-time receptionist who also does the bookkeeping. 1040ez tax She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. 1040ez tax For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. 1040ez tax Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. 1040ez tax 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. 1040ez tax Donna is an independent contractor. 1040ez tax Taxicab Driver Example. 1040ez tax Tom Spruce rents a cab from Taft Cab Co. 1040ez tax for $150 per day. 1040ez tax He pays the costs of maintaining and operating the cab. 1040ez tax Tom Spruce keeps all fares that he receives from customers. 1040ez tax Although he receives the benefit of Taft's two-way radio communication equipment, dispatcher, and advertising, these items benefit both Taft and Tom Spruce. 1040ez tax Tom Spruce is an independent contractor. 1040ez tax Salesperson To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. 1040ez tax 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). 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 3. 1040ez tax Employees of Exempt Organizations Many nonprofit organizations are exempt from federal income tax. 1040ez tax Although they do not have to pay federal income tax themselves, they must still withhold federal income tax from the pay of their employees. 1040ez tax However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees. 1040ez tax Section 501(c)(3) organizations. 1040ez tax   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. 1040ez tax These organizations are usually corporations and are exempt from federal income tax under section 501(a). 1040ez tax Social security and Medicare taxes. 1040ez tax   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. 1040ez tax The organization pays an employee less than $100 in a calendar year. 1040ez tax 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. 1040ez tax 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. 1040ez tax   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. 1040ez tax 28 or more in a year. 1040ez tax 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. 1040ez tax See Members of recognized religious sects opposed to insurance in section 4. 1040ez tax FUTA tax. 1040ez tax   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. 1040ez tax This exemption cannot be waived. 1040ez tax Do not file Form 940 to report wages paid by these organizations or pay the tax. 1040ez tax Note. 1040ez tax 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. 1040ez tax Other than section 501(c)(3) organizations. 1040ez tax   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. 1040ez tax However, these organizations are not exempt from withholding federal income, social security, or Medicare tax from their employees' pay, or from paying FUTA tax. 1040ez tax Two special rules for social security, Medicare, and FUTA taxes apply. 1040ez tax 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. 1040ez tax 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. 1040ez tax The above rules do not apply to employees who work for pension plans and other similar organizations described in section 401(a). 1040ez tax 4. 1040ez tax Religious Exemptions and Special Rules for Ministers Special rules apply to the treatment of ministers for social security and Medicare tax purposes. 1040ez tax An exemption from social security and Medicare taxes is available for ministers and certain other religious workers and members of certain recognized religious sects. 1040ez tax For more information on getting an exemption, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. 1040ez tax Ministers. 1040ez tax   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. 1040ez tax 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. 1040ez tax   Ministers are employees if they perform services in the exercise of ministry and are subject to your will and control. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax For more information, see Publication 517. 1040ez tax Form W-2. 1040ez tax   If your minister is an employee, report all taxable compensation as wages in box 1 on Form W-2. 1040ez tax Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Publication 15 (Circular E). 1040ez tax Do not include a parsonage allowance (excludable housing allowance) in this amount. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax For more information on ministers, see Publication 517. 1040ez tax Exemptions for ministers and others. 1040ez tax   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. 1040ez tax 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. 1040ez tax The exemption applies only to qualified services performed for the religious organization. 1040ez tax See Revenue Procedure 91-20, 1991-1 C. 1040ez tax B. 1040ez tax 524, for guidelines to determine whether an organization is a religious order or whether an individual is a member of a religious order. 1040ez tax   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. 1040ez tax See Publication 517 for more information about claiming an exemption from self-employment tax using Form 4361. 1040ez tax Members of recognized religious sects opposed to insurance. 1040ez tax   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. 1040ez tax 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). 1040ez tax If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. 1040ez tax Religious opposition based on the teachings of the sect is the only legal basis for the exemption. 1040ez tax In addition, your religious sect (or division) must have existed since December 31, 1950. 1040ez tax Self-employed. 1040ez tax   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. 1040ez tax Employees. 1040ez tax   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. 1040ez tax This applies to partnerships only if each partner is a member of the sect. 1040ez tax 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. 1040ez tax To get the exemption, the employee must file Form 4029. 1040ez tax   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. 1040ez tax 5. 1040ez tax Wages and Other Compensation Publication 15 (Circular E) provides a general discussion of taxable wages. 1040ez tax Publication 15-B discusses fringe benefits. 1040ez tax The following topics supplement those discussions. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax See chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Publication 15 (Circular E), for more information. 1040ez tax These rules generally apply to temporary work assignments both inside and outside the U. 1040ez tax S. 1040ez tax 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. 1040ez tax 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. 1040ez tax Excludable employee achievement awards also are not subject to FUTA tax. 1040ez tax Limits. 1040ez tax   The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. 1040ez tax A higher limit of $1,600 applies to qualified plan awards. 1040ez tax Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. 1040ez tax 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. 1040ez tax   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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax These amounts are reportable on Form W-2. 1040ez tax 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. 1040ez tax Any amounts that you pay for room and board are not excludable from the recipient's gross income. 1040ez tax A qualified scholarship is not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. 1040ez tax For more information, see Publication 970, Tax Benefits for Education. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax Back Pay Treat back pay as wages in the year paid and withhold and pay employment taxes as required. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax Amounts that represent a return to the employee of amounts previously subject to tax are not taxable and are not subject to withholding. 1040ez tax 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. 1040ez tax It does not matter whether the separation is temporary or permanent. 1040ez tax 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. 1040ez tax To qualify as supplemental unemployment benefits for these purposes, the benefits must meet the following requirements. 1040ez tax Benefits are paid only to unemployed former employees who are laid off by the employer. 1040ez tax Eligibility for benefits depends on meeting prescribed conditions after termination. 1040ez tax 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. 1040ez tax The right to benefits does not accrue until a prescribed period after termination. 1040ez tax Benefits are not attributable to the performance of particular services. 1040ez tax No employee has any right to the benefits until qualified and eligible to receive benefits. 1040ez tax Benefits may not be paid in a lump sum. 1040ez tax Withholding on taxable supplemental unemployment benefits must be based on the withholding certificate (Form W-4) that the employee gave to you. 1040ez tax Golden Parachute Payments A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. 1040ez tax 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. 1040ez tax Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. 1040ez tax See Regulations section 1. 1040ez tax 280G-1 for more information. 1040ez tax No deduction is allowed to the corporation for any excess parachute payment. 1040ez tax To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. 1040ez tax A parachute payment for purposes of section 280G is any payment that meets all of the following. 1040ez tax The payment is in the nature of compensation. 1040ez tax The payment is to, or for the benefit of, a disqualified individual. 1040ez tax 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. 1040ez tax 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. 1040ez tax The payment has an aggregate present value of at least three times the individual's base amount. 1040ez tax The base amount is the average annual compensation for service includible in the individual's gross income over the most recent 5 taxable years. 1040ez tax An excess parachute payment amount is the excess of any parachute payment over the base amount. 1040ez tax For more information, see Regulations section 1. 1040ez tax 280G-1. 1040ez tax The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. 1040ez tax If the recipient is an employee, the 20% excise tax is to be withheld by the corporation. 1040ez tax Example. 1040ez tax An officer of a corporation receives a golden parachute payment of $400,000. 1040ez tax This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. 1040ez tax The excess parachute payment is $300,000 ($400,000 minus $100,000). 1040ez tax The corporation cannot deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). 1040ez tax Reporting golden parachute payments. 1040ez tax   Golden parachute payments to employees must be reported on Form W-2. 1040ez tax See the General Instructions for Forms W-2 and W-3 for details. 1040ez tax For nonemployee reporting of these payments, see Box 7. 1040ez tax Nonemployee Compensation in the Instructions for Form 1099-MISC. 1040ez tax Exempt payments. 1040ez tax   Payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules. 1040ez tax See section 280G(b)(5) and (6) for more information. 1040ez tax 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. 1040ez tax This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. 1040ez tax This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. 1040ez tax Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). 1040ez tax The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. 1040ez tax You can get these rates by calling 1-800-829-4933 or by visiting IRS. 1040ez tax gov. 1040ez tax For more information, see section 7872 and its related regulations. 1040ez tax 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. 1040ez tax 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. 1040ez tax Do not include these amounts in the income of the transferors. 1040ez tax These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies. 1040ez tax 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. 1040ez tax 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. 1040ez tax Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. 1040ez tax 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. 1040ez tax Specific rules for reporting are provided in the instructions to the forms. 1040ez tax The provisions do not affect the application or reporting of social security, Medicare, or FUTA taxes. 1040ez tax 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. 1040ez tax For more information about nonqualified deferred compensation plans, see Regulations sections 1. 1040ez tax 409A-1 through 1. 1040ez tax 409A-6. 1040ez tax Notice 2008-113 provides guidance on the correction of certain operation failures of a NQDC plan. 1040ez tax Notice 2008-113, 2008-51 I. 1040ez tax R. 1040ez tax B. 1040ez tax 1305, is available at www. 1040ez tax irs. 1040ez tax gov/irb/2008-51_IRB/ar12. 1040ez tax html. 1040ez tax Also see Notice 2010-6, 2010-3 I. 1040ez tax R. 1040ez tax B. 1040ez tax 275, available at www. 1040ez tax irs. 1040ez tax gov/irb/2010-03_IRB/ar08. 1040ez tax html and Notice 2010-80, 2010-51 I. 1040ez tax R. 1040ez tax B. 1040ez tax 853, available at www. 1040ez tax irs. 1040ez tax gov/irb/2010-51_IRB/ar08. 1040ez tax html. 1040ez tax Social security, Medicare, and FUTA taxes. 1040ez tax   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. 1040ez tax   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. 1040ez tax 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. 1040ez tax You will have to determine later, when the amount is reasonably ascertainable, whether any additional taxes are required. 1040ez tax 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. 1040ez tax For more information, see Regulations sections 31. 1040ez tax 3121(v)(2)-1 and 31. 1040ez tax 3306(r)(2)-1. 1040ez tax 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. 1040ez tax 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. 1040ez tax See Regulations section 31. 1040ez tax 3121(a)(5)-2 for the definition of a salary reduction agreement. 1040ez tax 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. 1040ez tax These excluded amounts are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. 1040ez tax However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. 1040ez tax See Publication 560 for more information about SEPs. 1040ez tax Salary reduction simplified employee pensions (SARSEP) repealed. 1040ez tax   You may not establish a SARSEP after 1996. 1040ez tax However, SARSEPs established before January 1, 1997, may continue to receive contributions. 1040ez tax 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. 1040ez tax An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. 1040ez tax However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. 1040ez tax For more information about SIMPLE retirement plans, see Publication 560. 1040ez tax 6. 1040ez tax Sick Pay Reporting The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014. 1040ez tax Information about this change will be included in the revision of Publication 15-A that is expected to post to IRS. 1040ez tax gov in December 2014. 1040ez tax Special rules apply to the reporting of sick pay payments to employees. 1040ez tax How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company. 1040ez tax Sick pay is usually subject to social security, Medicare, and FUTA taxes. 1040ez tax For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. 1040ez tax Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. 1040ez tax 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. 1040ez tax It may be paid by either the employer or a third party, such as an insurance company. 1040ez tax Sick pay includes both short- and long-term benefits. 1040ez tax It is often expressed as a percentage of the employee's regular wages. 1040ez tax Payments That Are Not Sick Pay Sick pay does not include the following payments. 1040ez tax Disability retirement payments. 1040ez tax Disability retirement payments are not sick pay and are not discussed in this section. 1040ez tax Those payments are subject to the rules for federal income tax withholding from pensions and annuities. 1040ez tax See section 8. 1040ez tax Workers' compensation. 1040ez tax 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. 1040ez tax But see Payments in the nature of workers' compensation—public employees next. 1040ez tax Payments in the nature of workers' compensation—public employees. 1040ez tax 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. 1040ez tax 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. 1040ez tax Payments under a statute in the nature of a workers' compensation law are not sick pay and are not subject to employment taxes. 1040ez tax For more information, see Regulations section 31. 1040ez tax 3121(a)(2)-1. 1040ez tax Medical expense payments. 1040ez tax 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. 1040ez tax Payments unrelated to absence from work. 1040ez tax Accident or health insurance payments unrelated to absence from work are not sick pay and are not subject to employment taxes. 1040ez tax 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. 1040ez tax Example. 1040ez tax Donald was injured in a car accident and lost an eye. 1040ez tax Under a policy paid for by Donald's employer, Delta Insurance Co. 1040ez tax paid Donald $20,000 as compensation for the loss of his eye. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax Definition of employer. 1040ez tax   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. 1040ez tax Note. 1040ez tax 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). 1040ez tax Third-Party Payers of Sick Pay Employer's agent. 1040ez tax   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. 1040ez tax A third party may be your agent even if the third party is responsible for determining which employees are eligible to receive payments. 1040ez tax For example, if a third party provides administrative services only, the third party is your agent. 1040ez tax 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. 1040ez tax Whether an insurance company or other third party is your agent depends on the terms of their agreement with you. 1040ez tax   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. 1040ez tax This responsibility remains with you. 1040ez tax However, under an exception to this rule, the parties may enter into an agreement that makes the third-party agent responsible for employment taxes. 1040ez tax 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. 1040ez tax Third party not employer's agent. 1040ez tax   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. 1040ez tax   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. 1040ez tax This liability is transferred if the third party takes the following steps. 1040ez tax Withholds the employee social security and Medicare taxes from the sick pay payments. 1040ez tax Makes timely deposits of the employee social security and Medicare taxes. 1040ez tax Notifies the employer for whom the employee normally works of the payments on which employee taxes were withheld and deposited. 1040ez tax 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. 1040ez tax 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. 1040ez tax 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. 1040ez tax For multi-employer plans, see the special rule discussed next. 1040ez tax Multi-employer plan timing rule. 1040ez tax   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. 1040ez tax If the third-party insurer making the payments complies wi
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The 1040ez Tax

1040ez tax 10. 1040ez tax   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. 1040ez tax Individual retirement arrangements (IRAs). 1040ez tax Civil service retirement benefits. 1040ez tax Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. 1040ez tax How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. 1040ez tax Exclusion not limited to cost. 1040ez tax Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. 1040ez tax Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). 1040ez tax However, these distributions are taken into account when determining the modified adjusted gross income threshold. 1040ez tax Distributions from a nonqualified retirement plan are included in net investment income. 1040ez tax See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. 1040ez tax Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. 1040ez tax For more information, see Designated Roth accounts discussed later. 1040ez tax Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. 1040ez tax What is not covered in this chapter. 1040ez tax   The following topics are not discussed in this chapter. 1040ez tax The General Rule. 1040ez tax   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). 1040ez tax For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. 1040ez tax For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. 1040ez tax Individual retirement arrangements (IRAs). 1040ez tax   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. 1040ez tax Civil service retirement benefits. 1040ez tax    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. 1040ez tax S. 1040ez tax Civil Service Retirement Benefits. 1040ez tax Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. 1040ez tax Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. 1040ez tax S. 1040ez tax Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1040ez tax 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. 1040ez tax   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. 1040ez tax Elective deferrals that are designated as Roth contributions are included in your income. 1040ez tax However, qualified distributions are not included in your income. 1040ez tax See Publication 575 for more information. 1040ez tax In-plan rollovers to designated Roth accounts. 1040ez tax   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. 1040ez tax The rollover of any untaxed amounts must be included in income. 1040ez tax See Publication 575 for more information. 1040ez tax More than one program. 1040ez tax   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. 1040ez tax Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. 1040ez tax Section 457 deferred compensation plans. 1040ez tax    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. 1040ez tax If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. 1040ez tax You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. 1040ez tax You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. 1040ez tax   Your 457(b) plan may have a designated Roth account option. 1040ez tax If so, you may be able to roll over amounts to the designated Roth account or make contributions. 1040ez tax Elective deferrals to a designated Roth account are included in your income. 1040ez tax Qualified distributions from a designated Roth account are not subject to tax. 1040ez tax   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. 1040ez tax For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. 1040ez tax   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. 1040ez tax Disability pensions. 1040ez tax   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. 1040ez tax You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. 1040ez tax Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. 1040ez tax    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. 1040ez tax For information on the credit for the elderly or the disabled, see chapter 33. 1040ez tax   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. 1040ez tax Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. 1040ez tax    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. 1040ez tax For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. 1040ez tax   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. 1040ez tax Retired public safety officers. 1040ez tax   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. 1040ez tax See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. 1040ez tax Railroad retirement benefits. 1040ez tax   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. 1040ez tax For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. 1040ez tax For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. 1040ez tax Withholding and estimated tax. 1040ez tax   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. 1040ez tax You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. 1040ez tax If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. 1040ez tax   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. 1040ez tax Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. 1040ez tax See Direct rollover option under Rollovers, later. 1040ez tax   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. 1040ez tax Qualified plans for self-employed individuals. 1040ez tax   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. 1040ez tax R. 1040ez tax 10 plans. 1040ez tax Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. 1040ez tax They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. 1040ez tax    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. 1040ez tax If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. 1040ez tax For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. 1040ez tax Purchased annuities. 1040ez tax   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. 1040ez tax For more information about the General Rule, get Publication 939. 1040ez tax Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. 1040ez tax Loans. 1040ez tax   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. 1040ez tax This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. 1040ez tax This means that you must include in income all or part of the amount borrowed. 1040ez tax Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. 1040ez tax For details, see Loans Treated as Distributions in Publication 575. 1040ez tax For information on the deductibility of interest, see chapter 23. 1040ez tax Tax-free exchange. 1040ez tax   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. 1040ez tax However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. 1040ez tax See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. 1040ez tax How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. 1040ez tax If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. 1040ez tax If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. 1040ez tax If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. 1040ez tax More than one annuity. 1040ez tax   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. 1040ez tax If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. 1040ez tax Joint return. 1040ez tax   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. 1040ez tax Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. 1040ez tax Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. 1040ez tax This includes the amounts your employer contributed that were taxable to you when paid. 1040ez tax Cost does not include any amounts you deducted or were excluded from your income. 1040ez tax From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. 1040ez tax Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. 1040ez tax Designated Roth accounts. 1040ez tax   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. 1040ez tax Your cost will also include any in-plan Roth rollovers you included in income. 1040ez tax Foreign employment contributions. 1040ez tax   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. 1040ez tax See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. 1040ez tax Taxation of Periodic Payments Fully taxable payments. 1040ez tax   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. 1040ez tax You must report them on your income tax return. 1040ez tax Partly taxable payments. 1040ez tax   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. 1040ez tax The rest of the amount you receive is generally taxable. 1040ez tax You figure the tax-free part of the payment using either the Simplified Method or the General Rule. 1040ez tax Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. 1040ez tax   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. 1040ez tax Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. 1040ez tax   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. 1040ez tax   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. 1040ez tax Exclusion limit. 1040ez tax   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. 1040ez tax Once your annuity starting date is determined, it does not change. 1040ez tax If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. 1040ez tax That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. 1040ez tax Exclusion limited to cost. 1040ez tax   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. 1040ez tax Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. 1040ez tax This deduction is not subject to the 2%-of-adjusted-gross-income limit. 1040ez tax Exclusion not limited to cost. 1040ez tax   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. 1040ez tax If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. 1040ez tax The total exclusion may be more than your cost. 1040ez tax Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. 1040ez tax For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. 1040ez tax For any other annuity, this number is the number of monthly annuity payments under the contract. 1040ez tax Who must use the Simplified Method. 1040ez tax   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. 1040ez tax Guaranteed payments. 1040ez tax   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. 1040ez tax If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. 1040ez tax How to use the Simplified Method. 1040ez tax    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. 1040ez tax Single-life annuity. 1040ez tax    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. 1040ez tax Enter on line 3 the number shown for your age at the annuity starting date. 1040ez tax Multiple-lives annuity. 1040ez tax   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. 1040ez tax Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. 1040ez tax   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. 1040ez tax Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. 1040ez tax    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. 1040ez tax Example. 1040ez tax Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. 1040ez tax Bill's annuity starting date is January 1, 2013. 1040ez tax The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. 1040ez tax Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. 1040ez tax Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. 1040ez tax Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. 1040ez tax Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. 1040ez tax His completed worksheet is shown in Worksheet 10-A. 1040ez tax Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. 1040ez tax Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. 1040ez tax The full amount of any annuity payments received after 310 payments are paid must be included in gross income. 1040ez tax If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. 1040ez tax This deduction is not subject to the 2%-of-adjusted- gross-income limit. 1040ez tax Worksheet 10-A. 1040ez tax Simplified Method Worksheet for Bill Smith 1. 1040ez tax Enter the total pension or annuity payments received this year. 1040ez tax Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. 1040ez tax 14,400 2. 1040ez tax Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. 1040ez tax See Cost (Investment in the Contract) , earlier 2. 1040ez tax 31,000       Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). 1040ez tax Otherwise, go to line 3. 1040ez tax         3. 1040ez tax Enter the appropriate number from Table 1 below. 1040ez tax But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. 1040ez tax 310     4. 1040ez tax Divide line 2 by the number on line 3 4. 1040ez tax 100     5. 1040ez tax Multiply line 4 by the number of months for which this year's payments were made. 1040ez tax If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. 1040ez tax Otherwise, go to line 6 5. 1040ez tax 1,200     6. 1040ez tax Enter any amounts previously recovered tax free in years after 1986. 1040ez tax This is the amount shown on line 10 of your worksheet for last year 6. 1040ez tax -0-     7. 1040ez tax Subtract line 6 from line 2 7. 1040ez tax 31,000     8. 1040ez tax Enter the smaller of line 5 or line 7 8. 1040ez tax 1,200 9. 1040ez tax Taxable amount for year. 1040ez tax Subtract line 8 from line 1. 1040ez tax Enter the result, but not less than zero. 1040ez tax Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. 1040ez tax 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. 1040ez tax If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. 1040ez tax     10. 1040ez tax Was your annuity starting date before 1987? □ Yes. 1040ez tax STOP. 1040ez tax Do not complete the rest of this worksheet. 1040ez tax  ☑ No. 1040ez tax Add lines 6 and 8. 1040ez tax This is the amount you have recovered tax free through 2013. 1040ez tax You will need this number if you need to fill out this worksheet next year 10. 1040ez tax 1,200 11. 1040ez tax Balance of cost to be recovered. 1040ez tax Subtract line 10 from line 2. 1040ez tax If zero, you will not have to complete this worksheet next year. 1040ez tax The payments you receive next year will generally be fully taxable 11. 1040ez tax 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. 1040ez tax . 1040ez tax . 1040ez tax before November 19, 1996, enter on line 3. 1040ez tax . 1040ez tax . 1040ez tax after November 18, 1996, enter on line 3. 1040ez tax . 1040ez tax . 1040ez tax 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. 1040ez tax . 1040ez tax . 1040ez tax   THEN enter on line 3. 1040ez tax . 1040ez tax . 1040ez tax 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. 1040ez tax Who must use the General Rule. 1040ez tax   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. 1040ez tax Annuity starting before November 19, 1996. 1040ez tax   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. 1040ez tax You also had to use it for any fixed-period annuity. 1040ez tax If you did not have to use the General Rule, you could have chosen to use it. 1040ez tax If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. 1040ez tax   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. 1040ez tax Who cannot use the General Rule. 1040ez tax   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. 1040ez tax See Who must use the Simplified Method , earlier. 1040ez tax More information. 1040ez tax   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. 1040ez tax Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. 1040ez tax They include all payments other than periodic payments and corrective distributions. 1040ez tax Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. 1040ez tax Corrective distributions of excess plan contributions. 1040ez tax   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. 1040ez tax To correct an excess, your plan may distribute it to you (along with any income earned on the excess). 1040ez tax For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. 1040ez tax Figuring the taxable amount of nonperiodic payments. 1040ez tax   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. 1040ez tax If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. 1040ez tax If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. 1040ez tax Annuity starting date. 1040ez tax   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. 1040ez tax Distribution on or after annuity starting date. 1040ez tax   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. 1040ez tax Distribution before annuity starting date. 1040ez tax   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. 1040ez tax You exclude from your gross income the part that you allocate to the cost. 1040ez tax You include the remainder in your gross income. 1040ez tax   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). 1040ez tax This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. 1040ez tax    Distributions from nonqualified plans are subject to the net investment income tax. 1040ez tax See the Instructions for Form 8960. 1040ez tax   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. 1040ez tax Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. 1040ez tax If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. 1040ez tax A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). 1040ez tax A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. 1040ez tax The participant's entire balance from a plan does not include certain forfeited amounts. 1040ez tax It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. 1040ez tax For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. 1040ez tax If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. 1040ez tax The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. 1040ez tax The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. 1040ez tax You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. 1040ez tax Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. 1040ez tax The tax figured on Form 4972 is added to the regular tax figured on your other income. 1040ez tax This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. 1040ez tax How to treat the distribution. 1040ez tax   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. 1040ez tax Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. 1040ez tax Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). 1040ez tax Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). 1040ez tax Roll over all or part of the distribution. 1040ez tax See Rollovers , later. 1040ez tax No tax is currently due on the part rolled over. 1040ez tax Report any part not rolled over as ordinary income. 1040ez tax Report the entire taxable part of the distribution as ordinary income on your tax return. 1040ez tax   The first three options are explained in the following discussions. 1040ez tax Electing optional lump-sum treatment. 1040ez tax   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. 1040ez tax If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. 1040ez tax Taxable and tax-free parts of the distribution. 1040ez tax    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. 1040ez tax You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. 1040ez tax Cost. 1040ez tax   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. 1040ez tax You must reduce this cost by amounts previously distributed tax free. 1040ez tax Net unrealized appreciation (NUA). 1040ez tax   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. 1040ez tax (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. 1040ez tax ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. 1040ez tax The amount treated as capital gain is taxed at a 20% rate. 1040ez tax You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. 1040ez tax Complete Part II of Form 4972 to choose the 20% capital gain election. 1040ez tax For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. 1040ez tax 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. 1040ez tax You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. 1040ez tax You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. 1040ez tax The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. 1040ez tax You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. 1040ez tax Complete Part III of Form 4972 to choose the 10-year tax option. 1040ez tax You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. 1040ez tax Publication 575 illustrates how to complete Form 4972 to figure the separate tax. 1040ez tax Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. 1040ez tax For this purpose, the following plans are qualified retirement plans. 1040ez tax A qualified employee plan. 1040ez tax A qualified employee annuity. 1040ez tax A tax-sheltered annuity plan (403(b) plan). 1040ez tax An eligible state or local government section 457 deferred compensation plan. 1040ez tax Eligible rollover distributions. 1040ez tax   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. 1040ez tax For information about exceptions to eligible rollover distributions, see Publication 575. 1040ez tax Rollover of nontaxable amounts. 1040ez tax   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. 1040ez tax The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. 1040ez tax   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. 1040ez tax   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. 1040ez tax To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. 1040ez tax For more information, see the Form 8606 instructions. 1040ez tax Direct rollover option. 1040ez tax   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. 1040ez tax If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. 1040ez tax Payment to you option. 1040ez tax   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. 1040ez tax However, the full amount is treated as distributed to you even though you actually receive only 80%. 1040ez tax You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. 1040ez tax (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. 1040ez tax )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. 1040ez tax Time for making rollover. 1040ez tax   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. 1040ez tax (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. 1040ez tax )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. 1040ez tax   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. 1040ez tax Qualified domestic relations order (QDRO). 1040ez tax   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. 1040ez tax If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. 1040ez tax You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. 1040ez tax See Rollovers in Publication 575 for more information on benefits received under a QDRO. 1040ez tax Rollover by surviving spouse. 1040ez tax   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. 1040ez tax The rollover rules apply to you as if you were the employee. 1040ez tax You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. 1040ez tax For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. 1040ez tax    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. 1040ez tax However, see Rollovers by nonspouse beneficiary next. 1040ez tax Rollovers by nonspouse beneficiary. 1040ez tax   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. 1040ez tax The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. 1040ez tax The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. 1040ez tax For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). 1040ez tax Retirement bonds. 1040ez tax   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. 1040ez tax Designated Roth accounts. 1040ez tax   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. 1040ez tax If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. 1040ez tax For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. 1040ez tax In-plan rollovers to designated Roth accounts. 1040ez tax   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. 1040ez tax The rollover of any untaxed amounts must be included in income. 1040ez tax See Designated Roth accounts under Rollovers in Publication 575 for more information. 1040ez tax Rollovers to Roth IRAs. 1040ez tax   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. 1040ez tax   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. 1040ez tax You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. 1040ez tax In addition, the 10% tax on early distributions does not apply. 1040ez tax More information. 1040ez tax   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. 1040ez tax Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. 1040ez tax Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. 1040ez tax These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). 1040ez tax These taxes are discussed in the following sections. 1040ez tax If you must pay either of these taxes, report them on Form 5329. 1040ez tax However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. 1040ez tax Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. 1040ez tax Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. 1040ez tax This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. 1040ez tax Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. 1040ez tax This tax applies to the part of the distribution that you must include in gross income. 1040ez tax For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). 1040ez tax 5% rate on certain early distributions from deferred annuity contracts. 1040ez tax   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. 1040ez tax A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. 1040ez tax On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. 1040ez tax Attach an explanation to your return. 1040ez tax Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. 1040ez tax   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. 1040ez tax You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. 1040ez tax The additional tax is figured on Form 5329. 1040ez tax For more information, see Form 5329 and its instructions. 1040ez tax For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. 1040ez tax Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. 1040ez tax   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. 1040ez tax You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. 1040ez tax The additional tax is figured on Form 5329. 1040ez tax For more information, see Form 5329 and its instructions. 1040ez tax For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. 1040ez tax Exceptions to tax. 1040ez tax    Certain early distributions are excepted from the early distribution tax. 1040ez tax If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. 1040ez tax If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. 1040ez tax Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. 1040ez tax On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. 1040ez tax    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. 1040ez tax Enter exception number “12” on line 2. 1040ez tax General exceptions. 1040ez tax   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. 1040ez tax Additional exceptions for qualified retirement plans. 1040ez tax   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. 1040ez tax 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. 1040ez tax See Pub. 1040ez tax 721 for more information on the phased retirement program. 1040ez tax Qualified public safety employees. 1040ez tax   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. 1040ez tax You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. 1040ez tax Qualified reservist distributions. 1040ez tax   A qualified reservist distribution is not subject to the additional tax on early distributions. 1040ez tax A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. 1040ez tax You must have been ordered or called to active duty after September 11, 2001. 1040ez tax For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. 1040ez tax Additional exceptions for nonqualified annuity contracts. 1040ez tax   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). 1040ez tax Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). 1040ez tax The payments each year cannot be less than the required minimum distribution. 1040ez tax Required distributions not made. 1040ez tax   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. 1040ez tax The tax equals 50% of the part of the required minimum distribution that was not distributed. 1040ez tax   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). 1040ez tax Waiver. 1040ez tax   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. 1040ez tax See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. 1040ez tax State insurer delinquency proceedings. 1040ez tax   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. 1040ez tax If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. 1040ez tax Under certain conditions, you will not have to pay the 50% excise tax. 1040ez tax Required beginning date. 1040ez tax   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. 1040ez tax However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. 1040ez tax   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. 1040ez tax Your required distribution then must be made for 2014 by December 31, 2014. 1040ez tax 5% owners. 1040ez tax   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. 1040ez tax   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. 1040ez tax Age 70½. 1040ez tax   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. 1040ez tax   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. 1040ez tax If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. 1040ez tax Required distributions. 1040ez tax   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). 1040ez tax Additional information. 1040ez tax   For more information on this rule, see Tax on Excess Accumulation in Publication 575. 1040ez tax Form 5329. 1040ez tax   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. 1040ez tax Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. 1040ez tax However, some special rules apply. 1040ez tax See Publication 575 for more information. 1040ez tax Survivors of employees. 1040ez tax   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. 1040ez tax You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. 1040ez tax Survivors of retirees. 1040ez tax   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. 1040ez tax If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. 1040ez tax    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. 1040ez tax The resulting tax-free amount will then remain fixed. 1040ez tax Any increases in the survivor annuity are fully taxable. 1040ez tax    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. 1040ez tax This amount remains fixed even if the annuity payments are increased or decreased. 1040ez tax See Simplified Method , earlier. 1040ez tax   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. 1040ez tax Estate tax deduction. 1040ez tax   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. 1040ez tax You can deduct the part of the total estate tax that was based on the annuity. 1040ez tax The deceased annuitant must have died after the annuity starting date. 1040ez tax (For details, see section 1. 1040ez tax 691(d)-1 of the regulations. 1040ez tax ) Deduct it in equal amounts over your remaining life expectancy. 1040ez tax   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. 1040ez tax   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. 1040ez tax This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. 1040ez tax See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. 1040ez tax Prev  Up  Next   Home   More Online Publications