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My pay gov 2. My pay gov   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. My pay gov 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. My pay gov Deduction may depend on your type of business. My pay gov Exception for events that benefit charitable organizations. My pay gov Food and beverages in skybox seats. My pay gov What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. My pay gov You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. My pay gov The rules and definitions are summarized in Table 2-1 . My pay gov You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. My pay gov Directly-related test. My pay gov Associated test. My pay gov Both of these tests are explained later. My pay gov An ordinary expense is one that is common and accepted in your trade or business. My pay gov A necessary expense is one that is helpful and appropriate for your business. My pay gov An expense does not have to be required to be considered necessary. My pay gov The amount you can deduct for entertainment expenses may be limited. My pay gov Generally, you can deduct only 50% of your unreimbursed entertainment expenses. My pay gov This limit is discussed later under 50% Limit. My pay gov Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. My pay gov Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. My pay gov Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. My pay gov See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. My pay gov You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. My pay gov It is not necessary to devote more time to business than to entertainment. My pay gov However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. My pay gov Table 2-1. My pay gov When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. My pay gov Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. My pay gov An ordinary expense is one that is common and accepted in your trade or business. My pay gov A necessary expense is one that is helpful and appropriate. My pay gov Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. My pay gov   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. My pay gov Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. My pay gov You cannot deduct expenses that are lavish or extravagant under the circumstances. My pay gov You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). My pay gov You do not have to show that business income or other business benefit actually resulted from each entertainment expense. My pay gov Clear business setting. My pay gov   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. My pay gov The following situations are examples of entertainment in a clear business setting. My pay gov Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. My pay gov Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). My pay gov Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. My pay gov An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. My pay gov Expenses not considered directly related. My pay gov   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. My pay gov The following are examples of situations where there are substantial distractions. My pay gov A meeting or discussion at a nightclub, theater, or sporting event. My pay gov A meeting or discussion during what is essentially a social gathering, such as a cocktail party. My pay gov A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. My pay gov Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. My pay gov To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). My pay gov Associated with trade or business. My pay gov   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. My pay gov The purpose may be to get new business or to encourage the continuation of an existing business relationship. My pay gov Substantial business discussion. My pay gov   Whether a business discussion is substantial depends on the facts of each case. My pay gov A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. My pay gov   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. My pay gov It is not necessary that you devote more time to business than to entertainment. My pay gov You do not have to discuss business during the meal or entertainment. My pay gov Meetings at conventions. My pay gov   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. My pay gov However, your reason for attending the convention or meeting must be to further your trade or business. My pay gov The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. My pay gov Directly before or after business discussion. My pay gov   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. My pay gov   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. My pay gov Among the facts to consider are the place, date, and duration of the business discussion. My pay gov If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. My pay gov Example. My pay gov A group of business associates comes from out of town to your place of business to hold a substantial business discussion. My pay gov If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. My pay gov The expense meets the associated test. My pay gov 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. My pay gov (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. My pay gov See Individuals subject to “hours of service” limits , later. My pay gov ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. My pay gov Figure A summarizes the general rules explained in this section. My pay gov The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. My pay gov Included expenses. My pay gov   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. My pay gov However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. My pay gov Figure A. My pay gov Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. My pay gov See Exceptions to the 50% Limit . My pay gov Please click here for the text description of the image. My pay gov Figure A. My pay gov Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. My pay gov   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. My pay gov   The 50% limit also applies to certain meal and entertainment expenses that are not business related. My pay gov It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. My pay gov It also applies to the cost of meals included in deductible educational expenses. My pay gov When to apply the 50% limit. My pay gov   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. My pay gov You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. My pay gov Example 1. My pay gov You spend $200 for a business-related meal. My pay gov If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. My pay gov Your deduction cannot be more than $45 (50% × $90). My pay gov Example 2. My pay gov You purchase two tickets to a concert and give them to a client. My pay gov You purchased the tickets through a ticket agent. My pay gov You paid $200 for the two tickets, which had a face value of $80 each ($160 total). My pay gov Your deduction cannot be more than $80 (50% × $160). My pay gov Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. My pay gov Figure A can help you determine if the 50% limit applies to you. My pay gov Expenses not subject to 50% limit. My pay gov   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. My pay gov 1 - Employee's reimbursed expenses. My pay gov   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. My pay gov Accountable plans are discussed in chapter 6. My pay gov 2 - Self-employed. My pay gov   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. My pay gov You have these expenses as an independent contractor. My pay gov Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. My pay gov You provide adequate records of these expenses to your customer or client. My pay gov (See chapter 5 . My pay gov )   In this case, your client or customer is subject to the 50% limit on the expenses. My pay gov Example. My pay gov You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. My pay gov You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. My pay gov If the client can deduct the expenses, the client is subject to the 50% limit. My pay gov If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. My pay gov 3 - Advertising expenses. My pay gov   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. My pay gov For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. My pay gov 4 - Sale of meals or entertainment. My pay gov   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. My pay gov For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. My pay gov 5 - Charitable sports event. My pay gov   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. My pay gov For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. My pay gov Individuals subject to “hours of service” limits. My pay gov   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. My pay gov The percentage is 80%. My pay gov   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. My pay gov Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. My pay gov Interstate truck operators and bus drivers who are under Department of Transportation regulations. My pay gov Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. My pay gov Certain merchant mariners who are under Coast Guard regulations. My pay gov What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. My pay gov Entertainment. My pay gov   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. My pay gov Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. My pay gov   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. My pay gov A meal as a form of entertainment. My pay gov   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. My pay gov A meal expense includes the cost of food, beverages, taxes, and tips for the meal. My pay gov To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. My pay gov    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. My pay gov    Meals sold in the normal course of your business are not considered entertainment. My pay gov Deduction may depend on your type of business. My pay gov   Your kind of business may determine if a particular activity is considered entertainment. My pay gov For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. My pay gov This is because fashion shows are typical in your business. My pay gov But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. My pay gov Separating costs. My pay gov   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. My pay gov You must have a reasonable basis for making this allocation. My pay gov For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. My pay gov Taking turns paying for meals or entertainment. My pay gov   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. My pay gov Lavish or extravagant expenses. My pay gov   You cannot deduct expenses for entertainment that are lavish or extravagant. My pay gov An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. My pay gov Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. My pay gov Allocating between business and nonbusiness. My pay gov   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. My pay gov You can deduct only the business part. My pay gov If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. My pay gov Example. My pay gov You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. My pay gov Only 4/11 of the expense qualifies as a business entertainment expense. My pay gov You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. My pay gov Trade association meetings. My pay gov   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. My pay gov These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. My pay gov Entertainment tickets. My pay gov   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. My pay gov For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. My pay gov Exception for events that benefit charitable organizations. My pay gov   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. My pay gov You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. My pay gov The event's main purpose is to benefit a qualified charitable organization. My pay gov The entire net proceeds go to the charity. My pay gov The event uses volunteers to perform substantially all the event's work. My pay gov    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. My pay gov Example 1. My pay gov You purchase tickets to a golf tournament organized by the local volunteer fire company. My pay gov All net proceeds will be used to buy new fire equipment. My pay gov The volunteers will run the tournament. My pay gov You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. My pay gov Example 2. My pay gov You purchase tickets to a college football game through a ticket broker. My pay gov After having a business discussion, you take a client to the game. My pay gov Net proceeds from the game go to colleges that qualify as charitable organizations. My pay gov However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. My pay gov Skyboxes and other private luxury boxes. My pay gov   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. My pay gov   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. My pay gov For example, renting a skybox for a series of playoff games is considered renting it for more than one event. My pay gov All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. My pay gov   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. My pay gov Example. My pay gov You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. My pay gov The cost of regular nonluxury box seats at each event is $30 a seat. My pay gov You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). My pay gov Food and beverages in skybox seats. My pay gov   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. My pay gov The amounts separately stated for food and beverages must be reasonable. My pay gov You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. My pay gov What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. My pay gov Club dues and membership fees. My pay gov   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. My pay gov This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. My pay gov   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. My pay gov You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. My pay gov Entertainment facilities. My pay gov   Generally, you cannot deduct any expense for the use of an entertainment facility. My pay gov This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. My pay gov   An entertainment facility is any property you own, rent, or use for entertainment. My pay gov Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. My pay gov Out-of-pocket expenses. My pay gov   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. My pay gov These are not expenses for the use of an entertainment facility. My pay gov However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. My pay gov Expenses for spouses. My pay gov   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. My pay gov However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. My pay gov Example. My pay gov You entertain a customer. My pay gov The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. My pay gov The customer's spouse joins you because it is impractical to entertain the customer without the spouse. My pay gov You can deduct the cost of entertaining the customer's spouse. My pay gov If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. My pay gov Gift or entertainment. My pay gov   Any item that might be considered either a gift or entertainment generally will be considered entertainment. My pay gov However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. My pay gov   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. My pay gov You can treat the tickets as either a gift or entertainment, whichever is to your advantage. My pay gov   You can change your treatment of the tickets at a later date by filing an amended return. My pay gov Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. My pay gov   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. My pay gov You cannot choose, in this case, to treat the tickets as a gift. My pay gov Prev  Up  Next   Home   More Online Publications
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My pay gov Publication 15-A - Main Content Table of Contents 1. My pay gov Who Are Employees?Independent Contractors Common-Law Employees Statutory Employees Statutory Nonemployees Misclassification of Employees 2. My pay gov Employee or Independent Contractor?Common-Law Rules Industry Examples 3. My pay gov Employees of Exempt OrganizationsSocial security and Medicare taxes. My pay gov FUTA tax. My pay gov 4. My pay gov Religious Exemptions and Special Rules for MinistersForm W-2. My pay gov Self-employed. My pay gov Employees. My pay gov 5. My pay gov 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. My pay gov 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. My pay gov Special Rules for Paying TaxesCommon Paymaster Agents Reporting Agents Employee's Portion of Taxes Paid by Employer International Social Security Agreements 8. My pay gov Pensions and AnnuitiesFederal Income Tax Withholding 9. My pay gov Alternative Methods for Figuring WithholdingTerm of continuous employment. My pay gov 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. My pay gov Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersWithholding Tables How To Get Tax Help 1. My pay gov 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. My pay gov The person performing the services may be: An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee. My pay gov This discussion explains these four categories. My pay gov 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. My pay gov 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. My pay gov However, in some cases you may be required to withhold under the backup withholding requirements on these payments. My pay gov See Publication 15 (Circular E) for information on backup withholding. My pay gov 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. My pay gov However, whether such people are employees or independent contractors depends on the facts in each case. My pay gov 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. My pay gov 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. My pay gov This is so even when you give the employee freedom of action. My pay gov What matters is that you have the right to control the details of how the services are performed. My pay gov For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2. My pay gov If you have an employer-employee relationship, it makes no difference how it is labeled. My pay gov The substance of the relationship, not the label, governs the worker's status. My pay gov It does not matter whether the individual is employed full time or part time. My pay gov For employment tax purposes, no distinction is made between classes of employees. My pay gov Superintendents, managers, and other supervisory personnel are all employees. My pay gov 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. My pay gov A director of a corporation is not an employee with respect to services performed as a director. My pay gov You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. My pay gov However, the wages of certain employees may be exempt from one or more of these taxes. My pay gov See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4). My pay gov Leased employees. My pay gov   Under certain circumstances, a firm that furnishes workers to other firms is the employer of those workers for employment tax purposes. My pay gov 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. My pay gov   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. My pay gov 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. My pay gov 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. My pay gov For information on employee leasing as it relates to pension plan qualification requirements, see Leased employee in Publication 560, Retirement Plans for Small Business. My pay gov Additional information. My pay gov   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. My pay gov 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. My pay gov 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 . My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. My pay gov The work performed for you must be the salesperson's principal business activity. My pay gov See Salesperson in section 2. My pay gov Social security and Medicare taxes. My pay gov   You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. My pay gov The service contract states or implies that substantially all the services are to be performed personally by them. My pay gov 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). My pay gov The services are performed on a continuing basis for the same payer. My pay gov Federal unemployment (FUTA) tax. My pay gov   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. My pay gov 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. My pay gov Income tax. My pay gov   Do not withhold federal income tax from the wages of statutory employees. My pay gov Reporting payments to statutory employees. My pay gov   Furnish Form W-2 to a statutory employee, and check “Statutory employee” in box 13. My pay gov Show your payments to the employee as “other compensation” in box 1. My pay gov 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. My pay gov The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. My pay gov 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. My pay gov 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. My pay gov H-2A agricultural workers. My pay gov   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. My pay gov Statutory Nonemployees There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. My pay gov 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. My pay gov Direct sellers. My pay gov   Direct sellers include persons falling within any of the following three groups. My pay gov 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. My pay gov 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. My pay gov 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). My pay gov   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. My pay gov Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. My pay gov Licensed real estate agents. My pay gov   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. My pay gov Companion sitters. My pay gov   Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. My pay gov 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. My pay gov Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. My pay gov Misclassification of Employees Consequences of treating an employee as an independent contractor. My pay gov   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. My pay gov See section 2 in Publication 15 (Circular E) for more information. My pay gov Relief provision. My pay gov   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. My pay gov To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. My pay gov You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. My pay gov Technical service specialists. My pay gov   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. My pay gov 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. My pay gov   This limit on the application of the rule does not affect the determination of whether such workers are employees under the common-law rules. My pay gov The common-law rules control whether the specialist is treated as an employee or an independent contractor. My pay gov 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. My pay gov Test proctors and room supervisors. My pay gov   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. My pay gov Voluntary Classification Settlement Program (VCSP). My pay gov   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. My pay gov To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). My pay gov For more information, visit IRS. My pay gov gov and enter “VCSP” in the search box. My pay gov 2. My pay gov 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. My pay gov An employer does not generally have to withhold or pay over any federal taxes on payments to independent contractors. My pay gov 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. My pay gov In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. My pay gov 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. My pay gov These facts are discussed next. My pay gov Behavioral control. My pay gov   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. My pay gov   An employee is generally subject to the business' instructions about when, where, and how to work. My pay gov All of the following are examples of types of instructions about how to do work. My pay gov When and where to do the work. My pay gov What tools or equipment to use. My pay gov What workers to hire or to assist with the work. My pay gov Where to purchase supplies and services. My pay gov What work must be performed by a specified  individual. My pay gov What order or sequence to follow. My pay gov   The amount of instruction needed varies among different jobs. My pay gov 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. My pay gov A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. My pay gov 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. My pay gov Training that the business gives to the worker. My pay gov   An employee may be trained to perform services in a particular manner. My pay gov Independent contractors ordinarily use their own methods. My pay gov Financial control. My pay gov   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. My pay gov   Independent contractors are more likely to have unreimbursed expenses than are employees. My pay gov Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. My pay gov However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer. My pay gov The extent of the worker's investment. My pay gov   An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. My pay gov However, a significant investment is not necessary for independent contractor status. My pay gov The extent to which the worker makes his or her services available to the relevant market. My pay gov   An independent contractor is generally free to seek out business opportunities. My pay gov Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. My pay gov How the business pays the worker. My pay gov   An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. My pay gov This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. My pay gov An independent contractor is often paid a flat fee or on a time and materials basis for the job. My pay gov However, it is common in some professions, such as law, to pay independent contractors hourly. My pay gov The extent to which the worker can realize a profit or loss. My pay gov   An independent contractor can make a profit or loss. My pay gov Type of relationship. My pay gov   Facts that show the parties' type of relationship include: Written contracts describing the relationship the parties intended to create. My pay gov Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. My pay gov The permanency of the relationship. My pay gov 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. My pay gov The extent to which services performed by the worker are a key aspect of the regular business of the company. My pay gov 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. My pay gov 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. My pay gov This would indicate an employer-employee relationship. My pay gov IRS help. My pay gov   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. My pay gov Industry Examples The following examples may help you properly classify your workers. My pay gov Building and Construction Industry Example 1. My pay gov Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. My pay gov She did not advance funds to help him carry on the work. My pay gov She makes direct payments to the suppliers for all necessary materials. My pay gov She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. My pay gov She pays them an hourly rate and exercises almost constant supervision over the work. My pay gov Jerry is not free to transfer his assistants to other jobs. My pay gov He may not work on other jobs while working for Wilma. My pay gov He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. My pay gov He and his assistants perform personal services for hourly wages. My pay gov Jerry Jones and his assistants are employees of Wilma White. My pay gov Example 2. My pay gov Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. My pay gov He uses his own tools and performs services in the order designated by the corporation and according to its specifications. My pay gov The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. My pay gov He does not have a place of business or hold himself out to perform similar services for others. My pay gov Either party can end the services at any time. My pay gov Milton Manning is an employee of the corporation. My pay gov Example 3. My pay gov Wallace Black agreed with the Sawdust Co. My pay gov to supply the construction labor for a group of houses. My pay gov The company agreed to pay all construction costs. My pay gov However, he supplies all the tools and equipment. My pay gov He performs personal services as a carpenter and mechanic for an hourly wage. My pay gov He also acts as superintendent and foreman and engages other individuals to assist him. My pay gov The company has the right to select, approve, or discharge any helper. My pay gov A company representative makes frequent inspections of the construction site. My pay gov When a house is finished, Wallace is paid a certain percentage of its costs. My pay gov He is not responsible for faults, defects of construction, or wasteful operation. My pay gov At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. My pay gov The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages. My pay gov Wallace Black and his assistants are employees of the Sawdust Co. My pay gov Example 4. My pay gov Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. My pay gov A signed contract established a flat amount for the services rendered by Bill Plum. My pay gov Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. My pay gov He hires his own roofers who are treated as employees for federal employment tax purposes. My pay gov If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. My pay gov Bill Plum, doing business as Plum Roofing, is an independent contractor. My pay gov Example 5. My pay gov Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. My pay gov She is to receive $1,280 every 2 weeks for the next 10 weeks. My pay gov This is not considered payment by the hour. My pay gov Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. My pay gov She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. My pay gov Vera is an independent contractor. My pay gov Trucking Industry Example. My pay gov Rose Trucking contracts to deliver material for Forest, Inc. My pay gov , at $140 per ton. My pay gov Rose Trucking is not paid for any articles that are not delivered. My pay gov At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. My pay gov All operating expenses, including insurance coverage, are paid by Jan Rose. My pay gov All equipment is owned or rented by Jan and she is responsible for all maintenance. My pay gov None of the drivers are provided by Forest, Inc. My pay gov Jan Rose, operating as Rose Trucking, is an independent contractor. My pay gov Computer Industry Example. My pay gov Steve Smith, a computer programmer, is laid off when Megabyte, Inc. My pay gov , downsizes. My pay gov Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. My pay gov 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. My pay gov Megabyte provides Steve with no instructions beyond the specifications for the product itself. My pay gov 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. My pay gov Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. My pay gov Steve works at home and is not expected or allowed to attend meetings of the software development group. My pay gov Steve is an independent contractor. My pay gov Automobile Industry Example 1. My pay gov Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. My pay gov She works six days a week and is on duty in Bob's showroom on certain assigned days and times. My pay gov She appraises trade-ins, but her appraisals are subject to the sales manager's approval. My pay gov Lists of prospective customers belong to the dealer. My pay gov She is required to develop leads and report results to the sales manager. My pay gov Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. My pay gov She is paid a commission and is eligible for prizes and bonuses offered by Bob. My pay gov Bob also pays the cost of health insurance and group-term life insurance for Donna. My pay gov Donna is an employee of Bob Blue. My pay gov Example 2. My pay gov Sam Sparks performs auto repair services in the repair department of an auto sales company. My pay gov He works regular hours and is paid on a percentage basis. My pay gov He has no investment in the repair department. My pay gov 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. My pay gov Sam is an employee of the sales company. My pay gov Example 3. My pay gov An auto sales agency furnishes space for Helen Bach to perform auto repair services. My pay gov She provides her own tools, equipment, and supplies. My pay gov She seeks out business from insurance adjusters and other individuals and does all of the body and paint work that comes to the agency. My pay gov 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. My pay gov Helen is an independent contractor and the helpers are her employees. My pay gov Attorney Example. My pay gov 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. My pay gov Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. My pay gov Donna has a part-time receptionist who also does the bookkeeping. My pay gov She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. My pay gov For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. My pay gov Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. My pay gov 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. My pay gov Donna is an independent contractor. My pay gov Taxicab Driver Example. My pay gov Tom Spruce rents a cab from Taft Cab Co. My pay gov for $150 per day. My pay gov He pays the costs of maintaining and operating the cab. My pay gov Tom Spruce keeps all fares that he receives from customers. My pay gov Although he receives the benefit of Taft's two-way radio communication equipment, dispatcher, and advertising, these items benefit both Taft and Tom Spruce. My pay gov Tom Spruce is an independent contractor. My pay gov Salesperson To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. My pay gov 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). My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 3. My pay gov Employees of Exempt Organizations Many nonprofit organizations are exempt from federal income tax. My pay gov Although they do not have to pay federal income tax themselves, they must still withhold federal income tax from the pay of their employees. My pay gov However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees. My pay gov Section 501(c)(3) organizations. My pay gov   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. My pay gov These organizations are usually corporations and are exempt from federal income tax under section 501(a). My pay gov Social security and Medicare taxes. My pay gov   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. My pay gov The organization pays an employee less than $100 in a calendar year. My pay gov 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. My pay gov 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. My pay gov   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. My pay gov 28 or more in a year. My pay gov 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. My pay gov See Members of recognized religious sects opposed to insurance in section 4. My pay gov FUTA tax. My pay gov   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. My pay gov This exemption cannot be waived. My pay gov Do not file Form 940 to report wages paid by these organizations or pay the tax. My pay gov Note. My pay gov 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. My pay gov Other than section 501(c)(3) organizations. My pay gov   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. My pay gov However, these organizations are not exempt from withholding federal income, social security, or Medicare tax from their employees' pay, or from paying FUTA tax. My pay gov Two special rules for social security, Medicare, and FUTA taxes apply. My pay gov 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. My pay gov 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. My pay gov The above rules do not apply to employees who work for pension plans and other similar organizations described in section 401(a). My pay gov 4. My pay gov Religious Exemptions and Special Rules for Ministers Special rules apply to the treatment of ministers for social security and Medicare tax purposes. My pay gov An exemption from social security and Medicare taxes is available for ministers and certain other religious workers and members of certain recognized religious sects. My pay gov For more information on getting an exemption, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. My pay gov Ministers. My pay gov   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. My pay gov 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. My pay gov   Ministers are employees if they perform services in the exercise of ministry and are subject to your will and control. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov For more information, see Publication 517. My pay gov Form W-2. My pay gov   If your minister is an employee, report all taxable compensation as wages in box 1 on Form W-2. My pay gov Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Publication 15 (Circular E). My pay gov Do not include a parsonage allowance (excludable housing allowance) in this amount. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov For more information on ministers, see Publication 517. My pay gov Exemptions for ministers and others. My pay gov   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. My pay gov 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. My pay gov The exemption applies only to qualified services performed for the religious organization. My pay gov See Revenue Procedure 91-20, 1991-1 C. My pay gov B. My pay gov 524, for guidelines to determine whether an organization is a religious order or whether an individual is a member of a religious order. My pay gov   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. My pay gov See Publication 517 for more information about claiming an exemption from self-employment tax using Form 4361. My pay gov Members of recognized religious sects opposed to insurance. My pay gov   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. My pay gov 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). My pay gov If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. My pay gov Religious opposition based on the teachings of the sect is the only legal basis for the exemption. My pay gov In addition, your religious sect (or division) must have existed since December 31, 1950. My pay gov Self-employed. My pay gov   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. My pay gov Employees. My pay gov   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. My pay gov This applies to partnerships only if each partner is a member of the sect. My pay gov 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. My pay gov To get the exemption, the employee must file Form 4029. My pay gov   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. My pay gov 5. My pay gov Wages and Other Compensation Publication 15 (Circular E) provides a general discussion of taxable wages. My pay gov Publication 15-B discusses fringe benefits. My pay gov The following topics supplement those discussions. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov See chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Publication 15 (Circular E), for more information. My pay gov These rules generally apply to temporary work assignments both inside and outside the U. My pay gov S. My pay gov 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. My pay gov 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. My pay gov Excludable employee achievement awards also are not subject to FUTA tax. My pay gov Limits. My pay gov   The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. My pay gov A higher limit of $1,600 applies to qualified plan awards. My pay gov Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. My pay gov 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. My pay gov   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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov These amounts are reportable on Form W-2. My pay gov 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. My pay gov Any amounts that you pay for room and board are not excludable from the recipient's gross income. My pay gov A qualified scholarship is not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. My pay gov For more information, see Publication 970, Tax Benefits for Education. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov Back Pay Treat back pay as wages in the year paid and withhold and pay employment taxes as required. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov Amounts that represent a return to the employee of amounts previously subject to tax are not taxable and are not subject to withholding. My pay gov 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. My pay gov It does not matter whether the separation is temporary or permanent. My pay gov 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. My pay gov To qualify as supplemental unemployment benefits for these purposes, the benefits must meet the following requirements. My pay gov Benefits are paid only to unemployed former employees who are laid off by the employer. My pay gov Eligibility for benefits depends on meeting prescribed conditions after termination. My pay gov 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. My pay gov The right to benefits does not accrue until a prescribed period after termination. My pay gov Benefits are not attributable to the performance of particular services. My pay gov No employee has any right to the benefits until qualified and eligible to receive benefits. My pay gov Benefits may not be paid in a lump sum. My pay gov Withholding on taxable supplemental unemployment benefits must be based on the withholding certificate (Form W-4) that the employee gave to you. My pay gov Golden Parachute Payments A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. My pay gov 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. My pay gov Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. My pay gov See Regulations section 1. My pay gov 280G-1 for more information. My pay gov No deduction is allowed to the corporation for any excess parachute payment. My pay gov To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. My pay gov A parachute payment for purposes of section 280G is any payment that meets all of the following. My pay gov The payment is in the nature of compensation. My pay gov The payment is to, or for the benefit of, a disqualified individual. My pay gov 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. My pay gov 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. My pay gov The payment has an aggregate present value of at least three times the individual's base amount. My pay gov The base amount is the average annual compensation for service includible in the individual's gross income over the most recent 5 taxable years. My pay gov An excess parachute payment amount is the excess of any parachute payment over the base amount. My pay gov For more information, see Regulations section 1. My pay gov 280G-1. My pay gov The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. My pay gov If the recipient is an employee, the 20% excise tax is to be withheld by the corporation. My pay gov Example. My pay gov An officer of a corporation receives a golden parachute payment of $400,000. My pay gov This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. My pay gov The excess parachute payment is $300,000 ($400,000 minus $100,000). My pay gov The corporation cannot deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). My pay gov Reporting golden parachute payments. My pay gov   Golden parachute payments to employees must be reported on Form W-2. My pay gov See the General Instructions for Forms W-2 and W-3 for details. My pay gov For nonemployee reporting of these payments, see Box 7. My pay gov Nonemployee Compensation in the Instructions for Form 1099-MISC. My pay gov Exempt payments. My pay gov   Payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules. My pay gov See section 280G(b)(5) and (6) for more information. My pay gov 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. My pay gov This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. My pay gov This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. My pay gov Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). My pay gov The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. My pay gov You can get these rates by calling 1-800-829-4933 or by visiting IRS. My pay gov gov. My pay gov For more information, see section 7872 and its related regulations. My pay gov 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. My pay gov 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. My pay gov Do not include these amounts in the income of the transferors. My pay gov These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies. My pay gov 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. My pay gov 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. My pay gov Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. My pay gov 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. My pay gov Specific rules for reporting are provided in the instructions to the forms. My pay gov The provisions do not affect the application or reporting of social security, Medicare, or FUTA taxes. My pay gov 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. My pay gov For more information about nonqualified deferred compensation plans, see Regulations sections 1. My pay gov 409A-1 through 1. My pay gov 409A-6. My pay gov Notice 2008-113 provides guidance on the correction of certain operation failures of a NQDC plan. My pay gov Notice 2008-113, 2008-51 I. My pay gov R. My pay gov B. My pay gov 1305, is available at www. My pay gov irs. My pay gov gov/irb/2008-51_IRB/ar12. My pay gov html. My pay gov Also see Notice 2010-6, 2010-3 I. My pay gov R. My pay gov B. My pay gov 275, available at www. My pay gov irs. My pay gov gov/irb/2010-03_IRB/ar08. My pay gov html and Notice 2010-80, 2010-51 I. My pay gov R. My pay gov B. My pay gov 853, available at www. My pay gov irs. My pay gov gov/irb/2010-51_IRB/ar08. My pay gov html. My pay gov Social security, Medicare, and FUTA taxes. My pay gov   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. My pay gov   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. My pay gov 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. My pay gov You will have to determine later, when the amount is reasonably ascertainable, whether any additional taxes are required. My pay gov 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. My pay gov For more information, see Regulations sections 31. My pay gov 3121(v)(2)-1 and 31. My pay gov 3306(r)(2)-1. My pay gov 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. My pay gov 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. My pay gov See Regulations section 31. My pay gov 3121(a)(5)-2 for the definition of a salary reduction agreement. My pay gov 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. My pay gov These excluded amounts are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. My pay gov However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. My pay gov See Publication 560 for more information about SEPs. My pay gov Salary reduction simplified employee pensions (SARSEP) repealed. My pay gov   You may not establish a SARSEP after 1996. My pay gov However, SARSEPs established before January 1, 1997, may continue to receive contributions. My pay gov 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. My pay gov An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. My pay gov However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. My pay gov For more information about SIMPLE retirement plans, see Publication 560. My pay gov 6. My pay gov Sick Pay Reporting The IRS expects to change the third-party sick pay recap reporting and filing requirements for wages paid in 2014. My pay gov Information about this change will be included in the revision of Publication 15-A that is expected to post to IRS. My pay gov gov in December 2014. My pay gov Special rules apply to the reporting of sick pay payments to employees. My pay gov How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company. My pay gov Sick pay is usually subject to social security, Medicare, and FUTA taxes. My pay gov For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. My pay gov Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it. My pay gov 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. My pay gov It may be paid by either the employer or a third party, such as an insurance company. My pay gov Sick pay includes both short- and long-term benefits. My pay gov It is often expressed as a percentage of the employee's regular wages. My pay gov Payments That Are Not Sick Pay Sick pay does not include the following payments. My pay gov Disability retirement payments. My pay gov Disability retirement payments are not sick pay and are not discussed in this section. My pay gov Those payments are subject to the rules for federal income tax withholding from pensions and annuities. My pay gov See section 8. My pay gov Workers' compensation. My pay gov 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. My pay gov But see Payments in the nature of workers' compensation—public employees next. My pay gov Payments in the nature of workers' compensation—public employees. My pay gov 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. My pay gov 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. My pay gov Payments under a statute in the nature of a workers' compensation law are not sick pay and are not subject to employment taxes. My pay gov For more information, see Regulations section 31. My pay gov 3121(a)(2)-1. My pay gov Medical expense payments. My pay gov 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. My pay gov Payments unrelated to absence from work. My pay gov Accident or health insurance payments unrelated to absence from work are not sick pay and are not subject to employment taxes. My pay gov 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. My pay gov Example. My pay gov Donald was injured in a car accident and lost an eye. My pay gov Under a policy paid for by Donald's employer, Delta Insurance Co. My pay gov paid Donald $20,000 as compensation for the loss of his eye. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov Definition of employer. My pay gov   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. My pay gov Note. My pay gov 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). My pay gov Third-Party Payers of Sick Pay Employer's agent. My pay gov   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. My pay gov A third party may be your agent even if the third party is responsible for determining which employees are eligible to receive payments. My pay gov For example, if a third party provides administrative services only, the third party is your agent. My pay gov 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. My pay gov Whether an insurance company or other third party is your agent depends on the terms of their agreement with you. My pay gov   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. My pay gov This responsibility remains with you. My pay gov However, under an exception to this rule, the parties may enter into an agreement that makes the third-party agent responsible for employment taxes. My pay gov 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. My pay gov Third party not employer's agent. My pay gov   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. My pay gov   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. My pay gov This liability is transferred if the third party takes the following steps. My pay gov Withholds the employee social security and Medicare taxes from the sick pay payments. My pay gov Makes timely deposits of the employee social security and Medicare taxes. My pay gov Notifies the employer for whom the employee normally works of the payments on which employee taxes were withheld and deposited. My pay gov 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. My pay gov 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. My pay gov 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. My pay gov For multi-employer plans, see the special rule discussed next. My pay gov Multi-employer plan timing rule. My pay gov   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. My pay gov If the third-party insurer making the payments complies wi