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Ri 1040nr Publication 15 - Main Content Table of Contents 1. Ri 1040nr Employer Identification Number (EIN) 2. Ri 1040nr Who Are Employees?Relief provisions. Ri 1040nr Business Owned and Operated by Spouses 3. Ri 1040nr Family Employees 4. Ri 1040nr Employee's Social Security Number (SSN)Registering for SSNVS. Ri 1040nr 5. Ri 1040nr Wages and Other CompensationAccountable plan. Ri 1040nr Nonaccountable plan. Ri 1040nr Per diem or other fixed allowance. Ri 1040nr 50% test. Ri 1040nr Health Savings Accounts and medical savings accounts. Ri 1040nr Nontaxable fringe benefits. Ri 1040nr When fringe benefits are treated as paid. Ri 1040nr Valuation of fringe benefits. Ri 1040nr Withholding on fringe benefits. Ri 1040nr Depositing taxes on fringe benefits. Ri 1040nr 6. Ri 1040nr TipsOrdering rule. Ri 1040nr 7. Ri 1040nr Supplemental Wages 8. Ri 1040nr Payroll Period 9. Ri 1040nr Withholding From Employees' WagesIncome Tax Withholding Social Security and Medicare Taxes Part-Time Workers 10. Ri 1040nr Required Notice to Employees About the Earned Income Credit (EIC) 11. Ri 1040nr Depositing TaxesWhen To Deposit How To Deposit Deposit Penalties 12. Ri 1040nr Filing Form 941 or Form 944 13. Ri 1040nr Reporting Adjustments to Form 941 or Form 944Current Period Adjustments Prior Period Adjustments Wage Repayments 14. Ri 1040nr Federal Unemployment (FUTA) TaxSuccessor employer. Ri 1040nr Household employees. Ri 1040nr When to deposit. Ri 1040nr Household employees. Ri 1040nr Electronic filing by reporting agents. Ri 1040nr 16. Ri 1040nr How To Use the Income Tax Withholding TablesWage Bracket Method Percentage Method Alternative Methods of Income Tax Withholding How To Get Tax Help 1. Ri 1040nr Employer Identification Number (EIN) If you are required to report employment taxes or give tax statements to employees or annuitants, you need an EIN. Ri 1040nr The EIN is a nine-digit number the IRS issues. Ri 1040nr The digits are arranged as follows: 00-0000000. Ri 1040nr It is used to identify the tax accounts of employers and certain others who have no employees. Ri 1040nr Use your EIN on all of the items you send to the IRS and SSA. Ri 1040nr For more information, see Publication 1635, Employer Identification Number: Understanding Your EIN. Ri 1040nr If you do not have an EIN, you may apply for one online. Ri 1040nr Go to the IRS. Ri 1040nr gov and click on the Apply for an EIN Online link under Tools. Ri 1040nr You may also apply for an EIN by calling 1-800-829-4933, or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Ri 1040nr Do not use an SSN in place of an EIN. Ri 1040nr You should have only one EIN. Ri 1040nr If you have more than one and are not sure which one to use, call 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Ri 1040nr Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Ri 1040nr The IRS will tell you which number to use. Ri 1040nr If you took over another employer's business (see Successor employer in section 9), do not use that employer's EIN. Ri 1040nr If you have applied for an EIN but do not have your EIN by the time a return is due, file a paper return and write “Applied For” and the date you applied for it in the space shown for the number. Ri 1040nr 2. Ri 1040nr Who Are Employees? Generally, employees are defined either under common law or under statutes for certain situations. Ri 1040nr See Publication 15-A for details on statutory employees and nonemployees. Ri 1040nr Employee status under common law. Ri 1040nr   Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. Ri 1040nr This is so even when you give the employee freedom of action. Ri 1040nr What matters is that you have the right to control the details of how the services are performed. Ri 1040nr See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Ri 1040nr   Generally, people in business for themselves are not employees. Ri 1040nr For example, doctors, lawyers, veterinarians, and others in an independent trade in which they offer their services to the public are usually not employees. Ri 1040nr However, if the business is incorporated, corporate officers who work in the business are employees of the corporation. Ri 1040nr   If an employer-employee relationship exists, it does not matter what it is called. Ri 1040nr The employee may be called an agent or independent contractor. Ri 1040nr It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. Ri 1040nr Statutory employees. Ri 1040nr   If someone who works for you is not an employee under the common law rules discussed earlier, do not withhold federal income tax from his or her pay, unless backup withholding applies. Ri 1040nr Although the following persons may not be common law employees, they are considered employees by statute for social security, Medicare, and FUTA tax purposes under certain conditions. Ri 1040nr An agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else. Ri 1040nr A full-time life insurance salesperson who sells primarily for one company. Ri 1040nr A homeworker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates. Ri 1040nr A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. Ri 1040nr The orders must be for merchandise for resale or supplies for use in the customer's business. Ri 1040nr The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging. Ri 1040nr    Statutory nonemployees. Ri 1040nr   Direct sellers, qualified real estate agents, and certain companion sitters are, by law, considered nonemployees. Ri 1040nr They are generally treated as self-employed for all federal tax purposes, including income and employment taxes. Ri 1040nr H-2A agricultural workers. Ri 1040nr   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Ri 1040nr Treating employees as nonemployees. Ri 1040nr   You will generally be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold these taxes because you treated an employee as a nonemployee. Ri 1040nr You may be able to calculate your liability using special section 3509 rates for the employee share of social security and Medicare taxes and the federal income tax withholding. Ri 1040nr The applicable rates depend on whether you filed required Forms 1099. Ri 1040nr You cannot recover the employee share of social security, or Medicare tax, or income tax withholding from the employee if the tax is paid under section 3509. Ri 1040nr You are liable for the income tax withholding regardless of whether the employee paid income tax on the wages. Ri 1040nr You continue to owe the full employer share of social security and Medicare taxes. Ri 1040nr The employee remains liable for the employee share of social security and Medicare taxes. Ri 1040nr See Internal Revenue Code section 3509 for details. Ri 1040nr Also see the Instructions for Form 941-X. Ri 1040nr   Section 3509 rates are not available if you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes. Ri 1040nr Section 3509 is not available for reclassifying statutory employees. Ri 1040nr See Statutory employees , earlier in this section. Ri 1040nr   If the employer issued required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Ri 1040nr 2% plus 20% of the employee rate (see the Instructions for Form 941-X). Ri 1040nr For Medicare taxes; employer rate of 1. Ri 1040nr 45% plus 20% of the employee rate of 1. Ri 1040nr 45%, for a total rate of 1. Ri 1040nr 74% of wages. Ri 1040nr For Additional Medicare Tax; 0. Ri 1040nr 18% (20% of the employee rate of 0. Ri 1040nr 9%) of wages subject to Additional Medicare Tax. Ri 1040nr For income tax withholding, the rate is 1. Ri 1040nr 5% of wages. Ri 1040nr   If the employer did not issue required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Ri 1040nr 2% plus 40% of the employee rate (see the Instructions for Form 941-X). Ri 1040nr For Medicare taxes; employer rate of 1. Ri 1040nr 45% plus 40% of the employee rate of 1. Ri 1040nr 45%, for a total rate of 2. Ri 1040nr 03% of wages. Ri 1040nr For Additional Medicare Tax; 0. Ri 1040nr 36% (40% of the employee rate of 0. Ri 1040nr 9%) of wages subject to Additional Medicare Tax. Ri 1040nr For income tax withholding, the rate is 3. Ri 1040nr 0% of wages. Ri 1040nr Relief provisions. Ri 1040nr   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. Ri 1040nr To get this relief, you must file all required federal tax returns, including information returns, on a basis consistent with your treatment of the worker. Ri 1040nr You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. Ri 1040nr See Publication 1976, Do You Qualify for Relief Under Section 530. Ri 1040nr IRS help. Ri 1040nr   If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Ri 1040nr Voluntary Classification Settlement Program (VCSP). Ri 1040nr   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. Ri 1040nr To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Ri 1040nr For more information visit IRS. Ri 1040nr gov and enter “VCSP” in the search box. Ri 1040nr Business Owned and Operated by Spouses If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Ri 1040nr See Publication 541, Partnerships, for more details. Ri 1040nr The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. Ri 1040nr Exception—Qualified joint venture. Ri 1040nr   For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. Ri 1040nr A qualified joint venture conducts a trade or business where: The only members of the joint venture are spouses who file a joint income tax return, Both spouses materially participate (see Material participation in the Instructions for Schedule C (Form 1040), line G) in the trade or business (mere joint ownership of property is not enough), Both spouses elect to not be treated as a partnership, and The business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or limited liability company (LLC). Ri 1040nr   To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse's interest in the venture, and reported on separate Schedules C or F as sole proprietors. Ri 1040nr Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable. Ri 1040nr   Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. Ri 1040nr If employment taxes are owed by the qualified joint venture, either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse's sole proprietorship. Ri 1040nr Generally, filing as a qualified joint venture will not increase the spouses' total tax owed on the joint income tax return. Ri 1040nr However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return. Ri 1040nr    Note. Ri 1040nr If your spouse is your employee, not your partner, see One spouse employed by another in section 3. Ri 1040nr   For more information on qualified joint ventures, visit IRS. Ri 1040nr gov and enter “qualified joint venture” in the search box. Ri 1040nr Exception—Community income. Ri 1040nr   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Ri 1040nr S. Ri 1040nr possession, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. Ri 1040nr You may still make an election to be taxed as a qualified joint venture instead of a partnership. Ri 1040nr See Exception—Qualified joint venture , earlier. Ri 1040nr 3. Ri 1040nr Family Employees Child employed by parents. Ri 1040nr   Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Ri 1040nr If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they are not subject to social security and Medicare taxes until the child reaches age 21. Ri 1040nr However, see Covered services of a child or spouse , later in this section. Ri 1040nr Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, are not subject to FUTA tax. Ri 1040nr Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child is not regularly employed to do such work. Ri 1040nr One spouse employed by another. Ri 1040nr   The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax. Ri 1040nr However, the payments for services of one spouse employed by another in other than a trade or business, such as domestic service in a private home, are not subject to social security, Medicare, and FUTA taxes. Ri 1040nr Covered services of a child or spouse. Ri 1040nr   The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for: A corporation, even if it is controlled by the child's parent or the individual's spouse; A partnership, even if the child's parent is a partner, unless each partner is a parent of the child; A partnership, even if the individual's spouse is a partner; or An estate, even if it is the estate of a deceased parent. Ri 1040nr Parent employed by son or daughter. Ri 1040nr   When the employer is a son or daughter employing his or her parent the following rules apply. Ri 1040nr Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes. Ri 1040nr Payments for the services of a parent not in the son’s or daughter’s (the employer’s) trade or business are generally not subject to social security and Medicare taxes. Ri 1040nr    Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply: The parent is employed by his or her son or daughter; The son or daughter (the employer) has a child or stepchild living in the home; The son or daughter (the employer) is a widow or widower, divorced, or living with a spouse who, because of a mental or physical condition, cannot care for the child or stepchild for at least 4 continuous weeks in a calendar quarter; and The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition. Ri 1040nr   Payments made to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided. Ri 1040nr 4. Ri 1040nr Employee's Social Security Number (SSN) You are required to get each employee's name and SSN and to enter them on Form W-2. Ri 1040nr This requirement also applies to resident and nonresident alien employees. Ri 1040nr You should ask your employee to show you his or her social security card. Ri 1040nr The employee may show the card if it is available. Ri 1040nr Do not accept a social security card that says “Not valid for employment. Ri 1040nr ” A social security number issued with this legend does not permit employment. Ri 1040nr You may, but are not required to, photocopy the social security card if the employee provides it. Ri 1040nr If you do not provide the correct employee name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. Ri 1040nr See Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs, for information on the requirement to solicit the employee's SSN. Ri 1040nr Applying for a social security card. Ri 1040nr   Any employee who is legally eligible to work in the United States and does not have a social security card can get one by completing Form SS-5, Application for a Social Security Card, and submitting the necessary documentation. Ri 1040nr You can get Form SS-5 at SSA offices, by calling 1-800-772-1213, or from the SSA website at www. Ri 1040nr socialsecurity. Ri 1040nr gov/online/ss-5. Ri 1040nr html. Ri 1040nr The employee must complete and sign Form SS-5; it cannot be filed by the employer. Ri 1040nr You may be asked to supply a letter to accompany Form SS-5 if the employee has exceeded his or her yearly or lifetime limit for the number of replacement cards allowed. Ri 1040nr Applying for a social security number. Ri 1040nr   If you file Form W-2 on paper and your employee applied for an SSN but does not have one when you must file Form W-2, enter “Applied For” on the form. Ri 1040nr If you are filing electronically, enter all zeros (000-00-000) in the social security number field. Ri 1040nr When the employee receives the SSN, file Copy A of Form W-2c, Corrected Wage and Tax Statement, with the SSA to show the employee's SSN. Ri 1040nr Furnish copies B, C, and 2 of Form W-2c to the employee. Ri 1040nr Up to 25 Forms W-2c for each Form W-3c, Transmittal of Corrected Wage and Tax Statements, may now be filed per session over the Internet, with no limit on the number of sessions. Ri 1040nr For more information, visit the SSA's Employer W-2 Filing Instructions & Information webpage at www. Ri 1040nr socialsecurity. Ri 1040nr gov/employer. Ri 1040nr Advise your employee to correct the SSN on his or her original Form W-2. Ri 1040nr Correctly record the employee's name and SSN. Ri 1040nr   Record the name and number of each employee as they are shown on the employee's social security card. Ri 1040nr If the employee's name is not correct as shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA. Ri 1040nr Continue to report the employee's wages under the old name until the employee shows you an updated social security card with the new name. Ri 1040nr If the SSA issues the employee a replacement card after a name change, or a new card with a different social security number after a change in alien work status, file a Form W-2c to correct the name/SSN reported for the most recently filed Form W-2. Ri 1040nr It is not necessary to correct other years if the previous name and number were used for years before the most recent Form W-2. Ri 1040nr IRS individual taxpayer identification numbers (ITINs) for aliens. Ri 1040nr   Do not accept an ITIN in place of an SSN for employee identification or for work. Ri 1040nr An ITIN is only available to resident and nonresident aliens who are not eligible for U. Ri 1040nr S. Ri 1040nr employment and need identification for other tax purposes. Ri 1040nr You can identify an ITIN because it is a nine-digit number, beginning with the number “9” with either a “7” or “8” as the fourth digit and is formatted like an SSN (for example, 9NN-7N-NNNN). Ri 1040nr    An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN. Ri 1040nr If the individual is currently eligible to work in the United States, instruct the individual to apply for an SSN and follow the instructions under Applying for a social security number, earlier. Ri 1040nr Do not use an ITIN in place of an SSN on Form W-2. Ri 1040nr Verification of social security numbers. Ri 1040nr   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive the results the next business day. Ri 1040nr Visit www. Ri 1040nr socialsecurity. Ri 1040nr gov/employer/ssnv. Ri 1040nr htm for more information. Ri 1040nr Registering for SSNVS. Ri 1040nr   You must register online and receive authorization from your employer to use SSNVS. Ri 1040nr To register, visit SSA's website at www. Ri 1040nr ssa. Ri 1040nr gov/employer and click on the Business Services Online link. Ri 1040nr Follow the registration instructions to obtain a user identification (ID) and password. Ri 1040nr You will need to provide the following information about yourself and your company. Ri 1040nr Name. Ri 1040nr SSN. Ri 1040nr Date of birth. Ri 1040nr Type of employer. Ri 1040nr EIN. Ri 1040nr Company name, address, and telephone number. Ri 1040nr Email address. Ri 1040nr   When you have completed the online registration process, SSA will mail a one-time activation code to your employer. Ri 1040nr You must enter the activation code online to use SSNVS. Ri 1040nr 5. Ri 1040nr Wages and Other Compensation Wages subject to federal employment taxes generally include all pay you give to an employee for services performed. Ri 1040nr The pay may be in cash or in other forms. Ri 1040nr It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. Ri 1040nr It does not matter how you measure or make the payments. Ri 1040nr Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and FUTA taxes and income tax withholding. Ri 1040nr Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes. Ri 1040nr More information. Ri 1040nr   See section 6 for a discussion of tips and section 7 for a discussion of supplemental wages. Ri 1040nr Also, see section 15 for exceptions to the general rules for wages. Ri 1040nr Publication 15-A provides additional information on wages, including nonqualified deferred compensation, and other compensation. Ri 1040nr Publication 15-B provides information on other forms of compensation, including: Accident and health benefits, Achievement awards, Adoption assistance, Athletic facilities, De minimis (minimal) benefits, Dependent care assistance, Educational assistance, Employee discounts, Employee stock options, Employer-provided cell phones, Group-term life insurance coverage, Health Savings Accounts, Lodging on your business premises, Meals, Moving expense reimbursements, No-additional-cost services, Retirement planning services, Transportation (commuting) benefits, Tuition reduction, and Working condition benefits. Ri 1040nr Employee business expense reimbursements. Ri 1040nr   A reimbursement or allowance arrangement is a system by which you pay the advances, reimbursements, and charges for your employees' business expenses. Ri 1040nr How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan. Ri 1040nr If a single payment includes both wages and an expense reimbursement, you must specify the amount of the reimbursement. Ri 1040nr   These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee. Ri 1040nr Accountable plan. Ri 1040nr   To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules. Ri 1040nr They must have paid or incurred deductible expenses while performing services as your employees. Ri 1040nr The reimbursement or advance must be paid for the expense and must not be an amount that would have otherwise been paid by the employee. Ri 1040nr They must substantiate these expenses to you within a reasonable period of time. Ri 1040nr They must return any amounts in excess of substantiated expenses within a reasonable period of time. Ri 1040nr   Amounts paid under an accountable plan are not wages and are not subject to income, social security, Medicare, and FUTA taxes. Ri 1040nr   If the expenses covered by this arrangement are not substantiated (or amounts in excess of substantiated expenses are not returned within a reasonable period of time), the amount paid under the arrangement in excess of the substantiated expenses is treated as paid under a nonaccountable plan. Ri 1040nr This amount is subject to income, social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period of time. Ri 1040nr   A reasonable period of time depends on the facts and circumstances. Ri 1040nr Generally, it is considered reasonable if your employees receive their advance within 30 days of the time they incur the expenses, adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the expenses were paid or incurred. Ri 1040nr Also, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days. Ri 1040nr Nonaccountable plan. Ri 1040nr   Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes. Ri 1040nr Your payments are treated as paid under a nonaccountable plan if: Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses, You advance or pay an amount to your employee regardless of whether you reasonably expect the employee to have business expenses related to your business, or You pay an amount as a reimbursement you would have otherwise paid as wages. Ri 1040nr   See section 7 for more information on supplemental wages. Ri 1040nr Per diem or other fixed allowance. Ri 1040nr   You may reimburse your employees by travel days, miles, or some other fixed allowance under the applicable revenue procedure. Ri 1040nr In these cases, your employee is considered to have accounted to you if your reimbursement does not exceed rates established by the Federal Government. Ri 1040nr The 2013 standard mileage rate for auto expenses was 56. Ri 1040nr 5 cents per mile. Ri 1040nr The rate for 2014 is 56 cents per mile. Ri 1040nr   The government per diem rates for meals and lodging in the continental United States are listed in Publication 1542, Per Diem Rates. Ri 1040nr Other than the amount of these expenses, your employees' business expenses must be substantiated (for example, the business purpose of the travel or the number of business miles driven). Ri 1040nr   If the per diem or allowance paid exceeds the amounts substantiated, you must report the excess amount as wages. Ri 1040nr This excess amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Ri 1040nr Show the amount equal to the substantiated amount (for example, the nontaxable portion) in box 12 of Form W-2 using code “L. Ri 1040nr ” Wages not paid in money. Ri 1040nr   If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument, such as a check, you are said to pay them “in kind. Ri 1040nr ” Payments in kind may be in the form of goods, lodging, food, clothing, or services. Ri 1040nr Generally, the fair market value of such payments at the time they are provided is subject to federal income tax withholding and social security, Medicare, and FUTA taxes. Ri 1040nr   However, noncash payments for household work, agricultural labor, and service not in the employer's trade or business are exempt from social security, Medicare, and FUTA taxes. Ri 1040nr Withhold income tax on these payments only if you and the employee agree to do so. Ri 1040nr Nonetheless, noncash payments for agricultural labor, such as commodity wages, are treated as cash payments subject to employment taxes if the substance of the transaction is a cash payment. Ri 1040nr Moving expenses. Ri 1040nr   Reimbursed and employer-paid qualified moving expenses (those that would otherwise be deductible by the employee) paid under an accountable plan are not includible in an employee's income unless you have knowledge the employee deducted the expenses in a prior year. Ri 1040nr Reimbursed and employer-paid nonqualified moving expenses are includible in income and are subject to employment taxes and income tax withholding. Ri 1040nr For more information on moving expenses, see Publication 521, Moving Expenses. Ri 1040nr Meals and lodging. Ri 1040nr   The value of meals is not taxable income and is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the meals are furnished for the employer's convenience and on the employer's premises. Ri 1040nr The value of lodging is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the lodging is furnished for the employer's convenience, on the employer's premises, and as a condition of employment. Ri 1040nr    “For the convenience of the employer” means you have a substantial business reason for providing the meals and lodging other than to provide additional compensation to the employee. Ri 1040nr For example, meals you provide at the place of work so that an employee is available for emergencies during his or her lunch period are generally considered to be for your convenience. Ri 1040nr   However, whether meals or lodging are provided for the convenience of the employer depends on all of the facts and circumstances. Ri 1040nr A written statement that the meals or lodging are for your convenience is not sufficient. Ri 1040nr 50% test. Ri 1040nr   If over 50% of the employees who are provided meals on an employer's business premises receive these meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Ri 1040nr If this 50% test is met, the value of the meals is excludable from income for all employees and is not subject to federal income tax withholding or employment taxes. Ri 1040nr For more information, see Publication 15-B. Ri 1040nr Health insurance plans. Ri 1040nr   If you pay the cost of an accident or health insurance plan for your employees, including an employee's spouse and dependents, your payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Ri 1040nr Generally, this exclusion also applies to qualified long-term care insurance contracts. Ri 1040nr However, for income tax withholding, the value of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the S corporation (2% shareholders). Ri 1040nr For social security, Medicare, and FUTA taxes, the health insurance benefits are excluded from the wages only for employees and their dependents or for a class or classes of employees and their dependents. Ri 1040nr See Announcement 92-16 for more information. Ri 1040nr You can find Announcement 92-16 on page 53 of Internal Revenue Bulletin 1992-5. Ri 1040nr Health Savings Accounts and medical savings accounts. Ri 1040nr   Your contributions to an employee's Health Savings Account (HSA) or Archer medical savings account (MSA) are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they will be excludable from the income of the employee. Ri 1040nr To the extent it is not reasonable to believe they will be excludable, your contributions are subject to these taxes. Ri 1040nr Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. Ri 1040nr However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. Ri 1040nr For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs). Ri 1040nr Medical care reimbursements. Ri 1040nr   Generally, medical care reimbursements paid for an employee under an employer's self-insured medical reimbursement plan are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. Ri 1040nr See Publication 15-B for an exception for highly compensated employees. Ri 1040nr Differential wage payments. Ri 1040nr   Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and represent all or a portion of the wages the individual would have received from the employer if the individual were performing services for the employer. Ri 1040nr   Differential wage payments are wages for income tax withholding, but are not subject to social security, Medicare, or FUTA taxes. Ri 1040nr Employers should report differential wage payments in box 1 of Form W-2. Ri 1040nr For more information about the tax treatment of differential wage payments, visit IRS. Ri 1040nr gov and enter “employees in a combat zone” in the search box. Ri 1040nr Fringe benefits. Ri 1040nr   You generally must include fringe benefits in an employee's gross income (but see Nontaxable fringe benefits next). Ri 1040nr The benefits are subject to income tax withholding and employment taxes. Ri 1040nr Fringe benefits include cars you provide, flights on aircraft you provide, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. Ri 1040nr In general, the amount you must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount the law excludes. Ri 1040nr There are other special rules you and your employees may use to value certain fringe benefits. Ri 1040nr See Publication 15-B for more information. Ri 1040nr Nontaxable fringe benefits. Ri 1040nr   Some fringe benefits are not taxable (or are minimally taxable) if certain conditions are met. Ri 1040nr See Publication 15-B for details. Ri 1040nr The following are some examples of nontaxable fringe benefits. Ri 1040nr Services provided to your employees at no additional cost to you. Ri 1040nr Qualified employee discounts. Ri 1040nr Working condition fringes that are property or services the employee could deduct as a business expense if he or she had paid for it. Ri 1040nr Examples include a company car for business use and subscriptions to business magazines. Ri 1040nr Certain minimal value fringes (including an occasional cab ride when an employee must work overtime and meals you provide at eating places you run for your employees if the meals are not furnished at below cost). Ri 1040nr Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway vehicle, any transit pass, and qualified parking). Ri 1040nr Qualified moving expense reimbursement. Ri 1040nr See Moving expenses , earlier in this section, for details. Ri 1040nr The use of on-premises athletic facilities, if substantially all of the use is by employees, their spouses, and their dependent children. Ri 1040nr Qualified tuition reduction an educational organization provides to its employees for education. Ri 1040nr For more information, see Publication 970, Tax Benefits for Education. Ri 1040nr Employer-provided cell phones provided primarily for a noncompensatory business reason. Ri 1040nr   However, do not exclude the following fringe benefits from the income of highly compensated employees unless the benefit is available to other employees on a nondiscriminatory basis. Ri 1040nr No-additional-cost services. Ri 1040nr Qualified employee discounts. Ri 1040nr Meals provided at an employer operated eating facility. Ri 1040nr Reduced tuition for education. Ri 1040nr  For more information, including the definition of a highly compensated employee, see Publication 15-B. Ri 1040nr When fringe benefits are treated as paid. Ri 1040nr   You may choose to treat certain noncash fringe benefits as paid by the pay period, by the quarter, or on any other basis you choose as long as you treat the benefits as paid at least once a year. Ri 1040nr You do not have to make a formal choice of payment dates or notify the IRS of the dates you choose. Ri 1040nr You do not have to make this choice for all employees. Ri 1040nr You may change methods as often as you like, as long as you treat all benefits provided in a calendar year as paid by December 31 of the calendar year. Ri 1040nr See Publication 15-B for more information, including a discussion of the special accounting rule for fringe benefits provided during November and December. Ri 1040nr Valuation of fringe benefits. Ri 1040nr   Generally, you must determine the value of fringe benefits no later than January 31 of the next year. Ri 1040nr Before January 31, you may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time. Ri 1040nr Withholding on fringe benefits. Ri 1040nr   You may add the value of fringe benefits to regular wages for a payroll period and figure withholding taxes on the total, or you may withhold federal income tax on the value of the fringe benefits at the optional flat 25% supplemental wage rate. Ri 1040nr However, see Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages during the calendar year in section 7. Ri 1040nr   You may choose not to withhold income tax on the value of an employee's personal use of a vehicle you provide. Ri 1040nr You must, however, withhold social security and Medicare taxes on the use of the vehicle. Ri 1040nr See Publication 15-B for more information on this election. Ri 1040nr Depositing taxes on fringe benefits. Ri 1040nr   Once you choose when fringe benefits are paid, you must deposit taxes in the same deposit period you treat the fringe benefits as paid. Ri 1040nr To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period. Ri 1040nr   If you determine by January 31 you overestimated the value of a fringe benefit at the time you withheld and deposited for it, you may claim a refund for the overpayment or have it applied to your next employment tax return. Ri 1040nr See Valuation of fringe benefits , earlier. Ri 1040nr If you underestimated the value and deposited too little, you may be subject to a failure-to-deposit penalty. Ri 1040nr See section 11 for information on deposit penalties. Ri 1040nr   If you deposited the required amount of taxes but withheld a lesser amount from the employee, you can recover from the employee the social security, Medicare, or income taxes you deposited on his or her behalf, and included in the employee's Form W-2. Ri 1040nr However, you must recover the income taxes before April 1 of the following year. Ri 1040nr Sick pay. Ri 1040nr   In general, sick pay is any amount you pay under a plan to an employee who is unable to work because of sickness or injury. Ri 1040nr These amounts are sometimes paid by a third party, such as an insurance company or an employees' trust. Ri 1040nr In either case, these payments are subject to social security, Medicare, and FUTA taxes. Ri 1040nr Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the employee last worked for the employer. Ri 1040nr The payments are always subject to federal income tax. Ri 1040nr See Publication 15-A for more information. Ri 1040nr 6. Ri 1040nr Tips Tips your employee receives from customers are generally subject to withholding. Ri 1040nr Your employee must report cash tips to you by the 10th of the month after the month the tips are received. Ri 1040nr The report should include tips you paid over to the employee for charge customers, tips the employee received directly from customers, and tips received from other employees under any tip-sharing arrangement. Ri 1040nr Both directly and indirectly tipped employees must report tips to you. Ri 1040nr No report is required for months when tips are less than $20. Ri 1040nr Your employee reports the tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. Ri 1040nr The statement must be signed by the employee and must include: The employee's name, address, and SSN, Your name and address, The month or period the report covers, and The total of tips received during the month or period. Ri 1040nr Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. Ri 1040nr You are permitted to establish a system for electronic tip reporting by employees. Ri 1040nr See Regulations section 31. Ri 1040nr 6053-1(d). Ri 1040nr Collecting taxes on tips. Ri 1040nr   You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. Ri 1040nr The withholding rules for withholding an employee's share of Medicare tax on tips also apply to withholding the Additional Medicare Tax once wages and tips exceed $200,000 in the calendar year. Ri 1040nr If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax. Ri 1040nr   You can collect these taxes from the employee's wages or from other funds he or she makes available. Ri 1040nr See Tips treated as supplemental wages in section 7 for more information. Ri 1040nr Stop collecting the employee social security tax when his or her wages and tips for tax year 2014 reach $117,000; collect the income and employee Medicare taxes for the whole year on all wages and tips. Ri 1040nr You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the limit. Ri 1040nr You are responsible for the employer Medicare tax for the whole year on all wages and tips. Ri 1040nr File Form 941 or Form 944 to report withholding and employment taxes on tips. Ri 1040nr Ordering rule. Ri 1040nr   If, by the 10th of the month after the month for which you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. Ri 1040nr If there are not enough funds available, withhold taxes in the following order. Ri 1040nr Withhold on regular wages and other compensation. Ri 1040nr Withhold social security and Medicare taxes on tips. Ri 1040nr Withhold income tax on tips. Ri 1040nr Reporting tips. Ri 1040nr   Report tips and any collected and uncollected social security and Medicare taxes on Form W-2 and on Form 941, lines 5b, 5c, and 5d (Form 944, lines 4b, 4c, and 4d). Ri 1040nr Report an adjustment on Form 941, line 9 (Form 944, line 6), for the uncollected social security and Medicare taxes. Ri 1040nr Enter the amount of uncollected social security tax and Medicare tax on Form W-2, box 12, with codes “A” and “B. Ri 1040nr ” Do not include any uncollected Additional Medicare Tax in box 12 of Form W-2. Ri 1040nr See section 13 and the General Instructions for Forms W-2 and W-3. Ri 1040nr   Revenue Ruling 2012-18 provides guidance for employers regarding social security and Medicare taxes imposed on tips, including information on the reporting of the employer share of social security and Medicare taxes under section 3121(q), the difference between tips and service charges, and the section 45B credit. Ri 1040nr See Revenue Ruling 2012-18, 2012-26 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 1032, available at www. Ri 1040nr irs. Ri 1040nr gov/irb/2012-26_IRB/ar07. Ri 1040nr html. Ri 1040nr Allocated tips. Ri 1040nr   If you operate a large food or beverage establishment, you must report allocated tips under certain circumstances. Ri 1040nr However, do not withhold income, social security, or Medicare taxes on allocated tips. Ri 1040nr   A large food or beverage establishment is one that provides food or beverages for consumption on the premises, where tipping is customary, and where there were normally more than 10 employees on a typical business day during the preceding year. Ri 1040nr   The tips may be allocated by one of three methods—hours worked, gross receipts, or good faith agreement. Ri 1040nr For information about these allocation methods, including the requirement to file Forms 8027 electronically if 250 or more forms are filed, see the Instructions for Form 8027. Ri 1040nr For information on filing Form 8027 electronically with the IRS, see Publication 1239. Ri 1040nr Tip Rate Determination and Education Program. Ri 1040nr   Employers may participate in the Tip Rate Determination and Education Program. Ri 1040nr The program primarily consists of two voluntary agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. Ri 1040nr The two agreements are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). Ri 1040nr A tip agreement, the Gaming Industry Tip Compliance Agreement (GITCA), is available for the gaming (casino) industry. Ri 1040nr To get more information about TRDA and TRAC agreements, see Publication 3144, Tips on Tips. Ri 1040nr Additionally, visit IRS. Ri 1040nr gov and enter “MSU tips” in the search box to get more information about GITCA, TRDA, or TRAC agreements. Ri 1040nr 7. Ri 1040nr Supplemental Wages Supplemental wages are wage payments to an employee that are not regular wages. Ri 1040nr They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Ri 1040nr Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. Ri 1040nr How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. Ri 1040nr See Regulations section 31. Ri 1040nr 3402(g)-1 for additional guidance for wages paid after January 1, 2007. Ri 1040nr Also see Revenue Ruling 2008-29, 2008-24 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 1149, available at www. Ri 1040nr irs. Ri 1040nr gov/irb/2008-24_IRB/ar08. Ri 1040nr html. Ri 1040nr Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages from you during the calendar year. Ri 1040nr   Special rules apply to the extent supplemental wages paid to any one employee during the calendar year exceed $1 million. Ri 1040nr If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39. Ri 1040nr 6% (or the highest rate of income tax for the year). Ri 1040nr Withhold using the 39. Ri 1040nr 6% rate without regard to the employee's Form W-4. Ri 1040nr In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. Ri 1040nr For more information, see Treasury Decision 9276, 2006-37 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 423, available at www. Ri 1040nr irs. Ri 1040nr gov/irb/2006-37_IRB/ar09. Ri 1040nr html. Ri 1040nr Withholding on supplemental wage payments to an employee who does not receive $1 million of supplemental wages during the calendar year. Ri 1040nr   If the supplemental wages paid to the employee during the calendar year are less than or equal to $1 million, the following rules apply in determining the amount of income tax to be withheld. Ri 1040nr Supplemental wages combined with regular wages. Ri 1040nr   If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period. Ri 1040nr Supplemental wages identified separately from regular wages. Ri 1040nr   If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. Ri 1040nr If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages. Ri 1040nr Withhold a flat 25% (no other percentage allowed). Ri 1040nr If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. Ri 1040nr If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Ri 1040nr Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Ri 1040nr Subtract the tax withheld from the regular wages. Ri 1040nr Withhold the remaining tax from the supplemental wages. Ri 1040nr If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax. Ri 1040nr If you did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. Ri 1040nr This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Ri 1040nr Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes. Ri 1040nr Example 1. Ri 1040nr You pay John Peters a base salary on the 1st of each month. Ri 1040nr He is single and claims one withholding allowance. Ri 1040nr In January he is paid $1,000. Ri 1040nr Using the wage bracket tables, you withhold $50 from this amount. Ri 1040nr In February, he receives salary of $1,000 plus a commission of $2,000, which you combine with regular wages and do not separately identify. Ri 1040nr You figure the withholding based on the total of $3,000. Ri 1040nr The correct withholding from the tables is $338. Ri 1040nr Example 2. Ri 1040nr You pay Sharon Warren a base salary on the 1st of each month. Ri 1040nr She is single and claims one allowance. Ri 1040nr Her May 1 pay is $2,000. Ri 1040nr Using the wage bracket tables, you withhold $188. Ri 1040nr On May 14 she receives a bonus of $1,000. Ri 1040nr Electing to use supplemental wage withholding method 1-b, you: Add the bonus amount to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 = $3,000). Ri 1040nr Determine the amount of withholding on the combined $3,000 amount to be $338 using the wage bracket tables. Ri 1040nr Subtract the amount withheld from wages on the most recent base salary pay date (May 1) from the combined withholding amount ($338 – $188 = $150). Ri 1040nr Withhold $150 from the bonus payment. Ri 1040nr Example 3. Ri 1040nr The facts are the same as in Example 2, except you elect to use the flat rate method of withholding on the bonus. Ri 1040nr You withhold 25% of $1,000, or $250, from Sharon's bonus payment. Ri 1040nr Example 4. Ri 1040nr The facts are the same as in Example 2, except you elect to pay Sharon a second bonus of $2,000 on May 28. Ri 1040nr Using supplemental wage withholding method 1-b, you: Add the first and second bonus amounts to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 + $2,000 = $5,000). Ri 1040nr Determine the amount of withholding on the combined $5,000 amount to be $781 using the wage bracket tables. Ri 1040nr Subtract the amounts withheld from wages on the most recent base salary pay date (May 1) and the amounts withheld from the first bonus payment from the combined withholding amount ($781 – $188 – $150 = $443). Ri 1040nr Withhold $443 from the second bonus payment. Ri 1040nr Tips treated as supplemental wages. Ri 1040nr   Withhold income tax on tips from wages earned by the employee or from other funds the employee makes available. Ri 1040nr If an employee receives regular wages and reports tips, figure income tax withholding as if the tips were supplemental wages. Ri 1040nr If you have not withheld income tax from the regular wages, add the tips to the regular wages. Ri 1040nr Then withhold income tax on the total. Ri 1040nr If you withheld income tax from the regular wages, you can withhold on the tips by method 1-a or 1-b discussed earlier in this section under Supplemental wages identified separately from regular wages. Ri 1040nr Vacation pay. Ri 1040nr   Vacation pay is subject to withholding as if it were a regular wage payment. Ri 1040nr When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. Ri 1040nr If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. Ri 1040nr 8. Ri 1040nr Payroll Period Your payroll period is a period of service for which you usually pay wages. Ri 1040nr When you have a regular payroll period, withhold income tax for that time period even if your employee does not work the full period. Ri 1040nr No regular payroll period. Ri 1040nr   When you do not have a regular payroll period, withhold the tax as if you paid wages for a daily or miscellaneous payroll period. Ri 1040nr Figure the number of days (including Sundays and holidays) in the period covered by the wage payment. Ri 1040nr If the wages are unrelated to a specific length of time (for example, commissions paid on completion of a sale), count back the number of days from the payment period to the latest of: The last wage payment made during the same calendar year, The date employment began, if during the same calendar year, or January 1 of the same year. Ri 1040nr Employee paid for period less than 1 week. Ri 1040nr   When you pay an employee for a period of less than one week, and the employee signs a statement under penalties of perjury indicating he or she is not working for any other employer during the same week for wages subject to withholding, figure withholding based on a weekly payroll period. Ri 1040nr If the employee later begins to work for another employer for wages subject to withholding, the employee must notify you within 10 days. Ri 1040nr You then figure withholding based on the daily or miscellaneous period. Ri 1040nr 9. Ri 1040nr Withholding From Employees' Wages Income Tax Withholding Using Form W-4 to figure withholding. Ri 1040nr   To know how much federal income tax to withhold from employees' wages, you should have a Form W-4 on file for each employee. Ri 1040nr Encourage your employees to file an updated Form W-4 for 2014, especially if they owed taxes or received a large refund when filing their 2013 tax return. Ri 1040nr Advise your employees to use the IRS Withholding Calculator on the IRS website at www. Ri 1040nr irs. Ri 1040nr gov/individuals for help in determining how many withholding allowances to claim on their Forms W-4. Ri 1040nr   Ask all new employees to give you a signed Form W-4 when they start work. Ri 1040nr Make the form effective with the first wage payment. Ri 1040nr If a new employee does not give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances. Ri 1040nr Form in Spanish. Ri 1040nr   You can provide Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, in place of Form W-4, to your Spanish-speaking employees. Ri 1040nr For more information, see Publicación 17(SP), El Impuesto Federal sobre los Ingresos (Para Personas Físicas). Ri 1040nr The rules discussed in this section that apply to Form W-4 also apply to Formulario W-4(SP). Ri 1040nr Electronic system to receive Form W-4. Ri 1040nr   You may establish a system to electronically receive Forms W-4 from your employees. Ri 1040nr See Regulations section 31. Ri 1040nr 3402(f)(5)-1(c) for more information. Ri 1040nr Effective date of Form W-4. Ri 1040nr   A Form W-4 remains in effect until the employee gives you a new one. Ri 1040nr When you receive a new Form W-4 from an employee, do not adjust withholding for pay periods before the effective date of the new form. Ri 1040nr If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. Ri 1040nr For exceptions, see Exemption from federal income tax withholding , IRS review of requested Forms W-4 , and Invalid Forms W-4 , later in this section. Ri 1040nr A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year. Ri 1040nr Successor employer. Ri 1040nr   If you are a successor employer (see Successor employer , later in this section), secure new Forms W-4 from the transferred employees unless the “Alternative Procedure” in section 5 of Revenue Procedure 2004-53 applies. Ri 1040nr See Revenue Procedure 2004-53, 2004-34 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 320, available at www. Ri 1040nr irs. Ri 1040nr gov/irb/2004-34_IRB/ar13. Ri 1040nr html. Ri 1040nr Completing Form W-4. Ri 1040nr   The amount of any federal income tax withholding must be based on marital status and withholding allowances. Ri 1040nr Your employees may not base their withholding amounts on a fixed dollar amount or percentage. Ri 1040nr However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4. Ri 1040nr Employees may claim fewer withholding allowances than they are entitled to claim. Ri 1040nr They may wish to claim fewer allowances to ensure they have enough withholding or to offset the tax on other sources of taxable income not subject to withholding. Ri 1040nr See Publication 505, Tax Withholding and Estimated Tax, for more information about completing Form W-4. Ri 1040nr Along with Form W-4, you may wish to order Publication 505 for use by your employees. Ri 1040nr Do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. Ri 1040nr If they require additional withholding, they should submit a new Form W-4 and, if necessary, pay estimated tax by filing Form 1040-ES, Estimated Tax for Individuals, or by using the Electronic Federal Tax Payment System (EFTPS) to make estimated tax payments. Ri 1040nr Exemption from federal income tax withholding. Ri 1040nr   Generally, an employee may claim exemption from federal income tax withholding because he or she had no income tax liability last year and expects none this year. Ri 1040nr See the Form W-4 instructions for more information. Ri 1040nr However, the wages are still subject to social security and Medicare taxes. Ri 1040nr See also Invalid Forms W-4 , later in this section. Ri 1040nr   A Form W-4 claiming exemption from withholding is effective when it is filed with the employer and only for that calendar year. Ri 1040nr To continue to be exempt from withholding in the next calendar year, an employee must give you a new Form W-4 by February 15. Ri 1040nr If the employee does not give you a new Form W-4 by February 15, begin withholding based on the last Form W-4 for the employee that did not claim an exemption from withholding or, if one was not filed, then withhold tax as if he or she is single with zero withholding allowances. Ri 1040nr If the employee provides a new Form W-4 claiming exemption from withholding on February 16 or later, you may apply it to future wages but do not refund any taxes already withheld. Ri 1040nr Withholding income taxes on the wages of nonresident alien employees. Ri 1040nr   In general, you must withhold federal income taxes on the wages of nonresident alien employees. Ri 1040nr However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to this general rule. Ri 1040nr Also see section 3 of Publication 51 (Circular A), Agricultural Employer's Tax Guide, for guidance on H-2A visa workers. Ri 1040nr Withholding adjustment for nonresident alien employees. Ri 1040nr   For 2014, apply the procedure discussed next to figure the amount of income tax to withhold from the wages of nonresident alien employees performing services within the United States. Ri 1040nr Nonresident alien students from India and business apprentices from India are not subject to this procedure. Ri 1040nr Instructions. Ri 1040nr   To figure how much income tax to withhold from the wages paid to a nonresident alien employee performing services in the United States, use the following steps. Ri 1040nr Step 1. Ri 1040nr   Add to the wages paid to the nonresident alien employee for the payroll period the amount shown in the chart below for the applicable payroll period. Ri 1040nr    Amount to Add to Nonresident Alien Employee's Wages for Calculating Income Tax Withholding Only   Payroll Period Add Additional     Weekly $ 43. Ri 1040nr 30     Biweekly 86. Ri 1040nr 50     Semimonthly 93. Ri 1040nr 80     Monthly 187. Ri 1040nr 50     Quarterly 562. Ri 1040nr 50     Semiannually 1,125. Ri 1040nr 00     Annually 2,250. Ri 1040nr 00     Daily or Miscellaneous (each day of the payroll period) 8. Ri 1040nr 70   Step 2. Ri 1040nr   Use the amount figured in Step 1 and the number of withholding allowances claimed (generally limited to one allowance) to figure income tax withholding. Ri 1040nr Determine the value of withholding allowances by multiplying the number of withholding allowances claimed by the appropriate amount from Table 5. Ri 1040nr Percentage Method—2014 Amount for One Withholding Allowance shown on page 41. Ri 1040nr If you are using the Percentage Method Tables for Income Tax Withholding, provided on pages 43–44, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure the income tax withholding. Ri 1040nr If you are using the Wage Bracket Method for Income Tax Withholding, provided on pages 45–64, use the amount figured in Step 1 and the number of withholding allowances to figure income tax withholding. Ri 1040nr The amounts from the chart above are added to wages solely for calculating income tax withholding on the wages of the nonresident alien employee. Ri 1040nr The amounts from the chart should not be included in any box on the employee's Form W-2 and do not increase the income tax liability of the employee. Ri 1040nr Also, the amounts from the chart do not increase the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Ri 1040nr This procedure only applies to nonresident alien employees who have wages subject to income tax withholding. Ri 1040nr Example. Ri 1040nr An employer using the percentage method of withholding pays wages of $500 for a biweekly payroll period to a married nonresident alien employee. Ri 1040nr The nonresident alien has properly completed Form W-4, entering marital status as “single” with one withholding allowance and indicating status as a nonresident alien on Form W-4, line 6 (see Nonresident alien employee's Form W-4 , later in this section). Ri 1040nr The employer determines the wages to be used in the withholding tables by adding to the $500 amount of wages paid the amount of $86. Ri 1040nr 50 from the chart under Step 1 ($586. Ri 1040nr 50 total). Ri 1040nr The employer then applies the applicable tables to determine the income tax withholding for nonresident aliens (see Step 2 ). Ri 1040nr Reminder: If you use the Percentage Method Tables for Income Tax Withholding, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure income tax withholding. Ri 1040nr The $86. Ri 1040nr 50 added to wages for calculating income tax withholding is not reported on Form W-2, and does not increase the income tax liability of the employee. Ri 1040nr Also, the $86. Ri 1040nr 50 added to wages does not affect the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Ri 1040nr Supplemental wage payment. Ri 1040nr   This procedure for determining the amount of income tax withholding does not apply to a supplemental wage payment (see section 7) if the 39. Ri 1040nr 6% mandatory flat rate withholding applies or if the 25% optional flat rate withholding is being used to calculate income tax withholding on the supplemental wage payment. Ri 1040nr Nonresident alien employee's Form W-4. Ri 1040nr   When completing Forms W-4, nonresident aliens are required to: Not claim exemption from income tax withholding, Request withholding as if they are single, regardless of their actual marital status, Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or South Korea, or a student or business apprentice from India, he or she may claim more than one allowance), and Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4. Ri 1040nr   If you maintain an electronic Form W-4 system, you should provide a field for nonresident aliens to enter nonresident alien status in lieu of writing “Nonresident Alien” or “NRA” above the dotted line on line 6. Ri 1040nr A nonresident alien employee may request additional withholding at his or her option for other purposes, although such additions should not be necessary for withholding to cover federal income tax liability related to employment. Ri 1040nr Form 8233. Ri 1040nr   If a nonresident alien employee claims a tax treaty exemption from withholding, the employee must submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to the income exempt under the treaty, instead of Form W-4. Ri 1040nr See Publication 515 for details. Ri 1040nr IRS review of requested Forms W-4. Ri 1040nr   When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. Ri 1040nr You may also be directed to send certain Forms W-4 to the IRS. Ri 1040nr You may receive a notice from the IRS requiring you to submit a copy of Form W-4 for one or more of your named employees. Ri 1040nr Send the requested copy or copies of Form W-4 to the IRS at the address provided and in the manner directed by the notice. Ri 1040nr The IRS may also require you to submit copies of Form W-4 to the IRS as directed by Treasury Decision 9337, 2007-35 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 455, which is available at www. Ri 1040nr irs. Ri 1040nr gov/irb/2007-35_IRB/ar10. Ri 1040nr html. Ri 1040nr When we refer to Form W-4, the same rules apply to Formulario W-4(SP), its Spanish translation. Ri 1040nr After submitting a copy of a requested Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if it is valid (see Invalid Forms W-4 , later in this section). Ri 1040nr However, if the IRS later notifies you in writing the employee is not entitled to claim exemption from withholding or a claimed number of withholding allowances, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the IRS notice (commonly referred to as a "lock-in letter
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The Ri 1040nr

Ri 1040nr 2. Ri 1040nr   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Ri 1040nr Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. Ri 1040nr Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. Ri 1040nr Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. Ri 1040nr The annual accounting period for your income tax return is called a tax year. Ri 1040nr You can use one of the following tax years. Ri 1040nr A calendar tax year. Ri 1040nr A fiscal tax year. Ri 1040nr Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Ri 1040nr A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Ri 1040nr Calendar tax year. Ri 1040nr   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Ri 1040nr   You must adopt the calendar tax year if any of the following apply. Ri 1040nr You do not keep books. Ri 1040nr You have no annual accounting period. Ri 1040nr Your present tax year does not qualify as a fiscal year. Ri 1040nr Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. Ri 1040nr   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Ri 1040nr For more information, see Change in tax year, later. Ri 1040nr   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. Ri 1040nr Fiscal tax year. Ri 1040nr   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Ri 1040nr A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Ri 1040nr   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. Ri 1040nr   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. Ri 1040nr Change in tax year. Ri 1040nr   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. Ri 1040nr See the Instructions for Form 1128 for exceptions. Ri 1040nr If you qualify for an automatic approval request, a user fee is not required. Ri 1040nr If you do not qualify for automatic approval, a ruling must be requested. Ri 1040nr See the instructions for Form 1128 for information about user fees if you are requesting a ruling. Ri 1040nr Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Ri 1040nr Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. Ri 1040nr You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. Ri 1040nr After that, if you want to change your accounting method, you must generally get IRS approval. Ri 1040nr See Change in Accounting Method, later. Ri 1040nr Kinds of methods. Ri 1040nr   Generally, you can use any of the following accounting methods. Ri 1040nr Cash method. Ri 1040nr An accrual method. Ri 1040nr Special methods of accounting for certain items of income and expenses. Ri 1040nr Combination method using elements of two or more of the above. Ri 1040nr You must use the same accounting method to figure your taxable income and to keep your books. Ri 1040nr Also, you must use an accounting method that clearly shows your income. Ri 1040nr Business and personal items. Ri 1040nr   You can account for business and personal items under different accounting methods. Ri 1040nr For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Ri 1040nr Two or more businesses. Ri 1040nr   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. Ri 1040nr They are separate and distinct only if you maintain complete and separate books and records for each business. Ri 1040nr Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. Ri 1040nr However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. Ri 1040nr For more information, see Inventories, later. Ri 1040nr Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Ri 1040nr If you receive property or services, you must include their fair market value in income. Ri 1040nr Example. Ri 1040nr On December 30, 2012, Mrs. Ri 1040nr Sycamore sent you a check for interior decorating services you provided to her. Ri 1040nr You received the check on January 2, 2013. Ri 1040nr You must include the amount of the check in income for 2013. Ri 1040nr Constructive receipt. Ri 1040nr   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. Ri 1040nr You do not need to have possession of it. Ri 1040nr If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. Ri 1040nr Example. Ri 1040nr Interest is credited to your bank account in December 2013. Ri 1040nr You do not withdraw it or enter it into your passbook until 2014. Ri 1040nr You must include it in your gross income for 2013. Ri 1040nr Delaying receipt of income. Ri 1040nr   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Ri 1040nr You must report the income in the year the property is received or made available to you without restriction. Ri 1040nr Example. Ri 1040nr Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. Ri 1040nr She was told in December that her payment was available. Ri 1040nr At her request, she was not paid until January 2014. Ri 1040nr She must include this payment in her 2013 income because it was constructively received in 2013. Ri 1040nr Checks. Ri 1040nr   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. Ri 1040nr Example. Ri 1040nr Dr. Ri 1040nr Redd received a check for $500 on December 31, 2013, from a patient. Ri 1040nr She could not deposit the check in her business account until January 2, 2014. Ri 1040nr She must include this fee in her income for 2013. Ri 1040nr Debts paid by another person or canceled. Ri 1040nr   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Ri 1040nr If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Ri 1040nr For more information, see Canceled Debt under Kinds of Income in chapter 5. Ri 1040nr Repayment of income. Ri 1040nr   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. Ri 1040nr If the amount you repay is over $3,000, a special rule applies. Ri 1040nr For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. Ri 1040nr Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. Ri 1040nr This includes business expenses for which you contest liability. Ri 1040nr However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Ri 1040nr Expenses paid in advance. Ri 1040nr   You can deduct an expense you pay in advance only in the year to which it applies. Ri 1040nr Example. Ri 1040nr You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. Ri 1040nr You can deduct $500 in 2013 and $500 in 2014. Ri 1040nr Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Ri 1040nr The purpose of an accrual method of accounting is to match income and expenses in the correct year. Ri 1040nr Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Ri 1040nr Example. Ri 1040nr You are a calendar year accrual method taxpayer. Ri 1040nr You sold a computer on December 28, 2013. Ri 1040nr You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. Ri 1040nr You must include the amount received for the computer in your 2013 income. Ri 1040nr Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. Ri 1040nr Estimated income. Ri 1040nr   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. Ri 1040nr Change in payment schedule for services. Ri 1040nr   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. Ri 1040nr Advance payments for services. Ri 1040nr   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Ri 1040nr However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Ri 1040nr However, you cannot postpone including any payment beyond that tax year. Ri 1040nr   For more information, see Advance Payment for Services under Accrual Method in Publication 538. Ri 1040nr That publication also explains special rules for reporting the following types of income. Ri 1040nr Advance payments for service agreements. Ri 1040nr Prepaid rent. Ri 1040nr Advance payments for sales. Ri 1040nr   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. Ri 1040nr If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. Ri 1040nr An agreement includes a gift certificate that can be redeemed for goods. Ri 1040nr Treat amounts that are due and payable as amounts you received. Ri 1040nr   You generally include an advance payment in income for the tax year in which you receive it. Ri 1040nr However, you can use an alternative method. Ri 1040nr For information about the alternative method, see Publication 538. Ri 1040nr Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Ri 1040nr The all-events test has been met. Ri 1040nr The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Ri 1040nr Economic performance has occurred. Ri 1040nr Economic performance. Ri 1040nr   You generally cannot deduct or capitalize a business expense until economic performance occurs. Ri 1040nr If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Ri 1040nr If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Ri 1040nr An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Ri 1040nr For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. Ri 1040nr Example. Ri 1040nr You are a calendar year taxpayer and use an accrual method of accounting. Ri 1040nr You buy office supplies in December 2013. Ri 1040nr You receive the supplies and the bill in December, but you pay the bill in January 2014. Ri 1040nr You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. Ri 1040nr Your office supplies may qualify as a recurring expense. Ri 1040nr In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). Ri 1040nr Keeping inventories. Ri 1040nr   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. Ri 1040nr If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. Ri 1040nr For more information, see Inventories , later. Ri 1040nr Special rule for related persons. Ri 1040nr   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. Ri 1040nr Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Ri 1040nr If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Ri 1040nr   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Ri 1040nr For a list of other related persons, see section 267 of the Internal Revenue Code. Ri 1040nr Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Ri 1040nr However, the following restrictions apply. Ri 1040nr If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. Ri 1040nr (See, however, Inventories, later. Ri 1040nr ) You can use the cash method for all other items of income and expenses. Ri 1040nr If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Ri 1040nr If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Ri 1040nr If you use a combination method that includes the cash method, treat that combination method as the cash method. Ri 1040nr Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. Ri 1040nr However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Ri 1040nr These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Ri 1040nr A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Ri 1040nr A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Ri 1040nr Qualifying taxpayer. Ri 1040nr   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. Ri 1040nr (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. Ri 1040nr ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. Ri 1040nr Qualifying small business taxpayer. Ri 1040nr   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. Ri 1040nr (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Ri 1040nr ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Ri 1040nr Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). Ri 1040nr Business not owned or not in existence for 3 years. Ri 1040nr   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. Ri 1040nr If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. Ri 1040nr Materials and supplies that are not incidental. Ri 1040nr   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. Ri 1040nr If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. Ri 1040nr Changing accounting method. Ri 1040nr   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. Ri 1040nr See Change in Accounting Method, later. Ri 1040nr More information. Ri 1040nr    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Ri 1040nr For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Ri 1040nr Items included in inventory. Ri 1040nr   If you are required to account for inventories, include the following items when accounting for your inventory. Ri 1040nr Merchandise or stock in trade. Ri 1040nr Raw materials. Ri 1040nr Work in process. Ri 1040nr Finished products. Ri 1040nr Supplies that physically become a part of the item intended for sale. Ri 1040nr Valuing inventory. Ri 1040nr   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). Ri 1040nr To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. Ri 1040nr   Inventory valuation rules cannot be the same for all kinds of businesses. Ri 1040nr The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Ri 1040nr Your inventory practices must be consistent from year to year. Ri 1040nr More information. Ri 1040nr   For more information about inventories, see Publication 538. Ri 1040nr Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Ri 1040nr Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Ri 1040nr You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Ri 1040nr Activities subject to the uniform capitalization rules. Ri 1040nr   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Ri 1040nr Produce real or tangible personal property. Ri 1040nr For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Ri 1040nr Acquire property for resale. Ri 1040nr Exceptions. Ri 1040nr   These rules do not apply to the following property. Ri 1040nr Personal property you acquire for resale if your average annual gross receipts are $10 million or less. Ri 1040nr Property you produce if you meet either of the following conditions. Ri 1040nr Your indirect costs of producing the property are $200,000 or less. Ri 1040nr You use the cash method of accounting and do not account for inventories. Ri 1040nr For more information, see Inventories, earlier. Ri 1040nr Special Methods There are special methods of accounting for certain items of income or expense. Ri 1040nr These include the following. Ri 1040nr Amortization, discussed in chapter 8 of Publication 535, Business Expenses. Ri 1040nr Bad debts, discussed in chapter 10 of Publication 535. Ri 1040nr Depletion, discussed in chapter 9 of Publication 535. Ri 1040nr Depreciation, discussed in Publication 946, How To Depreciate Property. Ri 1040nr Installment sales, discussed in Publication 537, Installment Sales. Ri 1040nr Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Ri 1040nr A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. Ri 1040nr To get approval, you must file Form 3115, Application for Change in Accounting Method. Ri 1040nr You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. Ri 1040nr You may have to pay a user fee. Ri 1040nr For more information, see the form instructions. Ri 1040nr Automatic change procedures. Ri 1040nr   Certain taxpayers can presume to have IRS approval to change their method of accounting. Ri 1040nr The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. Ri 1040nr No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. Ri 1040nr   Generally, you must use Form 3115 to request an automatic change. Ri 1040nr For more information, see the Instructions for Form 3115. Ri 1040nr Prev  Up  Next   Home   More Online Publications