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

Independent establishments are created by Congress to address concerns that go beyond the scope of ordinary legislation. These agencies are responsible for keeping the government and economy running smoothly.



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The H&r Block

H&r block 11. H&r block   Departing Aliens and the Sailing or Departure Permit Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Aliens Not Required To Obtain Sailing or Departure Permits Aliens Required To Obtain Sailing or Departure PermitsGetting a Sailing or Departure Permit Forms To File Paying Taxes and Obtaining Refunds Bond To Ensure Payment Filing Annual U. H&r block S. H&r block Income Tax Returns Introduction Before leaving the United States, all aliens (except those listed under Aliens Not Required To Obtain Sailing or Departure Permits must obtain a certificate of compliance. H&r block This document, also popularly known as the sailing permit or departure permit, is part of the income tax form you must file before leaving. H&r block You will receive a sailing or departure permit after filing a Form 1040-C or Form 2063. H&r block These forms are discussed in this chapter. H&r block To find out if you need a sailing or departure permit, first read Aliens Not Required To Obtain Sailing or Departure Permits . H&r block If you do not fall into one of the categories in that discussion, you must obtain a sailing or departure permit. H&r block Read Aliens Required To Obtain Sailing or Departure Permits . H&r block Topics - This chapter discusses: Who needs a sailing permit, How to get a sailing permit, and Forms you file to get a sailing permit. H&r block Useful Items - You may want to see: Form (and Instructions) 1040-C U. H&r block S. H&r block Departing Alien Income Tax Return 2063 U. H&r block S. H&r block Departing Alien Income Tax Statement See chapter 12 for information about getting these forms. H&r block Aliens Not Required To Obtain Sailing or Departure Permits If you are included in one of the following categories, you do not have to get a sailing or departure permit before leaving the United States. H&r block If you are in one of these categories and do not have to get a sailing or departure permit, you must be able to support your claim for exemption with proper identification or give the authority for the exemption. H&r block Category 1. H&r block   Representatives of foreign governments with diplomatic passports, whether accredited to the United States or other countries, members of their households, and servants accompanying them. H&r block Servants who are leaving, but not with a person with a diplomatic passport, must get a sailing or departure permit. H&r block However, they can get a sailing or departure permit on Form 2063 without examination of their income tax liability by presenting a letter from the chief of their diplomatic mission certifying that: Their name appears on the “White List” (a list of employees of diplomatic missions), and They do not owe to the United States any income tax, and will not owe any tax up to and including the intended date of departure. H&r block   The statement must be presented to an IRS office. H&r block Category 2. H&r block    Employees of international organizations and foreign governments (other than diplomatic representatives exempt under category 1) and members of their households: Whose compensation for official services is exempt from U. H&r block S. H&r block tax under U. H&r block S. H&r block tax laws (described in chapter 10), and Who receive no other income from U. H&r block S. H&r block sources. H&r block If you are an alien in category (1) or (2), above, who filed the waiver under section 247(b) of the Immigration and Nationality Act, you must get a sailing or departure permit. H&r block This is true even if your income is exempt from U. H&r block S. H&r block tax because of an income tax treaty, consular agreement, or international agreement. H&r block Category 3. H&r block   Alien students, industrial trainees, and exchange visitors, including their spouses and children, who enter on an “F-1,” “F-2,” “H-3,” “H-4,” “J-1,” “J-2,” or “Q” visa only and who receive no income from U. H&r block S. H&r block sources while in the United States under those visas other than: Allowances to cover expenses incident to study or training in the United States, such as expenses for travel, maintenance, and tuition, The value of any services or food and lodging connected with this study or training, Income from employment authorized by the U. H&r block S. H&r block Citizenship and Immigration Services (USCIS), or Interest income on deposits that is not effectively connected with a U. H&r block S. H&r block trade or business. H&r block (See Interest Income in chapter 3. H&r block ) Category 4. H&r block   Alien students, including their spouses and children, who enter on an “M-1” or “M-2” visa only and who receive no income from U. H&r block S. H&r block sources while in the United States under those visas, other than: Income from employment authorized by the U. H&r block S. H&r block Citizenship and Immigration Services (USCIS) or Interest income on deposits that is not effectively connected with a U. H&r block S. H&r block trade or business. H&r block (See Interest Income in chapter 3. H&r block ) Category 5. H&r block   Certain other aliens temporarily in the United States who have received no taxable income during the tax year up to and including the date of departure or during the preceding tax year. H&r block If the IRS has reason to believe that an alien has received income subject to tax and that the collection of income tax is jeopardized by departure, it may then require the alien to obtain a sailing or departure permit. H&r block Aliens in this category are: Alien military trainees who enter the United States for training under the sponsorship of the Department of Defense and who leave the United States on official military travel orders, Alien visitors for business on a “B-1” visa, or on both a “B-1” visa and a “B-2” visa, who do not remain in the United States or a U. H&r block S. H&r block possession for more than 90 days during the tax year, Alien visitors for pleasure on a “B-2” visa, Aliens in transit through the United States or any of its possessions on a “C-1” visa, or under a contract, such as a bond agreement, between a transportation line and the Attorney General, and Aliens who enter the United States on a border-crossing identification card or for whom passports, visas, and border-crossing identification cards are not required, if they are: Visitors for pleasure, Visitors for business who do not remain in the United States or a U. H&r block S. H&r block possession for more than 90 days during the tax year, or In transit through the United States or any of its possessions. H&r block Category 6. H&r block   Alien residents of Canada or Mexico who frequently commute between that country and the United States for employment, and whose wages are subject to the withholding of U. H&r block S. H&r block tax. H&r block Aliens Required To Obtain Sailing or Departure Permits If you do not fall into one of the categories listed under Aliens Not Required To Obtain Sailing or Departure Permits, you must obtain a sailing or departure permit. H&r block To obtain a permit, file Form 1040-C or Form 2063 (whichever applies) with your local IRS office before you leave the United States. H&r block See Forms To File , later. H&r block You must also pay all the tax shown as due on Form 1040-C and any taxes due for past years. H&r block See Paying Taxes and Obtaining Refunds , later. H&r block Getting a Sailing or Departure Permit The following discussion covers when and where to get your sailing permit. H&r block Where to get a sailing or departure permit. H&r block   If you have been working in the United States, you should get the permit from an IRS office in the area of your employment, or you may obtain one from an IRS office in the area of your departure. H&r block When to get a sailing or departure permit. H&r block   You should get your sailing or departure permit at least 2 weeks before you plan to leave. H&r block You cannot apply earlier than 30 days before your planned departure date. H&r block Do not wait until the last minute in case there are unexpected problems. H&r block Papers to submit. H&r block   Getting your sailing or departure permit will go faster if you bring to the IRS office papers and documents related to your income and your stay in the United States. H&r block Bring the following records with you if they apply. H&r block Your passport and alien registration card or visa. H&r block Copies of your U. H&r block S. H&r block income tax returns filed for the past 2 years. H&r block If you were in the United States for less than 2 years, bring the income tax returns you filed for that period. H&r block Receipts for income taxes paid on these returns. H&r block Receipts, bank records, canceled checks, and other documents that prove your deductions, business expenses, and dependents claimed on your returns. H&r block A statement from each employer showing wages paid and tax withheld from January 1 of the current year to the date of departure if you were an employee. H&r block If you were self-employed, you must bring a statement of income and expenses up to the date you plan to leave. H&r block Proof of estimated tax payments for the past year and this year. H&r block Documents showing any gain or loss from the sale of personal property and/or real property, including capital assets and merchandise. H&r block Documents relating to scholarship or fellowship grants including: Verification of the grantor, source, and purpose of the grant. H&r block Copies of the application for, and approval of, the grant. H&r block A statement of the amount paid, and your duties and obligations under the grant. H&r block A list of any previous grants. H&r block Documents indicating you qualify for any special tax treaty benefits claimed. H&r block Document verifying your date of departure from the United States, such as an airline ticket. H&r block Document verifying your U. H&r block S. H&r block taxpayer identification number, such as a social security card or an IRS issued Notice CP 565 showing your individual taxpayer identification number (ITIN). H&r block Note. H&r block   If you are married and reside in a community property state, also bring the above-listed documents for your spouse. H&r block This applies whether or not your spouse requires a permit. H&r block Forms To File If you must get a sailing or departure permit, you must file Form 2063 or Form 1040-C. H&r block Employees in the IRS office can assist in filing these forms. H&r block Both forms have a “certificate of compliance” section. H&r block When the certificate of compliance is signed by an agent of the Field Assistance Area Director, it certifies that your U. H&r block S. H&r block tax obligations have been satisfied according to available information. H&r block Your Form 1040-C copy of the signed certificate, or the one detached from Form 2063, is your sailing or departure permit. H&r block Form 2063 This is a short form that asks for certain information but does not include a tax computation. H&r block The following departing aliens can get their sailing or departure permits by filing Form 2063. H&r block Aliens, whether resident or nonresident, who have had no taxable income for the tax year up to and including the date of departure and for the preceding year, if the period for filing the income tax return for that year has not expired. H&r block Resident aliens who have received taxable income during the tax year or preceding year and whose departure will not hinder the collection of any tax. H&r block However, if the IRS has information indicating that the aliens are leaving to avoid paying their income tax, they must file a Form 1040-C. H&r block Aliens in either of these categories who have not filed an income tax return or paid income tax for any tax year must file the return and pay the income tax before they can be issued a sailing or departure permit on Form 2063. H&r block The sailing or departure permit detached from Form 2063 can be used for all departures during the current year. H&r block However, the IRS may cancel the sailing or departure permit for any later departure if it believes the collection of income tax is jeopardized by that later departure. H&r block Form 1040-C If you must get a sailing or departure permit and you do not qualify to file Form 2063, you must file Form 1040-C. H&r block Ordinarily, all income received or reasonably expected to be received during the tax year up to and including the date of departure must be reported on Form 1040-C and the tax on it must be paid. H&r block When you pay any tax shown as due on the Form 1040-C, and you file all returns and pay all tax due for previous years, you will receive a sailing or departure permit. H&r block However, the IRS may permit you to furnish a bond guaranteeing payment instead of paying the taxes for certain years. H&r block See Bond To Ensure Payment , discussed later. H&r block The sailing or departure permit issued under the conditions in this paragraph is only for the specific departure for which it is issued. H&r block Returning to the United States. H&r block   If you furnish the IRS with information showing, to the satisfaction of the IRS, that you intend to return to the United States and that your departure does not jeopardize the collection of income tax, you can get a sailing or departure permit by filing Form 1040-C without having to pay the tax shown on it. H&r block You must, however, file all income tax returns that have not yet been filed as required, and pay all income tax that is due on these returns. H&r block   Your Form 1040-C must include all income received and reasonably expected to be received during the entire year of departure. H&r block The sailing or departure permit issued with this Form 1040-C can be used for all departures during the current year. H&r block However, the Service may cancel the sailing or departure permit for any later departure if the payment of income tax appears to be in jeopardy. H&r block Joint return on Form 1040-C. H&r block   Departing husbands and wives who are nonresident aliens cannot file joint returns. H&r block However, if both spouses are resident aliens, they can file a joint return on Form 1040-C if: Both spouses can reasonably be expected to qualify to file a joint return at the normal close of their tax year, and The tax years of the spouses end at the same time. H&r block Paying Taxes and Obtaining Refunds You must pay all tax shown as due on the Form 1040-C at the time of filing it, except when a bond is furnished, or the IRS is satisfied that your departure does not jeopardize the collection of income tax. H&r block You must also pay any taxes due for past years. H&r block If the tax computation on Form 1040-C results in an overpayment, there is no tax to pay at the time you file that return. H&r block However, the IRS cannot provide a refund at the time of departure. H&r block If you are due a refund, you must file either Form 1040NR or Form 1040NR-EZ at the end of the tax year. H&r block Bond To Ensure Payment Usually, you must pay the tax shown as due on Form 1040-C when you file it. H&r block However, if you pay all taxes due that you owe for prior years, you can furnish a bond guaranteeing payment instead of paying the income taxes shown as due on the Form 1040-C or the tax return for the preceding year if the period for filing that return has not expired. H&r block The bond must equal the tax due plus interest to the date of payment as figured by the IRS. H&r block Information about the form of bond and security on it can be obtained from your IRS office. H&r block Filing Annual U. H&r block S. H&r block Income Tax Returns Form 1040-C is not an annual U. H&r block S. H&r block income tax return. H&r block If an income tax return is required by law, that return must be filed even though a Form 1040-C has already been filed. H&r block Chapters 5 and 7 discuss filing an annual U. H&r block S. H&r block income tax return. H&r block The tax paid with Form 1040-C should be taken as a credit against the tax liability for the entire tax year on your annual U. H&r block S. H&r block income tax return. H&r block Prev  Up  Next   Home   More Online Publications