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Efile taxes free 4. Efile taxes free   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. Efile taxes free Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Efile taxes free Net unrelated income. Efile taxes free Net unrelated loss. Efile taxes free Control. Efile taxes free Income from property financed with qualified 501(c)(3) bonds. Efile taxes free Disposition of property received from taxable subsidiary and used in unrelated business. Efile taxes free Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. Efile taxes free If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. Efile taxes free In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Efile taxes free Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Efile taxes free For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Efile taxes free Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Efile taxes free Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Efile taxes free Dividends, interest, annuities and other investment income. Efile taxes free   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Efile taxes free Exception for insurance activity income of a controlled foreign corporation. Efile taxes free   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Efile taxes free The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Efile taxes free Certain exceptions to this rule apply. Efile taxes free For more information, see section 512(b)(17). Efile taxes free Other exceptions. Efile taxes free   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Efile taxes free Income from lending securities. Efile taxes free   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Efile taxes free   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Efile taxes free The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Efile taxes free Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Efile taxes free Royalties. Efile taxes free   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Efile taxes free   To be considered a royalty, a payment must relate to the use of a valuable right. Efile taxes free Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Efile taxes free Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Efile taxes free However, royalties do not include payments for personal services. Efile taxes free Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Efile taxes free   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Efile taxes free   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Efile taxes free However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Efile taxes free To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Efile taxes free To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Efile taxes free Exceptions. Efile taxes free   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Efile taxes free Rents. Efile taxes free   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Efile taxes free Rents from personal property are not excluded. Efile taxes free However, special rules apply to “mixed leases” of both real and personal property. Efile taxes free Mixed leases. Efile taxes free   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Efile taxes free If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Efile taxes free If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Efile taxes free   Property is placed in service when the lessee first may use it under the terms of a lease. Efile taxes free For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Efile taxes free   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Efile taxes free   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Efile taxes free Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Efile taxes free Exception for rents based on net profit. Efile taxes free   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Efile taxes free Exception for income from personal services. Efile taxes free   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Efile taxes free Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Efile taxes free Other exceptions. Efile taxes free   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Efile taxes free ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Efile taxes free See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Efile taxes free Income from research. Efile taxes free   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Efile taxes free However, the extent of the exclusion depends on the nature of the organization and the type of research. Efile taxes free   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Efile taxes free   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Efile taxes free   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Efile taxes free   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Efile taxes free In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Efile taxes free Gains and losses from disposition of property. Efile taxes free   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Efile taxes free   It should be noted that the last exception relates only to cut timber. Efile taxes free The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Efile taxes free Lapse or termination of options. Efile taxes free   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Efile taxes free The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Efile taxes free Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Efile taxes free Exception. Efile taxes free   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Efile taxes free Gain or loss on disposition of certain brownfield property. Efile taxes free   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Efile taxes free See sections 512(b)(19) and 514(b)(1)(E). Efile taxes free Income from services provided under federal license. Efile taxes free   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Efile taxes free   This exclusion applies only if the following requirements are met. Efile taxes free The trade or business must have been operated by the order or by the institution before May 27, 1959. Efile taxes free The trade or business must provide services under a license issued by a federal regulatory agency. Efile taxes free More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Efile taxes free The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Efile taxes free Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Efile taxes free Exception. Efile taxes free    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Efile taxes free Member income of mutual or cooperative electric companies. Efile taxes free   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Efile taxes free Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Efile taxes free For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Efile taxes free Exception. Efile taxes free   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Efile taxes free The limit on dues paid by an associate member is $148 for 2011. Efile taxes free   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Efile taxes free Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. Efile taxes free They cannot be directly connected with excluded income. Efile taxes free For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Efile taxes free Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. Efile taxes free For an exception, see Expenses attributable to exploitation of exempt activities, later. Efile taxes free Expenses attributable solely to unrelated business. Efile taxes free   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. Efile taxes free   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. Efile taxes free Expenses attributable to dual use of facilities or personnel. Efile taxes free   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. Efile taxes free The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. Efile taxes free Example 1. Efile taxes free A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Efile taxes free The school provides the tennis courts, housing, and dining facilities. Efile taxes free The contracted individual hires the instructors, recruits campers, and provides supervision. Efile taxes free The income the school receives from this activity is from a dual use of the facilities and personnel. Efile taxes free The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Efile taxes free Example 2. Efile taxes free An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Efile taxes free The president devotes approximately 10% of his time to the unrelated business. Efile taxes free To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. Efile taxes free Expenses attributable to exploitation of exempt activities. Efile taxes free   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. Efile taxes free (See Exploitation of exempt functions under Not substantially related in chapter 3. Efile taxes free ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. Efile taxes free Exception. Efile taxes free   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. Efile taxes free The unrelated business exploits the exempt activity. Efile taxes free The unrelated business is a type normally conducted for profit by taxable organizations. Efile taxes free The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Efile taxes free The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. Efile taxes free   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Efile taxes free Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Efile taxes free Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. Efile taxes free (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Efile taxes free ) Figuring unrelated business taxable income (UBTI). Efile taxes free   The UBTI of an advertising activity is the amount shown in the following chart. Efile taxes free IF gross advertising income is . Efile taxes free . Efile taxes free . Efile taxes free THEN UBTI is . Efile taxes free . Efile taxes free . Efile taxes free More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. Efile taxes free Equal to or less than direct advertising costs Zero. Efile taxes free   • Circulation income and readership costs are not taken into account. Efile taxes free   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Efile taxes free   The terms used in the chart are explained in the following discussions. Efile taxes free Periodical Income Gross advertising income. Efile taxes free   This is all the income from the unrelated advertising activities of an exempt organization periodical. Efile taxes free Circulation income. Efile taxes free   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Efile taxes free It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Efile taxes free It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Efile taxes free Allocable membership receipts. Efile taxes free   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. Efile taxes free   The amount used to allocate membership receipts is the amount shown in the following chart. Efile taxes free   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Efile taxes free The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. Efile taxes free IF . Efile taxes free . Efile taxes free . Efile taxes free THEN the amount used to allocate membership receipts is . Efile taxes free . Efile taxes free . Efile taxes free 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Efile taxes free The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. Efile taxes free Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. Efile taxes free U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Efile taxes free One of U's activities is publishing a monthly periodical distributed to all of its members. Efile taxes free U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Efile taxes free Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. Efile taxes free Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). Efile taxes free Example 2. Efile taxes free Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Efile taxes free Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. Efile taxes free U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. Efile taxes free Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. Efile taxes free Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. Efile taxes free Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Efile taxes free U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Efile taxes free Periodical Costs Direct advertising costs. Efile taxes free   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Efile taxes free   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. Efile taxes free Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. Efile taxes free   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Efile taxes free For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. Efile taxes free Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. Efile taxes free   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. Efile taxes free Readership costs. Efile taxes free   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Efile taxes free Costs partly attributable to other activities. Efile taxes free   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Efile taxes free When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Efile taxes free The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Efile taxes free Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. Efile taxes free Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. Efile taxes free It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Efile taxes free Consolidated treatment, once adopted, must be followed consistently and is binding. Efile taxes free This treatment can be changed only with the consent of the Internal Revenue Service. Efile taxes free An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. Efile taxes free Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. Efile taxes free The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. Efile taxes free For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. Efile taxes free The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. Efile taxes free Example. Efile taxes free Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Efile taxes free Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. Efile taxes free Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. Efile taxes free The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Efile taxes free The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. Efile taxes free It is not engaged in for profit. Efile taxes free Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Efile taxes free It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. Efile taxes free Modifications Net operating loss deduction. Efile taxes free   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Efile taxes free However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. Efile taxes free For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Efile taxes free   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. Efile taxes free This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Efile taxes free Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. Efile taxes free   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. Efile taxes free   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. Efile taxes free   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. Efile taxes free For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. Efile taxes free   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Efile taxes free Charitable contributions deduction. Efile taxes free   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. Efile taxes free   To be deductible, the contribution must be paid to another qualified organization. Efile taxes free For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. Efile taxes free   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. Efile taxes free Deduction limits. Efile taxes free   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. Efile taxes free See the Instructions for Form 990-T for more information. Efile taxes free    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. Efile taxes free However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. Efile taxes free   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Efile taxes free A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Efile taxes free Suspension of deduction limits for farmers and ranchers. Efile taxes free   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Efile taxes free See the Instructions for Form 990-T for details. Efile taxes free Specific deduction. Efile taxes free   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Efile taxes free However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Efile taxes free   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Efile taxes free Exception. Efile taxes free   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. Efile taxes free In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. Efile taxes free   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. Efile taxes free The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. Efile taxes free The local units cannot file separate returns. Efile taxes free However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Efile taxes free See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. Efile taxes free Example. Efile taxes free X is an association of churches and is divided into local units A, B, C, and D. Efile taxes free Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. Efile taxes free X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. Efile taxes free Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. Efile taxes free If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. Efile taxes free No distinction is made between limited and general partners. Efile taxes free The organization is required to notify the partnership of its tax-exempt status. Efile taxes free Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. Efile taxes free The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. Efile taxes free The partnership is required to provide the organization this information on Schedule K-1. Efile taxes free Example. Efile taxes free An exempt educational organization is a partner in a partnership that operates a factory. Efile taxes free The partnership also holds stock in a corporation. Efile taxes free The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. Efile taxes free Different tax years. Efile taxes free   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. Efile taxes free S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. Efile taxes free For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. Efile taxes free The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. Efile taxes free Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. Efile taxes free To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. Efile taxes free Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). Efile taxes free These organizations must figure unrelated business taxable income under special rules. Efile taxes free Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Efile taxes free ). Efile taxes free (See Exclusions under Income, earlier. Efile taxes free ) Therefore, they are generally subject to unrelated business income tax on this income. Efile taxes free The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Efile taxes free The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. Efile taxes free Losses from nonexempt activities. Efile taxes free   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. Efile taxes free Example. Efile taxes free A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. Efile taxes free The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Efile taxes free Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Efile taxes free Modifications. Efile taxes free   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Efile taxes free Exempt function income. Efile taxes free   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. Efile taxes free Exempt function income also includes income set aside for qualified purposes. Efile taxes free Income that is set aside. Efile taxes free   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Efile taxes free In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. Efile taxes free   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. Efile taxes free Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Efile taxes free These rules are explained in section 512(a)(3)(E)(ii). Efile taxes free   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Efile taxes free In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Efile taxes free   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. Efile taxes free However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. Efile taxes free The income set aside must have been includible in gross income for that earlier year. Efile taxes free Nonrecognition of gain. Efile taxes free   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. Efile taxes free The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. Efile taxes free   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. Efile taxes free Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. Efile taxes free The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. Efile taxes free For details, see section 512(a)(4) and the regulations under that section. Efile taxes free Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. Efile taxes free The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. Efile taxes free All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Efile taxes free Excess qualifying specified payments. Efile taxes free   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. Efile taxes free Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. Efile taxes free   If a controlled participant is not required to file a U. Efile taxes free S. Efile taxes free income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Efile taxes free 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Efile taxes free S. Efile taxes free Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Efile taxes free S. Efile taxes free Corporation or a Foreign Corporation Engaged in a U. Efile taxes free S. Efile taxes free Trade or Business, or any Form 8865, Return of U. Efile taxes free S. Efile taxes free Persons With Respect to Certain Foreign Partnerships, filed for that participant. Efile taxes free Addition to tax for valuation misstatements. Efile taxes free   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. Efile taxes free See section 512(b)(13)(E)(ii) for more information. Efile taxes free Net unrelated income. Efile taxes free   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. Efile taxes free Net unrelated loss. Efile taxes free   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. Efile taxes free Control. Efile taxes free   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. Efile taxes free For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Efile taxes free   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). Efile taxes free Income from property financed with qualified 501(c)(3) bonds. Efile taxes free If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. Efile taxes free No deduction is allowed for interest on the private activity bond. Efile taxes free See sections 150(b)(3) and (c) for more information. Efile taxes free Disposition of property received from taxable subsidiary and used in unrelated business. Efile taxes free A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). Efile taxes free The assets are treated as if sold at fair market value. Efile taxes free Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Efile taxes free S. Efile taxes free and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Efile taxes free A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. Efile taxes free However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. Efile taxes free In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Efile taxes free A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). Efile taxes free This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. Efile taxes free In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Efile taxes free If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. Efile taxes free If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Efile taxes free Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Efile taxes free Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. Efile taxes free Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. Efile taxes free The amount of income included is proportionate to the debt on the property. Efile taxes free Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). Efile taxes free It includes rental real estate, tangible personal property, and corporate stock. Efile taxes free Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. Efile taxes free The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Efile taxes free That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. Efile taxes free Example 1. Efile taxes free Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. Efile taxes free The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. Efile taxes free Example 2. Efile taxes free X, an exempt organization, forms a partnership with A and B. Efile taxes free The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. Efile taxes free X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Efile taxes free The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Efile taxes free The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Efile taxes free The loan is secured by a mortgage on the entire office building. Efile taxes free By agreement with Y bank, X is not personally liable for payment of the mortgage. Efile taxes free X has acquisition indebtedness of $7 million. Efile taxes free This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). Efile taxes free Example 3. Efile taxes free A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Efile taxes free The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. Efile taxes free Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Efile taxes free The union has no outstanding debt on the property. Efile taxes free The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. Efile taxes free The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Efile taxes free Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Efile taxes free In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. Efile taxes free Accordingly, the debt is not acquisition indebtedness. Efile taxes free Change in use of property. Efile taxes free   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. Efile taxes free Example. Efile taxes free Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Efile taxes free Last year, the university rented the apartment building to the public for nonexempt purposes. Efile taxes free The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Efile taxes free Continued debt. Efile taxes free   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. Efile taxes free This is true even if the original property was not debt-financed property. Efile taxes free Example. Efile taxes free To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. Efile taxes free The office building was not debt-financed property. Efile taxes free The organization later sold the building for $1 million without repaying the $400,000 loan. Efile taxes free It used the sale proceeds to buy an apartment building it rents to the general public. Efile taxes free The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Efile taxes free Property acquired subject to mortgage or lien. Efile taxes free   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. Efile taxes free Example. Efile taxes free An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Efile taxes free The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Efile taxes free Liens similar to a mortgage. Efile taxes free   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Efile taxes free A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Efile taxes free However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. Efile taxes free Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). Efile taxes free Exception for property acquired by gift, bequest, or devise. Efile taxes free   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. Efile taxes free However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. Efile taxes free   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). Efile taxes free   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. Efile taxes free Modifying existing debt. Efile taxes free   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Efile taxes free When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. Efile taxes free Extension or renewal. Efile taxes free   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. Efile taxes free   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. Efile taxes free Debt increase. Efile taxes free   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. Efile taxes free Example. Efile taxes free An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Efile taxes free The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. Efile taxes free A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. Efile taxes free Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Efile taxes free These include the following. Efile taxes free Debts incurred in performing an exempt purpose. Efile taxes free Annuity obligations. Efile taxes free Securities loans. Efile taxes free Real property debts of qualified organizations. Efile taxes free Certain Federal financing. Efile taxes free Debt incurred in performing exempt purpose. Efile taxes free   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Efile taxes free For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. Efile taxes free Annuity obligation. Efile taxes free   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Efile taxes free It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. Efile taxes free Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. Efile taxes free It must be payable over the lives of either one or two individuals living when issued. Efile taxes free It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. Efile taxes free Example. Efile taxes free X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Efile taxes free In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. Efile taxes free The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Efile taxes free The present value of this annuity is $81,156, determined from IRS valuation tables. Efile taxes free Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. Efile taxes free Securities loans. Efile taxes free   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). Efile taxes free This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. Efile taxes free   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from
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The Efile Taxes Free

Efile taxes free Publication 51 - Main Content Table of Contents 1. Efile taxes free Taxpayer Identification NumbersWhen you receive your EIN. Efile taxes free Registering for SSNVS. Efile taxes free 2. Efile taxes free Who Are Employees?Crew Leaders Business Owned and Operated by Spouses 3. Efile taxes free Wages and Other Compensation 4. Efile taxes free Social Security and Medicare TaxesThe $150 Test or the $2,500 Test Social Security and Medicare Tax Withholding 5. Efile taxes free Federal Income Tax WithholdingImplementation of lock-in letter. Efile taxes free Seasonal employees and employees not currently performing services. Efile taxes free Termination and re-hire of employees. Efile taxes free How To Figure Federal Income Tax Withholding 6. Efile taxes free Required Notice to Employees About Earned Income Credit (EIC) 7. Efile taxes free Depositing TaxesWhen To Deposit How To Deposit Deposit Penalties Employers of Both Farm and Nonfarm Workers 8. Efile taxes free Form 943 9. Efile taxes free Reporting Adjustments on Form 943Current Year Adjustments Prior Year Adjustments 10. Efile taxes free Federal Unemployment (FUTA) Tax 11. Efile taxes free Reconciling Wage Reporting Forms 13. Efile taxes free Federal Income Tax Withholding MethodsWage Bracket Method Percentage Method Alternative Methods of Federal Income Tax Withholding How To Get Tax Help 1. Efile taxes free Taxpayer Identification Numbers If you are required to withhold any federal income, social security, or Medicare taxes, you will need an employer identification number (EIN) for yourself. Efile taxes free Also, you will need the SSN of each employee and the name of each employee as shown on the employee's social security card. Efile taxes free Employer identification number (EIN). Efile taxes free   An employer identification number (EIN) is a nine-digit number that the IRS issues. Efile taxes free The digits are arranged as follows: 00-0000000. Efile taxes free It is used to identify the tax accounts of employers and certain others who have no employees. Efile taxes free Use your EIN on all of the items that you send to the IRS and SSA. Efile taxes free   If you do not have an EIN, you may apply for one online. Efile taxes free Visit IRS. Efile taxes free gov and click on the Apply for an EIN Online link under Tools. Efile taxes free You may also apply for an EIN by calling 1-800-829-4933, or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Efile taxes free Do not use a SSN in place of an EIN. Efile taxes free   If you do not have an EIN by the time a return is due, write “Applied For” and the date you applied for it in the space shown for the number. Efile taxes free If you took over another employer's business, do not use that employer's EIN. Efile taxes free   You should have only one EIN. Efile taxes free If you have more than one, and are not sure which one to use, call the toll-free Business and Specialty Tax Line at 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Efile taxes free Provide the EINs that you have, the name and address to which each number was assigned, and the address of your principal place of business. Efile taxes free The IRS will tell you which EIN to use. Efile taxes free   For more information, see Publication 1635 or Publication 583. Efile taxes free When you receive your EIN. Efile taxes free   If you are a new employer that indicated a federal tax obligation when requesting an EIN, you will be pre-enrolled in the Electronic Federal Tax Payment System (EFTPS). Efile taxes free You will receive information in your Employer Identification Number (EIN) Package about Express Enrollment and an additional mailing containing your EFTPS personal identification number (PIN) and instructions for activating your PIN. Efile taxes free Call the toll-free number located in your “How to Activate Your Enrollment” brochure to activate your enrollment and begin making your employment tax deposits. Efile taxes free If you outsource any of your payroll and related tax duties to a third party payer, such as a payroll service provider or reporting agent, be sure to tell them about your EFTPS enrollment. Efile taxes free Social security number (SSN). Efile taxes free   An employee's social security number (SSN) consists of nine digits arranged as follows: 000-00-0000. Efile taxes free You must obtain each employee's name and SSN as shown on the employee's social security card because you must enter them on Form W-2. Efile taxes free Do not accept a social security card that says “Not valid for employment. Efile taxes free ” A social security number issued with this legend does not permit employment. Efile taxes free You may, but are not required to, photocopy the social security card if the employee provides it. Efile taxes free If you do not show the employee's correct name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. Efile taxes free See Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs. Efile taxes free Applying for a social security card. Efile taxes free   Any employee who is legally eligible to work in the United States and does not have a social security card can get one by completing Form SS-5, Application for a Social Security Card, and submitting the necessary documentation to SSA. Efile taxes free You can get Form SS-5 at SSA offices, by calling 1-800-772-1213 or 1-800-325-0778 (TTY), or from the SSA website at www. Efile taxes free socialsecurity. Efile taxes free gov/online/ss-5. Efile taxes free html. Efile taxes free The employee must complete and sign Form SS-5; it cannot be filed by the employer. Efile taxes free You may be asked to supply a letter to accompany Form SS-5 if the employee has exceeded his or her yearly or lifetime limit for the number of replacement cards allowed. Efile taxes free Applying for a social security number. Efile taxes free   If you file Form W-2 on paper and your employee has applied for an SSN but does not have one when you must file Form W-2, enter “Applied For” on the form. Efile taxes free If you are filing electronically, enter all zeros (000-00-0000) in the social security number field. Efile taxes free When the employee receives the SSN, file Copy A of Form W-2c, Corrected Wage and Tax Statement, with the SSA to show the employee's SSN. Efile taxes free Furnish Copies B, C, and 2 of Form W-2c to the employee. Efile taxes free Up to 25 Forms W-2c per Form W-3c, Transmittal of Corrected Wage and Tax Statements, may be filed per session over the Internet, with no limit on the number of sessions. Efile taxes free For more information, visit SSA's Employer W-2 Filing Instructions & Information webpage at www. Efile taxes free socialsecurity. Efile taxes free gov/employer. Efile taxes free Advise your employee to correct the SSN on his or her original Form W-2. Efile taxes free Correctly record the employee's name and SSN. Efile taxes free   Record the name and number of each employee as they are shown on the employee's social security card. Efile taxes free If the employee's name is not correct as shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA. Efile taxes free Continue to report the employee's wages under the old name until the employee shows you an updated social security card with the new name. Efile taxes free   If the SSA issues the employee a replacement card after a name change, or a new card with a different social security number after a change in alien work status, file a Form W-2c to correct the name/SSN reported on the most recently filed Form W-2. Efile taxes free It is not necessary to correct other years if the previous name and SSN were used for years before the most recent Form W-2. Efile taxes free IRS individual taxpayer identification numbers (ITINs) for aliens. Efile taxes free   Do not accept an ITIN in place of an SSN for employee identification or for work. Efile taxes free An ITIN is issued for use by resident and nonresident aliens who need identification for tax purposes, but who are not eligible for U. Efile taxes free S. Efile taxes free employment. Efile taxes free The ITIN is a nine-digit number formatted like an SSN (for example, NNN-NN-NNNN). Efile taxes free However, it begins with the number “9” and has either a “7” or “8” as the fourth digit (for example, 9NN-7N-NNNN or 9NN-8N-NNNN). Efile taxes free    An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN. Efile taxes free If the individual is currently eligible to work in the United States, instruct the individual to apply for an SSN and follow the instructions under Applying for a social security number, earlier in this section. Efile taxes free Do not use an ITIN in place of an SSN on Form W-2. Efile taxes free Verification of social security numbers. Efile taxes free   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 employee names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive results the next business day. Efile taxes free Visit www. Efile taxes free socialsecurity. Efile taxes free gov/employer/ssnv. Efile taxes free htm for more information. Efile taxes free Registering for SSNVS. Efile taxes free   You must register online and receive authorization from your employer to use SSNVS. Efile taxes free To register, visit SSA's website at www. Efile taxes free socialsecurity. Efile taxes free gov/employer and click on the Business Services Online link. Efile taxes free Follow the registration instructions to obtain a user identification (ID) and password. Efile taxes free You will need to provide the following information about yourself and your company. Efile taxes free Name. Efile taxes free SSN. Efile taxes free Date of birth. Efile taxes free Type of employer. Efile taxes free EIN. Efile taxes free Company name, address, and telephone number. Efile taxes free Email address. Efile taxes free When you have completed the online registration process, SSA will mail a one-time activation code to your employer. Efile taxes free You must enter the activation code online to use SSNVS. Efile taxes free 2. Efile taxes free Who Are Employees? Generally, employees are defined either under common law or under statutes for certain situations. Efile taxes free See Publication 15-A for details on statutory employees and nonemployees. Efile taxes free Employee status under common law. Efile taxes free   Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. Efile taxes free This is so even when you give the employee freedom of action. Efile taxes free What matters is that you have the right to control the details of how the services are performed. Efile taxes free See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Efile taxes free If an employer-employee relationship exists, it does not matter what it is called. Efile taxes free The employee may be called an agent or independent contractor. Efile taxes free It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. Efile taxes free You are responsible for withholding and paying employment taxes for your employees. Efile taxes free You are also required to file employment tax returns. Efile taxes free These requirements do not apply to amounts that you pay to independent contractors. Efile taxes free The rules discussed in this publication apply only to workers who are your employees. Efile taxes free In general, you are an employer of farmworkers if your employees: Raise or harvest agricultural or horticultural products on your farm (including the raising and feeding of livestock); Work in connection with the operation, management, conservation, improvement, or maintenance of your farm and its tools and equipment; Provide services relating to salvaging timber, or clearing land of brush and other debris, left by a hurricane (also known as hurricane labor); Handle, process, or package any agricultural or horticultural commodity if you produced over half of the commodity (for a group of up to 20 unincorporated operators, all of the commodity); or Do work for you related to cotton ginning, turpentine, gum resin products, or the operation and maintenance of irrigation facilities. Efile taxes free For this purpose, the term “farm” includes stock, dairy, poultry, fruit, fur-bearing animal, and truck farms, as well as plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards. Efile taxes free Farmwork does not include reselling activities that do not involve any substantial activity of raising agricultural or horticultural commodities, such as a retail store or a greenhouse used primarily for display or storage. Efile taxes free The table in section 12, How Do Employment Taxes Apply to Farmwork , distinguishes between farm and nonfarm activities, and also addresses rules that apply in special situations. Efile taxes free Crew Leaders If you are a crew leader, you are an employer of farmworkers. Efile taxes free A crew leader is a person who furnishes and pays (either on his or her own behalf or on behalf of the farm operator) workers to do farmwork for the farm operator. Efile taxes free If there is no written agreement between you and the farm operator stating that you are his or her employee and if you pay the workers (either for yourself or for the farm operator), then you are a crew leader. Efile taxes free For FUTA tax rules, see section 10. Efile taxes free Business Owned and Operated by Spouses If you and your spouse jointly own and operate a farm or nonfarm business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Efile taxes free See Publication 541, Partnerships, for more details. Efile taxes free The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. Efile taxes free Exception—Qualified joint venture. Efile taxes free   For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. Efile taxes free A qualified joint venture conducts a trade or business where: The only members of the joint venture are spouses who file a joint income tax return, Both spouses materially participate (see Material participation in the Instructions for Schedule C (Form 1040), line G) in the trade or business (mere joint ownership of property is not enough), Both spouses elect to not be treated as a partnership, and The business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or limited liability company (LLC). Efile taxes free   To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse's interest in the venture, and reported on separate Schedules C or F as sole proprietors. Efile taxes free Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable. Efile taxes free   Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. Efile taxes free If employment taxes are owed by the qualified joint venture, either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse's sole proprietorship. Efile taxes free Generally, filing as a qualified joint venture will not increase the spouses' total tax owed on the joint income tax return. Efile taxes free However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return. Efile taxes free    Note. Efile taxes free If your spouse is your employee, not your partner, you must pay social security and Medicare taxes for him or her. Efile taxes free   For more information on qualified joint ventures, visit IRS. Efile taxes free gov and enter “qualified joint venture” in the search box. Efile taxes free Exception—Community income. Efile taxes free   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Efile taxes free S. Efile taxes free possession, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. Efile taxes free You may still make an election to be taxed as a qualified joint venture instead of a partnership. Efile taxes free See Exception—Qualified joint venture , earlier in this section. Efile taxes free 3. Efile taxes free Wages and Other Compensation Cash wages that you pay to employees for farmwork are generally subject to social security tax and Medicare tax. Efile taxes free You may also be required to withhold, deposit, and report Additional Medicare Tax. Efile taxes free See section 4 for more information. Efile taxes free If the wages are subject to social security and Medicare taxes, they are also subject to federal income tax withholding. Efile taxes free You may also be liable for FUTA tax, which is not withheld by you or paid by the employee. Efile taxes free FUTA tax is discussed in section 10. Efile taxes free Cash wages include checks, money orders, etc. Efile taxes free Do not count as cash wages the value of food, lodging, and other noncash items. Efile taxes free For more information on what payments are considered taxable wages, see Publication 15 (Circular E). Efile taxes free Commodity wages. Efile taxes free   Commodity wages are not cash and are not subject to social security and Medicare taxes or federal income tax withholding. Efile taxes free However, noncash payments, including commodity wages, are treated as cash wages (see above) if the substance of the transaction is a cash payment. Efile taxes free These noncash payments are subject to social security and Medicare taxes and federal income tax withholding. Efile taxes free Other compensation. Efile taxes free   Publications 15-A and 15-B discuss other forms of compensation that may be taxable. Efile taxes free Family members. Efile taxes free   Generally, the wages that you pay to family members who are your employees are subject to social security and Medicare taxes, federal income tax withholding, and FUTA tax. Efile taxes free However, certain exemptions may apply for your child, spouse, or parent. Efile taxes free See the table, How Do Employment Taxes Apply to Farmwork , in section 12. Efile taxes free Household employees. Efile taxes free   The wages of an employee who performs household services, such as a maid, babysitter, gardener, or cook, in your home are not subject to social security and Medicare taxes if you pay that employee cash wages of less than $1,900 in 2014. Efile taxes free   Social security and Medicare taxes do not apply to cash wages for housework in your private home if it was done by your spouse or your child under age 21. Efile taxes free Nor do the taxes apply to housework done by your parent unless: You have a child living in your home who is under age 18 or has a physical or mental condition that requires care by an adult for at least 4 continuous weeks in a calendar quarter, and You are a widow or widower, or divorced and not remarried, or have a spouse in the home who, because of a physical or mental condition, cannot care for your child for at least 4 continuous weeks in the quarter. Efile taxes free   For more information, see Publication 926, Household Employer's Tax Guide. Efile taxes free    Wages for household work may not be a deductible farm expense. Efile taxes free See Publication 225, Farmer's Tax Guide. Efile taxes free Share farmers. Efile taxes free   You do not have to withhold or pay social security and Medicare taxes on amounts paid to share farmers under share-farming arrangements. Efile taxes free Compensation paid to H-2A visa holders. Efile taxes free   Report compensation of $600 or more paid to foreign agricultural workers who entered the country on H-2A visas in box 1 of Form W-2 but do not report it as social security wages (box 3) or Medicare wages (box 5) on Form W-2 because compensation paid to H-2A workers for agricultural labor performed in connection with this visa is not subject to social security and Medicare taxes. Efile taxes free On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Efile taxes free   An employer is not required to withhold federal income tax from compensation it pays an H-2A worker for agricultural labor performed in connection with this visa unless the worker asks for withholding and the employer agrees. Efile taxes free In that case, the worker must give the employer a completed Form W-4. Efile taxes free Federal income tax withheld should be reported in box 2 of Form W-2. Efile taxes free These reporting rules apply when the H-2A worker provides his or her taxpayer identification number (TIN) to the employer. Efile taxes free For rules relating to backup withholding and reporting when the H-2A worker does not provide a TIN, see the Instructions for Form 1099-MISC and the Instructions for Form 945. Efile taxes free 4. Efile taxes free Social Security and Medicare Taxes Generally, you must withhold social security and Medicare taxes on all cash wage payments that you make to your employees. Efile taxes free You may also be required to withhold Additional Medicare Tax. Efile taxes free For more information, see Additional Medicare Tax withholding , later. Efile taxes free The $150 Test or the $2,500 Test All cash wages that you pay to an employee during the year for farmwork are subject to social security and Medicare taxes and federal income tax withholding if either of the two tests below is met. Efile taxes free You pay cash wages to an employee of $150 or more in a year for farmwork (count all cash wages paid on a time, piecework, or other basis). Efile taxes free The $150 test applies separately to each farmworker that you employ. Efile taxes free If you employ a family of workers, each member is treated separately. Efile taxes free Do not count wages paid by other employers. Efile taxes free The total that you pay for farmwork (cash and noncash) to all your employees is $2,500 or more during the year. Efile taxes free Exceptions. Efile taxes free   The $150 and $2,500 tests do not apply to wages that you pay to a farmworker who receives less than $150 in annual cash wages and the wages are not subject to social security and Medicare taxes, or federal income tax withholding, even if you pay $2,500 or more in that year to all of your farmworkers if the farmworker: Is employed in agriculture as a hand-harvest laborer, Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment, Commutes daily from his or her permanent home to the farm, and Had been employed in agriculture less than 13 weeks in the preceding calendar year. Efile taxes free   Amounts that you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages that you pay to other farmworkers are subject to social security and Medicare taxes. Efile taxes free Social Security and Medicare Tax Withholding The social security tax rate is 6. Efile taxes free 2%, for both the employee and employer, on the first $117,000 paid to each employee. Efile taxes free You must withhold at this rate from each employee and pay a matching amount. Efile taxes free The Medicare tax rate is 1. Efile taxes free 45% each for the employee and employer on all wages. Efile taxes free You must withhold at this rate from each employee and pay a matching amount. Efile taxes free There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax. Efile taxes free Social security and Medicare taxes apply to most payments of sick pay, including payments made by third parties such as insurance companies. Efile taxes free For details, see Publication 15-A. Efile taxes free Additional Medicare Tax withholding. Efile taxes free   In addition to withholding Medicare tax at 1. Efile taxes free 45%, you must withhold a 0. Efile taxes free 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Efile taxes free You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Efile taxes free Additional Medicare Tax is only imposed on the employee. Efile taxes free There is no employer share of Additional Medicare Tax. Efile taxes free All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Efile taxes free   For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E). Efile taxes free For more information on Additional Medicare Tax, visit IRS. Efile taxes free gov and enter “Additional Medicare Tax” in the search box. Efile taxes free Employee share paid by employer. Efile taxes free   If you would rather pay a household or agricultural employee's share of the social security and Medicare taxes without withholding them from his or her wages, you may do so. Efile taxes free If you do not withhold the taxes, however, you must still pay them. Efile taxes free Any employee social security and Medicare taxes that you pay is additional income to the employee. Efile taxes free Include it in box 1 of the employee's Form W-2, but do not count it as social security and Medicare wages and do not include it in boxes 3 and 5. Efile taxes free Also, do not count the additional income as wages for FUTA tax purposes. Efile taxes free Different rules apply to employer payments of social security and Medicare taxes for non-household and non-agricultural employees. Efile taxes free See section 7 of Publication 15-A. Efile taxes free Withholding social security and Medicare taxes on nonresident alien employees. Efile taxes free   In general, if you pay wages to nonresident alien employees, you must withhold social security and Medicare taxes as you would for a U. Efile taxes free S. Efile taxes free citizen or resident alien. Efile taxes free However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to this general rule. Efile taxes free Also see Compensation paid to H-2A visa holders in section 3. Efile taxes free Religious exemption. Efile taxes free    An exemption from social security and Medicare taxes is available to members of a recognized religious sect opposed to public insurance. Efile taxes free This exemption is available only if both the employee and the employer are members of the sect. Efile taxes free   For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Efile taxes free 5. Efile taxes free Federal Income Tax Withholding Farmers and crew leaders must withhold federal income tax from the wages of farmworkers if the wages are subject to social security and Medicare taxes. Efile taxes free The amount to withhold is figured on gross wages before taking out social security and Medicare taxes, union dues, insurance, etc. Efile taxes free You may use one of several methods to determine the amount of federal income tax withholding. Efile taxes free They are discussed in section 13. Efile taxes free Form W-4. Efile taxes free   To know how much federal income tax to withhold from employees' wages, you should have a Form W-4 on file for each employee. Efile taxes free Encourage your employees to file an updated Form W-4 for 2014, especially if they owed taxes or received a large refund when filing their 2013 tax return. Efile taxes free Advise your employees to use the IRS Withholding Calculator on the IRS website at www. Efile taxes free irs. Efile taxes free gov/individuals for help in determining how many withholding allowances to claim on their Form W-4. Efile taxes free   Ask each new employee to give you a signed Form W-4 when starting work. Efile taxes free Make the form effective with the first wage payment. Efile taxes free If a new employee does not give you a completed Form W-4, withhold tax as if he or she is single, with no withholding allowances. Efile taxes free Forms in Spanish. Efile taxes free   You can provide Formulario W-4(SP) in place of Form W-4 to your Spanish-speaking employees. Efile taxes free For more information, see Publicación 17(SP). Efile taxes free Effective date of Form W-4. Efile taxes free   A Form W-4 remains in effect until the employee gives you a new one. Efile taxes free When you receive a new Form W-4, do not adjust withholding for pay periods before the effective date of the new form. Efile taxes free Do not adjust withholding retroactively. Efile taxes free If an employee gives you a replacement Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. Efile taxes free For exceptions, see Exemption from federal income tax withholding , IRS review of requested Forms W-4 , and Invalid Forms W-4 , later in this section. Efile taxes free A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year. Efile taxes free Completing Form W-4. Efile taxes free   The amount of federal income tax withholding is based on marital status and withholding allowances. Efile taxes free Your employees may not base their withholding amounts on a fixed dollar amount or percentage. Efile taxes free However, the employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4. Efile taxes free   Employees may claim fewer withholding allowances than they are entitled to claim. Efile taxes free They may do this to ensure that they have enough withholding or to offset other sources of taxable income that are not subject to withholding. Efile taxes free   See Publication 505, Tax Withholding and Estimated Tax, for more information about completing Form W-4. Efile taxes free Along with Form W-4, you may wish to order Publication 505 for use by your employees. Efile taxes free    Do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. Efile taxes free If an employee wants additional withholding, he or she should submit a new Form W-4 and, if necessary, pay estimated tax by filing Form 1040-ES, Estimated Tax for Individuals, or by using the Electronic Federal Tax Payment System (EFTPS) to make estimated tax payments. Efile taxes free Exemption from federal income tax withholding. Efile taxes free   Generally, an employee may claim exemption from federal income tax withholding because he or she had no federal income tax liability last year and expects none this year. Efile taxes free See the Form W-4 instructions for more information. Efile taxes free However, the wages are still subject to social security and Medicare taxes. Efile taxes free   A Form W-4 claiming exemption from withholding is effective when it is filed with the employer and only for that calendar year. Efile taxes free To continue to be exempt from withholding in the next calendar year, an employee must give you a new Form W-4 by February 15. Efile taxes free If the employee does not give you a new Form W-4 by February 15, withhold tax based on the last valid Form W-4 you have for the employee that did not claim an exemption from withholding or, if one does not exist, withhold as if he or she is single with zero withholding allowances. Efile taxes free If the employee provides a new Form W-4 claiming an exemption from withholding on February 16 or later, you may apply the exemption to future wages, but do not refund taxes withheld while the exempt status was not in place. Efile taxes free Withholding income taxes on the wages of nonresident alien employees. Efile taxes free   In general, you must withhold federal income taxes on the wages of nonresident alien employees. Efile taxes free However, see Publication 515 for exceptions to this general rule. Efile taxes free Also see Compensation paid to H-2A visa workers in section 3. Efile taxes free Withholding adjustment for nonresident alien employees. Efile taxes free   A special procedure applies for figuring the amount of income tax to withhold from wages of nonresident alien employees performing services within the United States for wages paid in 2014. Efile taxes free This procedure requires a special chart to be used with the withholding tables to determine the amount to withhold from the wages of the nonresident alien employee. Efile taxes free See Withholding adjustment for nonresident alien employees in section 9 of Publication 15 (Circular E). Efile taxes free Nonresident alien employee's Form W-4. Efile taxes free   When completing Forms W-4, nonresident aliens are required to: Not claim exemption from income tax withholding; Request withholding as if they are single, regardless of their actual marital status; Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or Korea, he or she may claim more than one allowance); and Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4. Efile taxes free   If you maintain an electronic Form W-4 system, you should provide a field for nonresident alien employees to enter nonresident alien status in lieu of writing “Nonresident Alien” or “NRA” above the dotted line on line 6. Efile taxes free    A nonresident alien employee may request additional withholding at his or her option for other purposes, although such additions should not be necessary for withholding to cover federal income tax liability related to employment. Efile taxes free Form 8233. Efile taxes free   If a nonresident alien employee claims a tax treaty exemption from withholding, the employee must submit Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to the income exempt under the treaty, instead of Form W-4. Efile taxes free See Publication 515 for details. Efile taxes free IRS review of requested Forms W-4. Efile taxes free   When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. Efile taxes free You may also be directed to send certain Forms W-4 to the IRS. Efile taxes free You may receive a notice from the IRS requiring you to submit a copy of Form W-4 for one or more of your named employees. Efile taxes free Send the requested copy or copies of Form W-4 to the IRS at the address provided and in the manner directed by the notice. Efile taxes free The IRS may also require you to submit copies of Form W-4 to the IRS as directed by a revenue procedure or notice published in the Internal Revenue Bulletin. Efile taxes free When we refer to Form W-4, the same rules apply to Formulario W-4(SP), its Spanish translation. Efile taxes free   After submitting a copy of the requested Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if it is valid (see Invalid Forms W-4 , later in this section). Efile taxes free However, if the IRS later notifies you in writing that the employee is not entitled to claim a complete exemption from withholding or more than the maximum number of withholding allowances specified by the IRS in the written notice, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the notice (commonly referred to as a “lock-in letter”). Efile taxes free Initial lock-in letter. Efile taxes free   The IRS uses information reported on Form W-2 to identify employees with withholding compliance problems. Efile taxes free In some cases, where a serious under-withholding problem is found to exist for a particular employee, the IRS may issue a lock-in letter to the employer specifying the maximum number of withholding allowances and marital status permitted for a specific employee. Efile taxes free You will also receive a copy for the employee that identifies the maximum number of withholding allowances permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding allowances. Efile taxes free If the employee is employed by you as of the date of the notice, you must furnish the employee copy to the employee within 10 business days of receipt. Efile taxes free You may follow any reasonable business practice to furnish the employee copy to the employee. Efile taxes free Implementation of lock-in letter. Efile taxes free   When you receive the notice specifying the maximum number of withholding allowances and marital status permitted, you may not withhold immediately on the basis of the notice. Efile taxes free You must begin withholding tax on the basis of the notice for any wages paid after the date specified in the notice. Efile taxes free The delay between your receipt of the notice and the date to begin the withholding on the basis of the notice permits the employee to contact the IRS. Efile taxes free Seasonal employees and employees not currently performing services. Efile taxes free   If you receive a notice for an employee who is not currently performing services for you, you are still required to furnish the employee copy to the employee and withhold based on the notice if any of the following apply. Efile taxes free You are paying wages for the employee's prior services and the wages are subject to income tax withholding on or after the date specified in the notice. Efile taxes free You reasonably expect the employee to resume services within 12 months of the date of the notice. Efile taxes free The employee is on a bona fide leave of absence that does not exceed 12 months or the employee has a right to reemployment after the leave of absence. Efile taxes free Termination and re-hire of employees. Efile taxes free   If you are required to furnish and withhold based on the notice and the employment relationship is terminated after the date of the notice, you must continue to withhold based on the notice if you continue to pay any wages subject to income tax withholding. Efile taxes free You must also withhold based on the notice or modification notice (explained next) if the employee resumes the employment relationship with you within 12 months after the termination of the employment relationship. Efile taxes free Modification notice. Efile taxes free   After issuing the notice specifying the maximum number of withholding allowances and marital status permitted, the IRS may issue a subsequent notice (modification notice) that modifies the original notice. Efile taxes free The modification notice may change the marital status and/or the number of withholding allowances permitted. Efile taxes free You must withhold federal income tax based on the effective date specified in the modification notice. Efile taxes free New Form W-4 after IRS notice. Efile taxes free   After the IRS issues a notice or modification notice, if the employee provides you with a new Form W-4 claiming complete exemption from withholding or claims a marital status, a number of withholding allowances, and any additional withholding that results in less withholding than would result under the IRS notice or modification notice, you must disregard the new Form W-4. Efile taxes free You are required to withhold on the basis of the notice or modification notice unless the IRS subsequently notifies you to withhold based on the new Form W-4. Efile taxes free If the employee wants to put a new Form W-4 into effect that results in less withholding than required, the employee must contact the IRS. Efile taxes free   If, after you receive an IRS notice or modification notice, your employee provides you with a new Form W-4 that does not claim exemption from federal income tax withholding and claims a marital status, a number of withholding allowances, and any additional withholding that results in more withholding than would result under the notice or modification notice, you must withhold tax on the basis of that new Form W-4. Efile taxes free Otherwise, disregard any subsequent Forms W-4 provided by the employee and withhold based on the IRS notice or modification notice. Efile taxes free Substitute Forms W-4. Efile taxes free   You are encouraged to have your employees use the official version of Form W-4 to claim withholding allowances or exemption from withholding. Efile taxes free Call the IRS at 1-800-TAX-FORM (1-800-829-3676) or visit IRS. Efile taxes free gov to obtain copies of Form W-4. Efile taxes free   You may use a substitute version of Form W-4 to meet your business needs. Efile taxes free However, your substitute Form W-4 must contain language that is identical to the official Form W-4 and your form must meet all current IRS rules for substitute forms. Efile taxes free At the time that you provide your substitute form to the employee, you must provide him or her with all tables, instructions, and worksheets from the current Form W-4. Efile taxes free   You cannot accept a substitute Form W-4 developed by an employee, and the employee submitting such form will be treated as failing to furnish a Form W-4. Efile taxes free However, continue to use any valid Forms W-4 developed by your employees that you accepted before October 11, 2007. Efile taxes free Invalid Forms W-4. Efile taxes free   Any unauthorized change or addition to Form W-4 makes it invalid. Efile taxes free This includes taking out any language by which the employee certifies that the form is correct. Efile taxes free A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false. Efile taxes free An employee who submits a false Form W-4 may be subject to a $500 penalty. Efile taxes free You may treat a Form W-4 as invalid if the employee wrote “exempt” on line 7 and also entered a number on line 5 or an amount on line 6. Efile taxes free   When you get an invalid Form W-4, do not use it to figure federal income tax withholding. Efile taxes free Tell the employee that it is invalid and ask for another one. Efile taxes free If the employee does not give you a valid one, withhold taxes as if the employee was single and claiming no withholding allowances. Efile taxes free However, if you have an earlier Form W-4 for this worker that is valid, withhold as you did before. Efile taxes free   For additional information about these rules, see Treasury Decision 9337, 2007-35 I. Efile taxes free R. Efile taxes free B. Efile taxes free 455, available at www. Efile taxes free irs. Efile taxes free gov/irb/2007-35_IRB/ar10. Efile taxes free html. Efile taxes free Amounts exempt from levy on wages, salary, and other income. Efile taxes free   If you receive a Notice of Levy on Wages, Salary, and Other Income—Forms 668-W(ACS), 668-W(c)(DO), or 668-W(ICS), you must withhold amounts as described in the instructions for these forms. Efile taxes free Publication 1494, Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income—Forms 668-W(ACS), 668-W(c)(DO), and 668-W(ICS), shows the exempt amount. Efile taxes free If a levy issued in a prior year is still in effect and the taxpayer submits a new Statement of Exemptions and Filing Status, use the current year Publication 1494 to compute the exempt amount. Efile taxes free How To Figure Federal Income Tax Withholding There are several ways to figure federal income tax withholding. Efile taxes free Wage bracket tables. Efile taxes free See section 13 for directions on how to use the tables. Efile taxes free Percentage method. Efile taxes free See section 13 for directions on how to use the percentage method. Efile taxes free Alternative formula tables for percentage method withholding. Efile taxes free See Publication 15-A. Efile taxes free Wage bracket percentage method withholding tables. Efile taxes free See Publication 15-A. Efile taxes free Other alternative methods. Efile taxes free See Publication 15-A. Efile taxes free Employers with automated payroll systems will find the two alternative formula tables and the two alternative wage bracket percentage method tables in Publication 15-A useful. Efile taxes free If an employee wants additional federal tax withheld, have the employee show the extra amount on Form W-4. Efile taxes free Supplemental wages. Efile taxes free   Supplemental wages are wage payments to an employee that are not regular wages. Efile taxes free They include, but are not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards, prizes, back pay and retroactive pay increases for current employees, and payments for nondeductible moving expenses. Efile taxes free Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. Efile taxes free   If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total was a single payment for a regular payroll period. Efile taxes free   If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold federal income tax from your employee's regular wages. Efile taxes free If you withheld federal income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages. Efile taxes free Withhold a flat 25% (no other percentage allowed). Efile taxes free If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. Efile taxes free If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Efile taxes free Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Efile taxes free Subtract the tax withheld from the regular wages. Efile taxes free Withhold the remaining tax from the supplemental wages. Efile taxes free If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and previous supplemental wage payments, and withhold the remaining tax from the current payment of supplemental wages. Efile taxes free If you did not withhold federal income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b above. Efile taxes free This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Efile taxes free    Separate rules apply to any supplemental wages exceeding $1 million that you pay to an individual during the year. Efile taxes free See section 7 in Publication 15 (Circular E) for details. Efile taxes free   Regardless of the method that you use to withhold federal income tax on supplemental wages, they are generally subject to social security, Medicare, and FUTA taxes. Efile taxes free 6. Efile taxes free Required Notice to Employees About Earned Income Credit (EIC) You must notify employees who have no federal income tax withheld that they may be able to claim a tax refund because of the EIC. Efile taxes free Although you do not have to notify employees who claim exemption from withholding on Form W-4 about the EIC, you are encouraged to notify any employees whose wages for 2013 were less than $46,227 ($51,567 if married filing jointly) that they may be eligible to claim the credit for 2013. Efile taxes free This is because eligible employees may get a refund of the amount of EIC that is more than the tax that they owe. Efile taxes free You will meet the notification requirement if you issue to the employee Form W-2 with the EIC notice on the back of Copy B, or a substitute Form W-2 with the same statement. Efile taxes free You may also meet the requirement by providing Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC), or your own statement that contains the same wording. Efile taxes free If a substitute Form W-2 is given to the employee on time but does not have the required statement, you must notify the employee within 1 week of the date that the substitute Form W-2 is given. Efile taxes free If Form W-2 is required but is not given on time, you must give the employee Notice 797 or your written statement by the date that Form W-2 is required to be given. Efile taxes free If Form W-2 is not required, you must notify the employee by February 7, 2014. Efile taxes free 7. Efile taxes free Depositing Taxes Generally, you must deposit both the employer and employee shares of social security and Medicare taxes and federal income tax withheld. Efile taxes free You must use electronic funds transfer to make all federal tax deposits. Efile taxes free See How To Deposit , later in this section. Efile taxes free The credit against employment taxes for COBRA premium assistance payments is treated as a deposit of taxes on the first day of your return period. Efile taxes free For more information, see COBRA premium assistance credit under Introduction. Efile taxes free Payment with return. Efile taxes free   You may make payments with Forms 943 or 945 instead of depositing if one of the following applies. Efile taxes free You report less than a $2,500 tax liability for the year (Form 943, line 11; Form 945, line 3) and you pay in full with a return that is filed on time. Efile taxes free However, if you are unsure that you will report less than $2,500, deposit under the rules explained in this section so that you will not be subject to failure-to-deposit penalties. Efile taxes free You are a monthly schedule depositor and make a payment in accordance with the Accuracy of Deposits Rule discussed later in this section. Efile taxes free This payment may be $2,500 or more. Efile taxes free Only monthly schedule depositors, defined later, are allowed to make an Accuracy of Deposits Rule payment with the return. Efile taxes free Semiweekly schedule depositors must timely deposit the amount. Efile taxes free See Accuracy of Deposits Rule and How To Deposit, later in this section. Efile taxes free When To Deposit If you employ both farm and nonfarm workers, do not combine the taxes reportable on Forms 941 or 944 with Form 943 to decide whether to make a deposit. Efile taxes free See Employers of Both Farm and Nonfarm Workers, later in this section. Efile taxes free The rules for determining when to deposit Form 943 taxes are discussed below. Efile taxes free See section 10 for the separate rules that apply to FUTA tax. Efile taxes free Under these rules, you are classified as either a monthly schedule depositor or a semiweekly schedule depositor. Efile taxes free The terms “monthly schedule depositor” and “semiweekly schedule depositor” do not refer to how often your business pays its employees or how often you are required to make deposits. Efile taxes free The terms identify which set of rules you must follow when you incur a tax liability (for example, when you have a payday). Efile taxes free The deposit schedule that you must use for a calendar year is determined from the tax liability reported on your Form 943, line 9, for the lookback period, discussed next. Efile taxes free If you reported $50,000 or less of Form 943 taxes for the lookback period, you are a monthly schedule depositor. Efile taxes free If you reported more than $50,000 of Form 943 taxes for the lookback period, you are a semiweekly schedule depositor. Efile taxes free Lookback period. Efile taxes free   The lookback period is the second calendar year preceding the current calendar year. Efile taxes free For example, the lookback period for 2014 is 2012. Efile taxes free Example of deposit schedule based on lookback period. Efile taxes free Rose Co. Efile taxes free reported taxes on Form 943 as follows. Efile taxes free 2012 — $48,000 2013 — $60,000 Rose Co. Efile taxes free is a monthly schedule depositor for 2014 because its taxes for the lookback period ($48,000 for calendar year 2012) were not more than $50,000. Efile taxes free However, for 2015, Rose Co. Efile taxes free is a semiweekly schedule depositor because the total taxes before adjustment for its lookback period ($60,000 for calendar year 2013) exceeded $50,000. Efile taxes free Adjustments to lookback period taxes. Efile taxes free   To determine your taxes for the lookback period, use only the tax that you reported on the original return (Form 943, line 9). Efile taxes free Do not include adjustments shown on Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund. Efile taxes free Example of adjustments. Efile taxes free An employer originally reported total tax of $45,000 for the lookback period in 2012. Efile taxes free The employer discovered during March 2014 that the tax reported for the lookback period was understated by $10,000 and corrected this error by filing Form 943-X. Efile taxes free The total tax reported in the lookback period is still $45,000. Efile taxes free The $10,000 adjustment is also not treated as part of the 2014 taxes. Efile taxes free Deposit period. Efile taxes free   The term “deposit period” refers to the period during which tax liabilities are accumulated for each required deposit due date. Efile taxes free For monthly schedule depositors, the deposit period is a calendar month. Efile taxes free The deposit periods for semiweekly schedule depositors are Wednesday through Friday and Saturday through Tuesday. Efile taxes free Monthly Deposit Schedule If the tax liability reported on Form 943, line 9, for the lookback period is $50,000 or less, you are a monthly schedule depositor for the current year. Efile taxes free You must deposit Form 943 taxes on payments made during a calendar month by the 15th day of the following month. Efile taxes free Monthly schedule example. Efile taxes free   Red Co. Efile taxes free is a seasonal employer and a monthly schedule depositor. Efile taxes free It pays wages each Friday. Efile taxes free It paid wages during August 2014, but did not pay any wages during September. Efile taxes free Red Co. Efile taxes free must deposit the combined tax liabilities for the August paydays by September 15. Efile taxes free Red Co. Efile taxes free does not have a deposit requirement for September (that is, due by October 15, 2014) because no wages were paid in September; therefore, it did not have a tax liability for September. Efile taxes free New employers. Efile taxes free   For agricultural employers, your tax liability for any year in the lookback period before the date you started or acquired your business is considered to be zero. Efile taxes free Therefore, you are a monthly schedule depositor for the first and second calendar years of your agricultural business (but see the $100,000 Next-Day Deposit Rule , later in this section). Efile taxes free Semiweekly Deposit Schedule You are a semiweekly schedule depositor for a calendar year if the tax liability on Form 943, line 9, during your lookback period was more than $50,000. Efile taxes free Under the semiweekly deposit schedule, deposit Form 943 taxes for payments made on Wednesday, Thursday, and/or Friday by the following Wednesday. Efile taxes free Deposit amounts accumulated for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday. Efile taxes free Semiweekly depositors are not required to deposit twice a week if their payments were in the same semiweekly period unless the $100,000 Next-Day Deposit Rule (discussed later in this section) applies. Efile taxes free For example, if you made a payment on both Wednesday and Friday and incurred taxes of $10,000 for each pay date, deposit the $20,000 by the following Wednesday. Efile taxes free If you made no additional payments on Saturday through Tuesday, no deposit is due on Friday. Efile taxes free Semiweekly schedule depositors must complete Form 943-A, Agricultural Employer's Record of Federal Tax Liability, and submit it with Form 943. Efile taxes free Semiweekly Deposit Schedule IF the payday falls on a. Efile taxes free . Efile taxes free . Efile taxes free THEN deposit taxes by the following. Efile taxes free . Efile taxes free . Efile taxes free Wednesday, Thursday, and/or Friday Wednesday Saturday, Sunday, Monday, and/or Tuesday Friday Semiweekly schedule example. Efile taxes free   Green, Inc. Efile taxes free , is a semiweekly schedule depositor and pays wages once each month on the last Friday of the month. Efile taxes free Green, Inc. Efile taxes free , will deposit only once a month, but the deposit will be made under the semiweekly deposit schedule as follows. Efile taxes free Green, Inc. Efile taxes free 's tax liability for the April 25, 2014 (Friday), wage payment must be deposited by April 30, 2014 (Wednesday). Efile taxes free Semiweekly deposit period spanning two quarters. Efile taxes free   If you have more than one pay date during a semiweekly period and the pay dates fall in different calendar quarters, you will need to make separate deposits for the separate liabilities. Efile taxes free For example, if you have a pay date on Monday, March 31, 2014 (first quarter), and another pay date on Tuesday, April 1, 2014 (second quarter), two separate deposits will be required even though the pay dates fall within the same semiweekly period. Efile taxes free Both deposits will be due Friday, April 4, 2014 (3 business days from the end of the semiweekly deposit period). Efile taxes free Deposits on Business Days Only If a deposit is required to be made on a day that is not a business day, the deposit is considered timely if it is made by the close of the next business day. Efile taxes free A business day is any day other than a Saturday, Sunday, or legal holiday. Efile taxes free For example, if a deposit is required to be made on Friday and Friday is a legal holiday, the deposit is considered timely if it is made by the following Monday (if Monday is a business day). Efile taxes free Semiweekly schedule depositors   will always have 3 business days to make a deposit. Efile taxes free That is, if any of the 3 weekdays after the end of a semiweekly period is a legal holiday, you will have an additional day for each day that is a legal holiday to make the deposit. Efile taxes free For example, if a semiweekly schedule depositor accumulated taxes on Friday and the following Monday is a legal holiday, the deposit normally due on Wednesday may be made on Thursday (this allows 3 business days to make the deposit). Efile taxes free Legal holiday. Efile taxes free   The term “legal holiday” means any legal holiday in the District of Columbia. Efile taxes free Legal holidays for 2014 are listed below. Efile taxes free January 1— New Year's Day January 20— Birthday of Martin Luther King, Jr. Efile taxes free February 17— Washington's Birthday April 16— District of Columbia Emancipation Day May 26— Memorial Day July 4— Independence Day September 1— Labor Day October 13— Columbus Day November 11— Veterans' Day November 27— Thanksgiving Day December 25— Christmas Day $100,000 Next-Day Deposit Rule If you accumulate $100,000 or more of Form 943 taxes (that is, taxes reported on Form 943, line 11) on any day during a deposit period, you must deposit the tax by the close of the next business day, whether you are a monthly or a semiweekly schedule depositor. Efile taxes free For purposes of the $100,000 rule, do not continue accumulating a tax liability after the end of a deposit period. Efile taxes free For example, if a semiweekly schedule depositor has accumulated a liability of $95,000 on a Tuesday (of a Saturday-through-Tuesday deposit period) and accumulated a $10,000 liability on Wednesday, the $100,000 next-day deposit rule does not apply because the $10,000 is accumulated in the next deposit period. Efile taxes free Thus, $95,000 must be deposited by Friday and $10,000 must be deposited by the following Wednesday. Efile taxes free However, once you accumulate at least $100,000 in a deposit period, stop accumulating at the end of that day and begin to accumulate anew on the next day. Efile taxes free For example, Fir Co. Efile taxes free is a semiweekly schedule depositor. Efile taxes free On Monday, Fir Co. Efile taxes free accumulates taxes of $110,000 and must deposit this amount on Tuesday, the next business day. Efile taxes free On Tuesday, Fir Co. Efile taxes free accumulates additional taxes of $30,000. Efile taxes free Because the $30,000 is not added to the previous $110,000 and is less than $100,000, Fir Co. Efile taxes free does not have to deposit the $30,000 until Friday (following the semiweekly deposit schedule). Efile taxes free If you are a monthly schedule depositor and you accumulate a $100,000 tax liability on any day, you become a semiweekly schedule depositor on the next day and remain so for at least the rest of the calendar year and for the following calendar year. Efile taxes free Example of the $100,000 next-day deposit rule. Efile taxes free   Elm, Inc. Efile taxes free , started its business on May 1, 2014. Efile taxes free Because Elm, Inc. Efile taxes free , is a new employer, the taxes for its lookback period are considered to be zero; therefore, Elm, Inc. Efile taxes free , is a monthly schedule depositor. Efile taxes free On May 8, Elm, Inc. Efile taxes free , paid wages for the first time and accumulated taxes of $50,000. Efile taxes free On May 9 (Friday), Elm, Inc. Efile taxes free , paid wages and accumulated taxes of $60,000, for a total of $110,000. Efile taxes free Because Elm, Inc. Efile taxes free , accumulated $110,000 on May 9, it must deposit $110,000 by May 12 (Monday), the next business day. Efile taxes free Elm, Inc. Efile taxes free , became a semiweekly schedule depositor on May 10. Efile taxes free It will be a semiweekly schedule depositor for the remainder of 2014 and for 2015. Efile taxes free Accuracy of Deposits Rule You are required to deposit 100% of your tax liability on or before the deposit due date. Efile taxes free However, penalties will not be applied for depositing less than 100% if both of the following conditions are met. Efile taxes free Any deposit shortfall does not exceed the greater of $100 or 2% of the amount of taxes otherwise required to be deposited. Efile taxes free The deposit shortfall is paid or deposited by the shortfall makeup date as described below. Efile taxes free Makeup Date for Deposit Shortfall:    Monthly Schedule Depositor—Deposit the shortfall or pay it with your return by the due date of your Form 943. Efile taxes free You may pay the shortfall with your Form 943 even if the amount is $2,500 or more. Efile taxes free Semiweekly Schedule Depositor—Deposit by the earlier of (a) the first Wednesday or Friday (whichever comes first) that falls on or after the 15th of the month following the month in which the shortfall occurred, or (b) the due date for Form 943. Efile taxes free For example, if a semiweekly schedule depositor has a deposit shortfall during February 2014, the shortfall makeup date is March 19, 2014 (Wednesday). Efile taxes free How To Deposit You must deposit employment taxes by electronic funds transfer. Efile taxes free See Payment with return , earlier in this section, for exceptions explaining when taxes may be paid with the tax return instead of being deposited. Efile taxes free Electronic deposit requirement. Efile taxes free   You must use electronic funds transfer to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). Efile taxes free Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). Efile taxes free If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Efile taxes free   EFTPS is a free service provided by the Department of Treasury. Efile taxes free To get more information or to enroll in EFTPS, call 1-800-555-4477 (business), 1-800-316-6541 (individual), or 1-800-733-4829 (TDD). Efile taxes free You can also visit the EFTPS website at www. Efile taxes free eftps. Efile taxes free gov. Efile taxes free Additional information about EFTPS is also available in Publication 966. Efile taxes free New employers that have a federal tax obligation will be pre-enrolled in EFTPS. Efile taxes free Call the toll-free number located in your Employer Identification Number (EIN) Package to activate your enrollment and begin making your tax deposit payments. Efile taxes free See When you receive your EIN in section 1 for more information. Efile taxes free Deposit record. Efile taxes free   For your records, an Electronic Funds Transfer (EFT) Trace Number will be provided with each successful payment. Efile taxes free The number can be used as a receipt or to trace the payment. Efile taxes free Depositing on time. Efile taxes free   For deposits made by EFTPS to be on time, you must initiate the deposit by 8 p. Efile taxes free m. Efile taxes free Eastern time the day before the date a deposit is due. Efile taxes free If you use a third party to make a deposit on your behalf, they may have different cutoff times. Efile taxes free Same-day payment option. Efile taxes free   If you fail to initiate a deposit transaction on EFTPS by 8 p. Efile taxes free m. Efile taxes free Eastern time the day before the date a deposit is due, you can still make your deposit on time by using the Federal Tax Application (FTA). Efile taxes free To use the same-day payment method, you will need to make arrangements with your financial institution ahead of time. Efile taxes free Please check with your financial institution regarding availability, deadlines, and costs. Efile taxes free Your financial institution may charge you a fee for payments made this way. Efile taxes free To learn more about the information you will need to provide to your financial institution to make a same-day wire payment, visit www. Efile taxes free eftps. Efile taxes free gov to download the Same-Day Payment Worksheet. Efile taxes free Deposit Penalties Penalties may apply if you do not make required deposits on time or if you make deposits for less than the required amount. Efile taxes free The penalties do not apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect. Efile taxes free IRS may also waive deposit penalties if you inadvertently fail to deposit in the first quarter that a deposit is due, or the first quarter during which your frequency of deposits changed, if you timely filed your employment tax return. Efile taxes free For amounts not properly deposited or not deposited on time, the penalty rates are shown next. Efile taxes free Penalty Charged for. Efile taxes free . Efile taxes free . Efile taxes free 2% Deposits made 1 to 5 days late. Efile taxes free 5% Deposits made 6 to 15 days late. Efile taxes free 10% Deposits made 16 or more days late. Efile taxes free Also applies to amounts paid within 10 days of the date of the first notice the IRS sent asking for the tax due. Efile taxes free 10% Amounts (that should have been deposited) paid directly to the IRS or paid with your tax return. Efile taxes free See Payment with return , earlier in this section, for exceptions. Efile taxes free 15% Amounts still unpaid more than 10 days after the date of the first notice that the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier. Efile taxes free Late deposit penalty amounts are determined using calendar days, starting from the due date of the liability. Efile taxes free Order in which deposits are applied. Efile taxes free   Deposits generally are applied to the most recent tax liability within the year. Efile taxes free If you receive a failure-to-deposit penalty notice, you may designate how your deposits are to be applied in order to minimize the amount of the penalty, if you do so within 90 days of the date of the notice. Efile taxes free Follow the instructions on the penalty notice that you received. Efile taxes free For examples on how the IRS will apply deposits and more information on designating deposits, see Revenue Procedure 2001-58. Efile taxes free You can find Revenue Procedure 2001-58 on page 579 of Internal Revenue Bulletin 2001-50 at www. Efile taxes free irs. Efile taxes free gov/pub/irs-irbs/irb01-50. Efile taxes free pdf. Efile taxes free Example. Efile taxes free Cedar, Inc. Efile taxes free , is required to make a deposit of $1,000 on July 15 and $1,500 on August 15. Efile taxes free It does not make the deposit on July 15. Efile taxes free On August 15, Cedar, Inc. Efile taxes free , deposits $2,000. Efile taxes free Under the deposits rule, which applies deposits to the most recent tax liability, $1,500 of the deposit is applied to the August 15 deposit and the remaining $500 is applied to the July deposit. Efile taxes free Accordingly, $500 of the July 15 liability remains undeposited. Efile taxes free The penalty on this underdeposit will apply as explained above. Efile taxes free Trust fund recovery penalty. Efile taxes free   If federal income, social security, or Medicare taxes that must be withheld are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. Efile taxes free The penalty is the full amount of the unpaid trust fund tax. Efile taxes free This penalty may apply to you if these unpaid taxes cannot be immediately collected from the employer or business. Efile taxes free   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. Efile taxes free   A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant, a volunteer director/trustee, or an employee of a sole proprietorship. Efile taxes free A responsible person also may include one who signs checks for the business or otherwise has authority to cause the spending of business funds. Efile taxes free    Willfully means voluntarily, consciously, and intentionally. Efile taxes free A responsible person acts willfully if the person knows that the required actions of collecting, accounting for or paying over trust fund taxes are not taking place, or recklessly disregards obvious and known risks to the government's right to receive trust fund taxes. Efile taxes free “Average” failure-to-deposit penalty. Efile taxes free   IRS may assess an “averaged” failure-to-deposit penalty of 2% to 10% if you are a monthly schedule depositor and did not properly complete Form 943, line 17, when your tax liability shown on Form 943, line 11, was $2,500 or more. Efile taxes free IRS may also assess this penalty of 2% to 10% if you are a semiweekly schedule depositor and your tax liability shown on Form 943, line 11, was $2,500 or more and you did any of the following. Efile taxes free Completed Form 943, line 17, instead of Form 943-A. Efile taxes free Failed to attach a properly completed Form 943-A. Efile taxes free Completed Form 943-A incorrectly, for example, by entering tax deposits instead of tax liabilities in the numbered spaces. Efile taxes free   IRS figures the penalty by allocating your tax liability on Form 943, line 11, equally throughout the tax period. Efile taxes free Your deposits and payments may not be counted as timely because IRS does not know the actual dates of your tax liabilities. Efile taxes free   You can avoid the penalty by reviewing your return before filing it. Efile taxes free Follow these steps before filing your Form 943. Efile taxes free If you are a monthly schedule depositor, report your tax liabilities (not your deposits) in the monthly entry spaces on Form 943, line 17. Efile taxes free If you are a semiweekly schedule depositor, report your tax liabilities (not your deposits) on Form 943-A in the lines that represent the dates you paid your employees. Efile taxes free Verify that your total liability shown on Form 943, line 17, or Form 943-A, line M, equals your tax liability shown on Form 943, line 11. Efile taxes free Do not show negative amounts on Form 943, line 17, or Form 943-A. Efile taxes free For prior period errors discovered after December 31, 2008, do not adjust your tax liabilities reported on Form 943, line 17, or on Form 943-A. Efile taxes free Employers of Both Farm and Nonfarm Workers If you employ both farm and nonfarm workers, you must treat employment taxes for the farmworkers (Form 943 taxes) separately from employment taxes for the nonfarm workers (Form 941 and 944 taxes). Efile taxes free Form 943 taxes and Form 941/944 taxes are not combined for purposes of applying any of the deposit schedule rules. Efile taxes free If a deposit is due, deposi