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Taxes And Unemployment

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Taxes And Unemployment

Taxes and unemployment 6. Taxes and unemployment   Tip Income Table of Contents Introduction Useful Items - You may want to see: Keeping a Daily Tip RecordElectronic tip record. Taxes and unemployment Reporting Tips to Your EmployerElectronic tip statement. Taxes and unemployment Final report. Taxes and unemployment Reporting Tips on Your Tax Return Allocated Tips Introduction This chapter is for employees who receive tips. Taxes and unemployment All tips you receive are income and are subject to federal income tax. Taxes and unemployment You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement. Taxes and unemployment The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax. Taxes and unemployment Reporting your tip income correctly is not difficult. Taxes and unemployment You must do three things. Taxes and unemployment Keep a daily tip record. Taxes and unemployment Report tips to your employer. Taxes and unemployment Report all your tips on your income tax return. Taxes and unemployment  This chapter will explain these three things and show you what to do on your tax return if you have not done the first two. Taxes and unemployment This chapter will also show you how to treat allocated tips. Taxes and unemployment For information on special tip programs and agreements, see Publication 531. Taxes and unemployment Useful Items - You may want to see: Publication 531 Reporting Tip Income 1244 Employee's Daily Record of Tips and Report to Employer Form (and Instructions) 4137 Social Security and Medicare Tax on Unreported Tip Income 4070 Employee's Report of Tips to Employer Keeping a Daily Tip Record Why keep a daily tip record. Taxes and unemployment   You must keep a daily tip record so you can: Report your tips accurately to your employer, Report your tips accurately on your tax return, and Prove your tip income if your return is ever questioned. Taxes and unemployment How to keep a daily tip record. Taxes and unemployment   There are two ways to keep a daily tip record. Taxes and unemployment You can either: Write information about your tips in a tip diary, or Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips. Taxes and unemployment You should keep your daily tip record with your tax or other personal records. Taxes and unemployment You must keep your records for as long as they are important for administration of the federal tax law. Taxes and unemployment For information on how long to keep records, see How long to keep records in chapter 1. Taxes and unemployment    If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. Taxes and unemployment To get Form 4070A, ask the Internal Revenue Service (IRS) or your employer for Publication 1244. Taxes and unemployment Also, Publication 1244 is available online at www. Taxes and unemployment irs. Taxes and unemployment gov/pub/irs-pdf/p1244. Taxes and unemployment pdf. Taxes and unemployment Publication 1244 includes a 1-year supply of Form 4070A. Taxes and unemployment Each day, write in the information asked for on the form. Taxes and unemployment   In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Taxes and unemployment Although you do not report these tips to your employer, you must report them on your tax return. Taxes and unemployment   If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business (if it is different from your employer's name). Taxes and unemployment Then, each workday, write the date and the following information. Taxes and unemployment Cash tips you get directly from customers or from other employees. Taxes and unemployment Tips from credit and debit card charge customers that your employer pays you. Taxes and unemployment The value of any noncash tips you get, such as tickets, passes, or other items of value. Taxes and unemployment The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips. Taxes and unemployment Electronic tip record. Taxes and unemployment   You can use an electronic system provided by your employer to record your daily tips. Taxes and unemployment If you do, you must receive and keep a paper copy of this record. Taxes and unemployment Service charges. Taxes and unemployment    Do not write in your tip diary the amount of any service charge that your employer adds to a customer's bill and then pays to you and treats as wages. Taxes and unemployment This is part of your wages, not a tip. Taxes and unemployment See examples below. Taxes and unemployment Example 1. Taxes and unemployment Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. Taxes and unemployment Jane’s bill for food and beverages for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes this amount. Taxes and unemployment Because Jane did not have an unrestricted right to determine the amount on the “tip line,” the 18% charge is considered a service charge. Taxes and unemployment Do not include the 18% charge in your tip diary. Taxes and unemployment Service charges that are paid to you are considered wages, not tips. Taxes and unemployment Example 2. Taxes and unemployment Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided to customers. Taxes and unemployment David’s bill includes a blank “tip line,” with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath the signature line. Taxes and unemployment Because David is free to enter any amount on the “tip line” or leave it blank, any amount he includes is considered a tip. Taxes and unemployment Be sure to include this amount in your tip diary. Taxes and unemployment Reporting Tips to Your Employer Why report tips to your employer. Taxes and unemployment   You must report tips to your employer so that: Your employer can withhold federal income tax and social security, Medicare, Additional Medicare, or railroad retirement taxes, Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and You can avoid the penalty for not reporting tips to your employer (explained later). Taxes and unemployment What tips to report. Taxes and unemployment   Report to your employer only cash, check, and debit and credit card tips you receive. Taxes and unemployment   If your total tips for any 1 month from any one job are less than $20, do not report the tips for that month to that employer. Taxes and unemployment   If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Taxes and unemployment Do not report to your employer any portion of the tips you receive that you pass on to other employees. Taxes and unemployment However, you must report tips you receive from other employees. Taxes and unemployment    Do not report the value of any noncash tips, such as tickets or passes, to your employer. Taxes and unemployment You do not pay social security, Medicare, Additional Medicare or railroad retirement taxes on these tips. Taxes and unemployment How to report. Taxes and unemployment    If your employer does not give you any other way to report tips, you can use Form 4070. Taxes and unemployment Fill in the information asked for on the form, sign and date the form, and give it to your employer. Taxes and unemployment To get a 1-year supply of the form, ask the IRS or your employer for Publication 1244. Taxes and unemployment   If you do not use Form 4070, give your employer a statement with the following information. Taxes and unemployment Your name, address, and social security number. Taxes and unemployment Your employer's name, address, and business name (if it is different from your employer's name). Taxes and unemployment The month (or the dates of any shorter period) in which you received tips. Taxes and unemployment The total tips required to be reported for that period. Taxes and unemployment You must sign and date the statement. Taxes and unemployment Be sure to keep a copy with your tax or other personal records. Taxes and unemployment   Your employer may require you to report your tips more than once a month. Taxes and unemployment However, the statement cannot cover a period of more than 1 calendar month. Taxes and unemployment Electronic tip statement. Taxes and unemployment   Your employer can have you furnish your tip statements electronically. Taxes and unemployment When to report. Taxes and unemployment   Give your report for each month to your employer by the 10th of the next month. Taxes and unemployment If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that is not a Saturday, Sunday, or legal holiday. Taxes and unemployment Example. Taxes and unemployment You must report your tips received in September 2014 by October 10, 2014. Taxes and unemployment Final report. Taxes and unemployment   If your employment ends during the month, you can report your tips when your employment ends. Taxes and unemployment Penalty for not reporting tips. Taxes and unemployment   If you do not report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security, Medicare, and Additional Medicare taxes or railroad retirement tax you owe on the unreported tips. Taxes and unemployment (For information about these taxes, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, later. Taxes and unemployment ) The penalty amount is in addition to the taxes you owe. Taxes and unemployment   You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. Taxes and unemployment To do so, attach a statement to your return explaining why you did not report them. Taxes and unemployment Giving your employer money for taxes. Taxes and unemployment   Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your reported tips. Taxes and unemployment If this happens, you can give your employer money until the close of the calendar year to pay the rest of the taxes. Taxes and unemployment   If you do not give your employer enough money, your employer will apply your regular pay and any money you give in the following order. Taxes and unemployment All taxes on your regular pay. Taxes and unemployment Social security, Medicare, and Additional Medicare taxes or railroad retirement taxes on your reported tips. Taxes and unemployment Federal, state, and local income taxes on your reported tips. Taxes and unemployment    Any taxes that remain unpaid can be collected by your employer from your next paycheck. Taxes and unemployment If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. Taxes and unemployment See Publication 505, Tax Withholding and Estimated Tax, for more information. Taxes and unemployment    Uncollected taxes. Taxes and unemployment You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected at the end of 2013. Taxes and unemployment These uncollected taxes will be shown on your 2013 Form W-2. Taxes and unemployment See Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer under Reporting Tips on Your Tax Return, later. Taxes and unemployment Reporting Tips on Your Tax Return How to report tips. Taxes and unemployment    Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; or Form 1040EZ, line 1. Taxes and unemployment What tips to report. Taxes and unemployment   You must report all tips you received in 2013 on your tax return, including both cash tips and noncash tips. Taxes and unemployment Any tips you reported to your employer for 2013 are included in the wages shown in box 1 of your Form W-2. Taxes and unemployment Add to the amount in box 1 only the tips you did not report to your employer. Taxes and unemployment    If you received $20 or more in cash and charge tips in a month and did not report all of those tips to your employer, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer, later. Taxes and unemployment    If you did not keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see Allocated Tips, later. Taxes and unemployment   If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add the following tips to the amount in box 1 of your Form W-2. Taxes and unemployment Cash and charge tips you received that totaled less than $20 for any month. Taxes and unemployment The value of noncash tips, such as tickets, passes, or other items of value. Taxes and unemployment Example. Taxes and unemployment Ben Smith began working at the Blue Ocean Restaurant (his only employer in 2013) on June 30 and received $10,000 in wages during the year. Taxes and unemployment Ben kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. Taxes and unemployment He was not required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required. Taxes and unemployment Ben's Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. Taxes and unemployment He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return. Taxes and unemployment Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer. Taxes and unemployment    If you received $20 or more in cash and charge tips in a month from any one job and did not report all of those tips to your employer, you must report the social security, Medicare, and Additional Medicare taxes on the unreported tips as additional tax on your return. Taxes and unemployment To report these taxes, you must file a return even if you would not otherwise have to file. Taxes and unemployment You must use Form 1040. Taxes and unemployment (You cannot file Form 1040EZ or Form 1040A. Taxes and unemployment )    Use Form 4137 to figure social security and Medicare taxes. Taxes and unemployment Enter the tax on your return as instructed, and attach the completed Form 4137 to your return. Taxes and unemployment Use Form 8959 to figure Additional Medicare Tax. Taxes and unemployment    If you are subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported tips. Taxes and unemployment To get railroad retirement credit, you must report tips to your employer. Taxes and unemployment Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer. Taxes and unemployment   You may have uncollected taxes if your regular pay was not enough for your employer to withhold all the taxes you owe and you did not give your employer enough money to pay the rest of the taxes. Taxes and unemployment For more information, see Giving your employer money for taxes , under Reporting Tips to Your Employer, earlier. Taxes and unemployment   If your employer could not collect all the social security and Medicare taxes or railroad retirement tax you owe on tips reported for 2013, the uncollected taxes will be shown in box 12 of your Form W-2 (codes A and B). Taxes and unemployment You must report these amounts as additional tax on your return. Taxes and unemployment Unlike the uncollected portion of the regular (1. Taxes and unemployment 45%) Medicare tax, the uncollected Additional Medicare Tax is not reported in box 12 of Form W-2 with code B. Taxes and unemployment    To report these uncollected taxes, you must file a return even if you would not otherwise have to file. Taxes and unemployment You must report these taxes on Form 1040, line 60. Taxes and unemployment See the instructions for Form 1040, line 60. Taxes and unemployment (You cannot file Form 1040EZ or Form 1040A. Taxes and unemployment ) Allocated Tips If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2. Taxes and unemployment They are not included in box 1 with your wages and reported tips. Taxes and unemployment If box 8 is blank, this discussion does not apply to you. Taxes and unemployment What are allocated tips. Taxes and unemployment   These are tips that your employer assigned to you in addition to the tips you reported to your employer for the year. Taxes and unemployment Your employer will have done this only if: You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees, and The tips you reported to your employer were less than your share of 8% of food and drink sales. Taxes and unemployment No income, social security, Medicare, Additional Medicare or railroad retirement taxes are withheld on allocated tips. Taxes and unemployment How were your allocated tips figured. Taxes and unemployment   The tips allocated to you are your share of an amount figured by subtracting the reported tips of all employees from 8% (or an approved lower rate) of food and drink sales (other than carryout sales and sales with a service charge of 10% or more). Taxes and unemployment Your share of that amount was figured using either a method provided by an employer-employee agreement or a method provided by IRS regulations based on employees' sales or hours worked. Taxes and unemployment For information about the exact allocation method used, ask your employer. Taxes and unemployment Must you report your allocated tips on your tax return. Taxes and unemployment   You must report all tips you received in 2013 on your tax return, including both cash tips and noncash tips. Taxes and unemployment Any tips you reported to your employer for 2013 are included in the wages shown in box 1 of your Form W-2. Taxes and unemployment Add to the amount in box 1 only the tips you did not report to your employer. Taxes and unemployment This should include any allocated tips shown in box 8 on your Form(s) W-2, unless you have adequate records to show that you received less tips in the year than the allocated figures. Taxes and unemployment   See What tips to report under Reporting Tips on Your Tax Return, and Keeping a Daily Tip Record , earlier. Taxes and unemployment How to report allocated tips. Taxes and unemployment   Report the amount in box 1 and the allocated tips in box 8 of your Form(s) W-2 as wages on Form 1040, line 7; Form 1040NR, line 8; or Form 1040NR-EZ, line 3. Taxes and unemployment (You cannot file Form 1040A or Form 1040EZ when you have allocated tips. Taxes and unemployment )    Because social security, Medicare, and Additional Medicare taxes were not withheld from the allocated tips, you must report those taxes as additional tax on your return. Taxes and unemployment Complete Form 4137, and include the allocated tips on line 1 of the form. Taxes and unemployment See Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier. Taxes and unemployment Prev  Up  Next   Home   More Online Publications
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The Taxes And Unemployment

Taxes and unemployment 3. Taxes and unemployment   Savings Incentive Match Plans for Employees (SIMPLE) Table of Contents Introduction What Is a SIMPLE Plan?Eligible Employees How Are Contributions Made? How Much Can Be Contributed on Your Behalf?Matching contributions less than 3%. Taxes and unemployment Traditional IRA mistakenly moved to SIMPLE IRA. Taxes and unemployment When Can You Withdraw or Use Assets?Are Distributions Taxable? Introduction This chapter is for employees who need information about savings incentive match plans for employees (SIMPLE plans). Taxes and unemployment It explains what a SIMPLE plan is, contributions to a SIMPLE plan, and distributions from a SIMPLE plan. Taxes and unemployment Under a SIMPLE plan, SIMPLE retirement accounts for participating employees can be set up either as: Part of a 401(k) plan, or A plan using IRAs (SIMPLE IRA). Taxes and unemployment This chapter only discusses the SIMPLE plan rules that relate to SIMPLE IRAs. Taxes and unemployment See chapter 3 of Publication 560 for information on any special rules for SIMPLE plans that do not use IRAs. Taxes and unemployment If your employer maintains a SIMPLE plan, you must be notified, in writing, that you can choose the financial institution that will serve as trustee for your SIMPLE IRA and that you can roll over or transfer your SIMPLE IRA to another financial institution. Taxes and unemployment See Rollovers and Transfers Exception, later under When Can You Withdraw or Use Assets. Taxes and unemployment What Is a SIMPLE Plan? A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Taxes and unemployment See chapter 3 of Publication 560 for information on the requirements employers must satisfy to set up a SIMPLE plan. Taxes and unemployment A SIMPLE plan is a written agreement (salary reduction agreement) between you and your employer that allows you, if you are an eligible employee (including a self-employed individual), to choose to: Reduce your compensation (salary) by a certain percentage each pay period, and Have your employer contribute the salary reductions to a SIMPLE IRA on your behalf. Taxes and unemployment These contributions are called salary reduction contributions. Taxes and unemployment All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. Taxes and unemployment The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described in chapter 1. Taxes and unemployment Contributions are made on behalf of eligible employees. Taxes and unemployment (See Eligible Employees below. Taxes and unemployment ) Contributions are also subject to various limits. Taxes and unemployment (See How Much Can Be Contributed on Your Behalf , later. Taxes and unemployment ) In addition to salary reduction contributions, your employer must make either matching contributions or nonelective contributions. Taxes and unemployment See How Are Contributions Made , later. Taxes and unemployment You may be able to claim a credit for contributions to your SIMPLE plan. Taxes and unemployment For more information, see chapter 4. Taxes and unemployment Eligible Employees You must be allowed to participate in your employer's SIMPLE plan if you: Received at least $5,000 in compensation from your employer during any 2 years prior to the current year, and Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made. Taxes and unemployment Self-employed individual. Taxes and unemployment   For SIMPLE plan purposes, the term employee includes a self-employed individual who received earned income. Taxes and unemployment Excludable employees. Taxes and unemployment   Your employer can exclude the following employees from participating in the SIMPLE plan. Taxes and unemployment Employees whose retirement benefits are covered by a collective bargaining agreement (union contract). Taxes and unemployment Employees who are nonresident aliens and received no earned income from sources within the United States. Taxes and unemployment Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year. Taxes and unemployment Compensation. Taxes and unemployment   For purposes of the SIMPLE plan rules, your compensation for a year generally includes the following amounts. Taxes and unemployment Wages, tips, and other pay from your employer that is subject to income tax withholding. Taxes and unemployment Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457) plans, SEP plans, and SIMPLE plans. Taxes and unemployment Self-employed individual compensation. Taxes and unemployment   For purposes of the SIMPLE plan rules, if you are self-employed, your compensation for a year is your net earnings from self-employment (Schedule SE (Form 1040), Section A, line 4, or Section B, line 6) before subtracting any contributions made to a SIMPLE IRA on your behalf. Taxes and unemployment   For these purposes, net earnings from self-employment include services performed while claiming exemption from self-employment tax as a member of a group conscientiously opposed to social security benefits. Taxes and unemployment How Are Contributions Made? Contributions under a salary reduction agreement are called salary reduction contributions. Taxes and unemployment They are made on your behalf by your employer. Taxes and unemployment Your employer must also make either matching contributions or nonelective contributions. Taxes and unemployment Salary reduction contributions. Taxes and unemployment   During the 60-day period before the beginning of any year, and during the 60-day period before you are eligible, you can choose salary reduction contributions expressed either as a percentage of compensation, or as a specific dollar amount (if your employer offers this choice). Taxes and unemployment You can choose to cancel the election at any time during the year. Taxes and unemployment   Salary reduction contributions are also referred to as “elective deferrals. Taxes and unemployment ”   Your employer cannot place restrictions on the contributions amount (such as by limiting the contributions percentage), except to comply with the salary reduction contributions limit, discussed under How Much Can Be Contributed on Your Behalf, later. Taxes and unemployment Matching contributions. Taxes and unemployment   Unless your employer chooses to make nonelective contributions, your employer must make contributions equal to the salary reduction contributions you choose (elect), but only up to certain limits. Taxes and unemployment See How Much Can Be Contributed on Your Behalf below. Taxes and unemployment These contributions are in addition to the salary reduction contributions and must be made to the SIMPLE IRAs of all eligible employees (defined earlier) who chose salary reductions. Taxes and unemployment These contributions are referred to as matching contributions. Taxes and unemployment   Matching contributions on behalf of a self-employed individual are not treated as salary reduction contributions. Taxes and unemployment Nonelective contributions. Taxes and unemployment   Instead of making matching contributions, your employer may be able to choose to make nonelective contributions on behalf of all eligible employees. Taxes and unemployment These nonelective contributions must be made on behalf of each eligible employee who has at least $5,000 of compensation from your employer, whether or not the employee chose salary reductions. Taxes and unemployment   One of the requirements your employer must satisfy is notifying the employees that the election was made. Taxes and unemployment For other requirements that your employer must satisfy, see chapter 3 of Publication 560. Taxes and unemployment How Much Can Be Contributed on Your Behalf? The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made. Taxes and unemployment Salary reduction contributions limit. Taxes and unemployment   Salary reduction contributions (employee-chosen contributions or elective deferrals) that your employer can make on your behalf under a SIMPLE plan are limited to $12,000 for 2013. Taxes and unemployment The limitation remains at $12,000 for 2014. Taxes and unemployment If you are a participant in any other employer plans during 2013 and you have elective salary reductions or deferred compensation under those plans, the salary reduction contributions under the SIMPLE plan also are included in the annual limit of $17,500 for 2013 on exclusions of salary reductions and other elective deferrals. Taxes and unemployment You, not your employer, are responsible for monitoring compliance with these limits. Taxes and unemployment Additional elective deferrals can be contributed to your SIMPLE plan if: You reached age 50 by the end of 2013, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit. Taxes and unemployment The most that can be contributed in additional elective deferrals to your SIMPLE plan is the lesser of the following two amounts. Taxes and unemployment $2,500 for 2013, or Your compensation for the year reduced by your other elective deferrals for the year. Taxes and unemployment The additional deferrals are not subject to any other contribution limit and are not taken into account in applying other contribution limits. Taxes and unemployment The additional deferrals are not subject to the nondiscrimination rules as long as all eligible participants are allowed to make them. Taxes and unemployment Matching employer contributions limit. Taxes and unemployment   Generally, your employer must make matching contributions to your SIMPLE IRA in an amount equal to your salary reduction contributions. Taxes and unemployment These matching contributions cannot be more than 3% of your compensation for the calendar year. Taxes and unemployment See Matching contributions less than 3% below. Taxes and unemployment Example 1. Taxes and unemployment In 2013, Joshua was a participant in his employer's SIMPLE plan. Taxes and unemployment His compensation, before SIMPLE plan contributions, was $41,600 ($800 per week). Taxes and unemployment Instead of taking it all in cash, Joshua elected to have 12. Taxes and unemployment 5% of his weekly pay ($100) contributed to his SIMPLE IRA. Taxes and unemployment For the full year, Joshua's salary reduction contributions were $5,200, which is less than the $12,000 limit on these contributions. Taxes and unemployment Under the plan, Joshua's employer was required to make matching contributions to Joshua's SIMPLE IRA. Taxes and unemployment Because his employer's matching contributions must equal Joshua's salary reductions, but cannot be more than 3% of his compensation (before salary reductions) for the year, his employer's matching contribution was limited to $1,248 (3% of $41,600). Taxes and unemployment Example 2. Taxes and unemployment Assume the same facts as in Example 1 , except that Joshua's compensation for the year was $408,163 and he chose to have 2. Taxes and unemployment 94% of his weekly pay contributed to his SIMPLE IRA. Taxes and unemployment In this example, Joshua's salary reduction contributions for the year (2. Taxes and unemployment 94% × $408,163) were equal to the 2013 limit for salary reduction contributions ($12,000). Taxes and unemployment Because 3% of Joshua's compensation ($12,245) is more than the amount his employer was required to match ($12,000), his employer's matching contributions were limited to $12,000. Taxes and unemployment In this example, total contributions made on Joshua's behalf for the year were $24,000 ($12,000 (Joshua's contributions) + $12,000 (matching contributions)), the maximum contributions permitted under a SIMPLE IRA for 2013. Taxes and unemployment Matching contributions less than 3%. Taxes and unemployment   Your employer can reduce the 3% limit on matching contributions for a calendar year, but only if: The limit is not reduced below 1%, The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective, and Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which they can enter into salary reduction agreements. Taxes and unemployment   For purposes of applying the rule in item (2) in determining whether the limit was reduced below 3% for the year, any year before the first year in which your employer (or a former employer) maintains a SIMPLE IRA plan will be treated as a year for which the limit was 3%. Taxes and unemployment If your employer chooses to make nonelective contributions for a year, that year also will be treated as a year for which the limit was 3%. Taxes and unemployment Nonelective employer contributions limit. Taxes and unemployment   If your employer chooses to make nonelective contributions, instead of matching contributions, to each eligible employee's SIMPLE IRA, contributions must be 2% of your compensation for the entire year. Taxes and unemployment For 2013, only $255,000 of your compensation can be taken into account to figure the contribution limit. Taxes and unemployment   Your employer can substitute the 2% nonelective contribution for the matching contribution for a year if both of the following requirements are met. Taxes and unemployment Eligible employees are notified that a 2% nonelective contribution will be made instead of a matching contribution. Taxes and unemployment This notice is provided within a reasonable period during which employees can enter into salary reduction agreements. Taxes and unemployment Example 3. Taxes and unemployment Assume the same facts as in Example 2 , except that Joshua's employer chose to make nonelective contributions instead of matching contributions. Taxes and unemployment Because his employer's nonelective contributions are limited to 2% of up to $255,000 of Joshua's compensation, his employer's contribution to Joshua's SIMPLE IRA was limited to $5,100. Taxes and unemployment In this example, total contributions made on Joshua's behalf for the year were $17,100 (Joshua's salary reductions of $12,000 plus his employer's contribution of $5,100). Taxes and unemployment Traditional IRA mistakenly moved to SIMPLE IRA. Taxes and unemployment   If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA. Taxes and unemployment For more information, see Recharacterizations in chapter 1. Taxes and unemployment Recharacterizing employer contributions. Taxes and unemployment   You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. Taxes and unemployment SEPs are discussed in chapter 2 of Publication 560. Taxes and unemployment SIMPLE plans are discussed in this chapter. Taxes and unemployment Converting from a SIMPLE IRA. Taxes and unemployment   Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained in chapter 1 under Converting From Any Traditional IRA Into a Roth IRA . Taxes and unemployment    However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer. Taxes and unemployment When Can You Withdraw or Use Assets? Generally, the same distribution (withdrawal) rules that apply to traditional IRAs apply to SIMPLE IRAs. Taxes and unemployment These rules are discussed in chapter 1. Taxes and unemployment Your employer cannot restrict you from taking distributions from a SIMPLE IRA. Taxes and unemployment Are Distributions Taxable? Generally, distributions from a SIMPLE IRA are fully taxable as ordinary income. Taxes and unemployment If the distribution is an early distribution (discussed in chapter 1), it may be subject to the additional tax on early distributions. Taxes and unemployment See Additional Tax on Early Distributions, later. Taxes and unemployment Rollovers and Transfers Exception Generally, rollovers and trustee-to-trustee transfers are not taxable distributions. Taxes and unemployment Two-year rule. Taxes and unemployment   To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. Taxes and unemployment The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA. Taxes and unemployment   After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan). Taxes and unemployment Additional Tax on Early Distributions The additional tax on early distributions (discussed in chapter 1) applies to SIMPLE IRAs. Taxes and unemployment If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer's SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%. Taxes and unemployment If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed. Taxes and unemployment Prev  Up  Next   Home   More Online Publications