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Taxact 1040nr Publication 721 - Introductory Material Table of Contents Reminders IntroductionOrdering forms and publications. Taxact 1040nr Tax questions. Taxact 1040nr Useful Items - You may want to see: Reminders Future developments. Taxact 1040nr For the latest information about developments related to Publication 721, such as legislation enacted after it was published, go to www. Taxact 1040nr IRS. Taxact 1040nr gov/pub721. Taxact 1040nr Phased retirement. Taxact 1040nr The new phased retirement program was signed into law by the Moving Ahead for Progress in the 21st Century Act and will be available for retirement eligible individuals once the regulations for this program are effective. Taxact 1040nr This new program will allow eligible employees to begin receiving annuity payments while working part-time. Taxact 1040nr For more information, go to the Office of Personnel Management (OPM) website at www. Taxact 1040nr opm. Taxact 1040nr gov. Taxact 1040nr Roth Thrift Savings Plan (TSP) balance. Taxact 1040nr You may be able to contribute to a designated Roth account through the TSP known as the Roth TSP. Taxact 1040nr Roth TSP contributions are after-tax contributions, subject to the same contribution limits as the traditional TSP. Taxact 1040nr Qualified distributions from a Roth TSP are not included in your income. Taxact 1040nr See Thrift Savings Plan in Part II for more information. Taxact 1040nr Rollovers. Taxact 1040nr You can roll over certain amounts from the CSRS, FERS, or TSP, to a tax-sheltered annuity plan (403(b) plan) or a state or local government section 457 deferred compensation plan. Taxact 1040nr See Rollover Rules in Part II. Taxact 1040nr Rollovers by surviving spouse. Taxact 1040nr You may be able to roll over a distribution you receive as the surviving spouse of a deceased employee or retiree into a qualified retirement plan or an IRA. Taxact 1040nr See Rollover Rules in Part II. Taxact 1040nr Thrift Savings Plan (TSP) beneficiary participant accounts. Taxact 1040nr If you are the spouse beneficiary of a decedent's TSP account, you have the option of leaving the death benefit payment in a TSP account in your own name (a beneficiary participant account). Taxact 1040nr The amounts in the beneficiary participant account are neither taxable or reportable until you choose to make a withdrawal, or otherwise receive a distribution from the account. Taxact 1040nr Benefits for public safety officer's survivors. Taxact 1040nr A survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty generally will be excluded from the recipient's income. Taxact 1040nr For more information, see Dependents of public safety officers in Part IV. Taxact 1040nr Uniformed services Thrift Savings Plan (TSP) accounts. Taxact 1040nr If you have a uniformed services TSP account, it may include contributions from combat zone pay. Taxact 1040nr This pay is tax-exempt and contributions attributable to that pay are tax-exempt when they are distributed from the uniformed services TSP account. Taxact 1040nr However, any earnings on those contributions are subject to tax when they are distributed. Taxact 1040nr The statement you receive from the TSP will separately state the total amount of your distribution and the amount of your taxable distribution for the year. Taxact 1040nr If you have both a civilian and a uniformed services TSP account, you should apply the rules discussed in this publication separately to each account. Taxact 1040nr You can get more information from the TSP website, www. Taxact 1040nr tsp. Taxact 1040nr gov, or the TSP Service Office. Taxact 1040nr Photographs of missing children. Taxact 1040nr The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Taxact 1040nr Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Taxact 1040nr You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Taxact 1040nr Introduction This publication explains how the federal income tax rules apply to civil service retirement benefits received by retired federal employees (including those disabled) or their survivors. Taxact 1040nr These benefits are paid primarily under the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS). Taxact 1040nr Tax rules for annuity benefits. Taxact 1040nr Part of the annuity benefits you receive is a tax-free recovery of your contributions to the CSRS or FERS. Taxact 1040nr The rest of your benefits are taxable. Taxact 1040nr If your annuity starting date is after November 18, 1996, you must use the Simplified Method to figure the taxable and tax-free parts. Taxact 1040nr If your annuity starting date is before November 19, 1996, you generally could have chosen to use the Simplified Method or the General Rule. Taxact 1040nr See Part II, Rules for Retirees . Taxact 1040nr Thrift Savings Plan. Taxact 1040nr The Thrift Savings Plan (TSP) provides federal employees with the same savings and tax benefits that many private employers offer their employees. Taxact 1040nr This plan is similar to private sector 401(k) plans. Taxact 1040nr You can defer tax on part of your pay by having it contributed to your traditional balance in the plan. Taxact 1040nr The contributions and earnings on them are not taxed until they are distributed to you. Taxact 1040nr Also the TSP offers a Roth TSP option. Taxact 1040nr Contributions to this type of balance are after tax and qualified distributions from the account are tax free. Taxact 1040nr See Thrift Savings Plan in Part II. Taxact 1040nr Comments and suggestions. Taxact 1040nr We welcome your comments about this publication and your suggestions for future editions. Taxact 1040nr You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Taxact 1040nr NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Taxact 1040nr Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Taxact 1040nr You can send your comments from www. Taxact 1040nr irs. Taxact 1040nr gov/formspubs/. Taxact 1040nr Click on “More Information” and then on “Comment on Tax Forms and Publications”. Taxact 1040nr Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Taxact 1040nr Ordering forms and publications. Taxact 1040nr Visit www. Taxact 1040nr irs. Taxact 1040nr gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Taxact 1040nr Internal Revenue Service 1201 N. Taxact 1040nr Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Taxact 1040nr If you have a tax question, check the information available on IRS. Taxact 1040nr gov or call 1-800-829-1040. Taxact 1040nr We cannot answer tax questions sent to either of the above addresses. Taxact 1040nr Useful Items - You may want to see: Publication 524 Credit for the Elderly or the Disabled 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 939 General Rule for Pensions and Annuities Form (and Instructions) CSA 1099R Statement of Annuity Paid CSF 1099R Statement of Survivor Annuity Paid W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Taxact 1040nr 5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts See How To Get Tax Help near the end of this publication for information about getting publications and forms. Taxact 1040nr Prev Up Next Home More Online Publications
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The Taxact 1040nr
Taxact 1040nr 2. Taxact 1040nr Employees' Pay Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tests for Deducting PayTest 1—Reasonableness Test 2—For Services Performed Kinds of PayAwards Bonuses Education Expenses Fringe Benefits Loans or Advances Property Reimbursements for Business Expenses Sick and Vacation Pay Introduction You can generally deduct the amount you pay your employees for the services they perform. Taxact 1040nr The pay may be in cash, property, or services. Taxact 1040nr It may include wages, salaries, bonuses, commissions, or other non-cash compensation such as vacation allowances and fringe benefits. Taxact 1040nr For information about deducting employment taxes, see chapter 5. Taxact 1040nr You can claim employment credits, such as the following, if you hire individuals who meet certain requirements. Taxact 1040nr Empowerment zone employment credit (Form 8844). Taxact 1040nr Indian employment credit (Form 8845). Taxact 1040nr Work opportunity credit (Form 5884). Taxact 1040nr Credit for employer differential wage payments (Form 8932). Taxact 1040nr Reduce your deduction for employee wages by the amount of employment credits you claim. Taxact 1040nr For more information about these credits, see the form on which the credit is claimed. Taxact 1040nr Topics - This chapter discusses: Tests for deducting pay Kinds of pay Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits See chapter 12 for information about getting publications and forms. Taxact 1040nr Tests for Deducting Pay To be deductible, your employees' pay must be an ordinary and necessary business expense and you must pay or incur it. Taxact 1040nr These and other requirements that apply to all business expenses are explained in chapter 1. Taxact 1040nr In addition, the pay must meet both of the following tests. Taxact 1040nr Test 1. Taxact 1040nr It must be reasonable. Taxact 1040nr Test 2. Taxact 1040nr It must be for services performed. Taxact 1040nr The form or method of figuring the pay does not affect its deductibility. Taxact 1040nr For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible. Taxact 1040nr Test 1—Reasonableness You must be able to prove that the pay is reasonable. Taxact 1040nr Whether the pay is reasonable depends on the circumstances that existed when you contracted for the services, not those that exist when reasonableness is questioned. Taxact 1040nr If the pay is excessive, the excess pay is disallowed as a deduction. Taxact 1040nr Factors to consider. Taxact 1040nr Determine the reasonableness of pay by the facts and circumstances. Taxact 1040nr Generally, reasonable pay is the amount that a similar business would pay for the same or similar services. Taxact 1040nr To determine if pay is reasonable, also consider the following items and any other pertinent facts. Taxact 1040nr The duties performed by the employee. Taxact 1040nr The volume of business handled. Taxact 1040nr The character and amount of responsibility. Taxact 1040nr The complexities of your business. Taxact 1040nr The amount of time required. Taxact 1040nr The cost of living in the locality. Taxact 1040nr The ability and achievements of the individual employee performing the service. Taxact 1040nr The pay compared with the gross and net income of the business, as well as with distributions to shareholders if the business is a corporation. Taxact 1040nr Your policy regarding pay for all your employees. Taxact 1040nr The history of pay for each employee. Taxact 1040nr Test 2—For Services Performed You must be able to prove the payment was made for services actually performed. Taxact 1040nr Employee-shareholder salaries. Taxact 1040nr If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-shareholder. Taxact 1040nr The excessive part of the salary would not be allowed as a salary deduction by the corporation. Taxact 1040nr For more information on corporate distributions to shareholders, see Publication 542, Corporations. Taxact 1040nr Kinds of Pay Some of the ways you may provide pay to your employees in addition to regular wages or salaries are discussed next. Taxact 1040nr For specialized and detailed information on employees' pay and the employment tax treatment of employees' pay, see Publications 15, 15-A, and 15-B. Taxact 1040nr Awards You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. Taxact 1040nr If you give property to an employee as an employee achievement award, your deduction may be limited. Taxact 1040nr Achievement awards. Taxact 1040nr An achievement award is an item of tangible personal property that meets all the following requirements. Taxact 1040nr It is given to an employee for length of service or safety achievement. Taxact 1040nr It is awarded as part of a meaningful presentation. Taxact 1040nr It is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay. Taxact 1040nr Length-of-service award. Taxact 1040nr An award will qualify as a length-of-service award only if either of the following applies. Taxact 1040nr The employee receives the award after his or her first 5 years of employment. Taxact 1040nr The employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years. Taxact 1040nr Safety achievement award. Taxact 1040nr An award for safety achievement will qualify as an achievement award unless one of the following applies. Taxact 1040nr It is given to a manager, administrator, clerical employee, or other professional employee. Taxact 1040nr During the tax year, more than 10% of your employees, excluding those listed in (1), have already received a safety achievement award (other than one of very small value). Taxact 1040nr Deduction limit. Taxact 1040nr Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following. Taxact 1040nr $400 for awards that are not qualified plan awards. Taxact 1040nr $1,600 for all awards, whether or not qualified plan awards. Taxact 1040nr A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. Taxact 1040nr A highly compensated employee is an employee who meets either of the following tests. Taxact 1040nr The employee was a 5% owner at any time during the year or the preceding year. Taxact 1040nr The employee received more than $115,000 in pay for the preceding year. Taxact 1040nr You can choose to ignore test (2) if the employee was not also in the top 20% of employees ranked by pay for the preceding year. Taxact 1040nr An award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be qualified plan awards except for this limit) is more than $400. Taxact 1040nr To figure this average cost, ignore awards of nominal value. Taxact 1040nr Deduct achievement awards as a nonwage business expense on your return or business schedule. Taxact 1040nr You may not owe employment taxes on the value of some achievement awards you provide to an employee. Taxact 1040nr See Publication 15-B. Taxact 1040nr Bonuses You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. Taxact 1040nr However, the total bonuses, salaries, and other pay must be reasonable for the services performed. Taxact 1040nr If the bonus is paid in property, see Property , later. Taxact 1040nr Gifts of nominal value. Taxact 1040nr If, to promote employee goodwill, you distribute food or merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense. Taxact 1040nr Your deduction for de minimis gifts of food or drink are not subject to the 50% deduction limit that generally applies to meals. Taxact 1040nr For more information on this deduction limit, see Meals and lodging , later. Taxact 1040nr Education Expenses If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. Taxact 1040nr Deduct them on the “Employee benefit programs” or other appropriate line of your tax return. Taxact 1040nr For information on educational assistance programs, see Educational Assistance in section 2 of Publication 15-B. Taxact 1040nr Fringe Benefits A fringe benefit is a form of pay for the performance of services. Taxact 1040nr You can generally deduct the cost of fringe benefits. Taxact 1040nr You may be able to exclude all or part of the value of some fringe benefits from your employees' pay. Taxact 1040nr You also may not owe employment taxes on the value of the fringe benefits. Taxact 1040nr See Table 2-1, Special Rules for Various Types of Fringe Benefits, in Publication 15-B for details. Taxact 1040nr Your deduction for the cost of fringe benefits for activities generally considered entertainment, amusement, or recreation, or for a facility used in connection with such an activity (for example, a company aircraft) for certain officers, directors, and more-than-10% shareholders is limited. Taxact 1040nr Certain fringe benefits are discussed next. Taxact 1040nr See Publication 15-B for more details on these and other fringe benefits. Taxact 1040nr Meals and lodging. Taxact 1040nr You can usually deduct the cost of furnishing meals and lodging to your employees. Taxact 1040nr Deduct the cost in whatever category the expense falls. Taxact 1040nr For example, if you operate a restaurant, deduct the cost of the meals you furnish to employees as part of the cost of goods sold. Taxact 1040nr If you operate a nursing home, motel, or rental property, deduct the cost of furnishing lodging to an employee as expenses for utilities, linen service, salaries, depreciation, etc. Taxact 1040nr Deduction limit on meals. Taxact 1040nr You can generally deduct only 50% of the cost of furnishing meals to your employees. Taxact 1040nr However, you can deduct the full cost of the following meals. Taxact 1040nr Meals whose value you include in an employee's wages. Taxact 1040nr Meals that qualify as a de minimis fringe benefit as discussed in section 2 of Publication 15-B. Taxact 1040nr This generally includes meals you furnish to employees at your place of business if more than half of these employees are provided the meals for your convenience. Taxact 1040nr Meals you furnish to your employees at the work site when you operate a restaurant or catering service. Taxact 1040nr Meals you furnish to your employees as part of the expense of providing recreational or social activities, such as a company picnic. Taxact 1040nr Meals you are required by federal law to furnish to crew members of certain commercial vessels (or would be required to furnish if the vessels were operated at sea). Taxact 1040nr This does not include meals you furnish on vessels primarily providing luxury water transportation. Taxact 1040nr Meals you furnish on an oil or gas platform or drilling rig located offshore or in Alaska. Taxact 1040nr This includes meals you furnish at a support camp that is near and integral to an oil or gas drilling rig located in Alaska. Taxact 1040nr Employee benefit programs. Taxact 1040nr Employee benefit programs include the following. Taxact 1040nr Accident and health plans. Taxact 1040nr Adoption assistance. Taxact 1040nr Cafeteria plans. Taxact 1040nr Dependent care assistance. Taxact 1040nr Education assistance. Taxact 1040nr Life insurance coverage. Taxact 1040nr Welfare benefit funds. Taxact 1040nr You can generally deduct amounts you spend on employee benefit programs on the applicable line of your tax return. Taxact 1040nr For example, if you provide dependent care by operating a dependent care facility for your employees, deduct your costs in whatever categories they fall (utilities, salaries, etc. Taxact 1040nr ). Taxact 1040nr Life insurance coverage. Taxact 1040nr You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. Taxact 1040nr See Regulations section 1. Taxact 1040nr 264-1 for more information. Taxact 1040nr Welfare benefit funds. Taxact 1040nr A welfare benefit fund is a funded plan (or a funded arrangement having the effect of a plan) that provides welfare benefits to your employees, independent contractors, or their beneficiaries. Taxact 1040nr Welfare benefits are any benefits other than deferred compensation or transfers of restricted property. Taxact 1040nr Your deduction for contributions to a welfare benefit fund is limited to the fund's qualified cost for the tax year. Taxact 1040nr If your contributions to the fund are more than its qualified cost, carry the excess over to the next tax year. Taxact 1040nr Generally, the fund's “qualified cost” is the total of the following amounts, reduced by the after-tax income of the fund. Taxact 1040nr The cost you would have been able to deduct using the cash method of accounting if you had paid for the benefits directly. Taxact 1040nr The contributions added to a reserve account that are needed to fund claims incurred but not paid as of the end of the year. Taxact 1040nr These claims can be for supplemental unemployment benefits, severance pay, or disability, medical, or life insurance benefits. Taxact 1040nr For more information, see sections 419(c) and 419A of the Internal Revenue Code and the related regulations. Taxact 1040nr Loans or Advances You generally can deduct as wages an advance you make to an employee for services performed if you do not expect the employee to repay the advance. Taxact 1040nr However, if the employee performs no services, treat the amount you advanced as a loan. Taxact 1040nr If the employee does not repay the loan, treat it as income to the employee. Taxact 1040nr Below-market interest rate loans. Taxact 1040nr On certain loans you make to an employee or shareholder, you are treated as having received interest income and as having paid compensation or dividends equal to that interest. Taxact 1040nr See Below-Market Loans in chapter 4. Taxact 1040nr Property If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. Taxact 1040nr The amount you can deduct is the property's fair market value on the date of the transfer less any amount the employee paid for the property. Taxact 1040nr You can claim the deduction only for the tax year in which your employee includes the property's value in income. Taxact 1040nr Your employee is deemed to have included the value in income if you report it on Form W-2, Wage and Tax Statement, in a timely manner. Taxact 1040nr You treat the deductible amount as received in exchange for the property, and you must recognize any gain or loss realized on the transfer, unless it is the company's stock transferred as payment for services. Taxact 1040nr Your gain or loss is the difference between the fair market value of the property and its adjusted basis on the date of transfer. Taxact 1040nr These rules also apply to property transferred to an independent contractor for services, generally reported on Form 1099-MISC, Miscellaneous Income. Taxact 1040nr Restricted property. Taxact 1040nr If the property you transfer for services is subject to restrictions that affect its value, you generally cannot deduct it and do not report gain or loss until it is substantially vested in the recipient. Taxact 1040nr However, if the recipient pays for the property, you must report any gain at the time of the transfer up to the amount paid. Taxact 1040nr “Substantially vested” means the property is not subject to a substantial risk of forfeiture. Taxact 1040nr This means that the recipient is not likely to have to give up his or her rights in the property in the future. Taxact 1040nr Reimbursements for Business Expenses You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. Taxact 1040nr However, your deduction may be limited. Taxact 1040nr If you make the payment under an accountable plan, deduct it in the category of the expense paid. Taxact 1040nr For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. Taxact 1040nr If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W-2. Taxact 1040nr See Reimbursement of Travel, Meals, and Entertainment in chapter 11 for more information about deducting reimbursements and an explanation of accountable and nonaccountable plans. Taxact 1040nr Sick and Vacation Pay Sick pay. Taxact 1040nr You can deduct amounts you pay to your employees for sickness and injury, including lump-sum amounts, as wages. Taxact 1040nr However, your deduction is limited to amounts not compensated by insurance or other means. Taxact 1040nr Vacation pay. Taxact 1040nr Vacation pay is an employee benefit. Taxact 1040nr It includes amounts paid for unused vacation leave. Taxact 1040nr You can deduct vacation pay only in the tax year in which the employee actually receives it. Taxact 1040nr This rule applies regardless of whether you use the cash or accrual method of accounting. Taxact 1040nr Prev Up Next Home More Online Publications