- Publication 15-A - Introductory Material
- Publication 15-A - Main Contents
- 1. Who Are Employees?
- Independent Contractors
- Common-Law Employees
- Statutory Employees
- Statutory Nonemployees
- Misclassification of Employees
- 2. Employee or Independent Contractor?
- Common-Law Rules
- Behavioral control.
- Instructions that the business gives to the worker.
- Training that the business gives to the worker.
- Financial control.
- The extent to which the worker has unreimbursed business expenses.
- The extent of the worker's investment.
- The extent to which the worker makes his or her services available to the relevant market.
- How the business pays the worker.
- The extent to which the worker can realize a profit or loss.
- Type of relationship.
- IRS help.
- Industry Examples
- Common-Law Rules
- 3. Employees of Exempt Organizations
- 4. Religious Exemptions and Special Rules for Ministers
- 5. Wages and Other Compensation
- Relocating for Temporary Work Assignments
- Employee Achievement Awards
- Scholarship and Fellowship Payments
- Outplacement Services
- Withholding for Idle Time
- Back Pay
- Supplemental Unemployment Compensation Benefits
- Golden Parachute Payments
- Interest-Free and Below-Market-Interest-Rate Loans
- Leave Sharing Plans
- Nonqualified Deferred Compensation Plans
- Tax-Sheltered Annuities
- Contributions to a Simplified Employee Pension (SEP)
- SIMPLE Retirement Plans
- 6. Sick Pay Reporting
- Sick Pay
- Payments That Aren't Sick Pay
- Sick Pay Plan
- Third-Party Payers of Sick Pay
- Social Security, Medicare, and FUTA Taxes on Sick Pay
- Income Tax Withholding on Sick Pay
- Depositing and Reporting
- Sick Pay Paid by Employer or Agent
- Sick Pay Paid by Third Party
- Example of Figuring and Reporting Sick Pay
- 7. Special Rules for Paying Taxes
- Common Paymaster
- Agent With an Approved Form 2678
- Reporting Agents
- Employee's Portion of Taxes Paid by Employer
- International Social Security Agreements
- 8. Pensions and Annuities
- How To Get Tax Help
- Preparing and filing your tax return.
- Employers can register to use Business Services Online.
- Tax reform.
- IRS social media.
- Watching IRS videos.
- Getting tax information in other languages.
- Getting tax forms and publications.
- Getting a transcript or copy of a return.
- Resolving tax-related identity theft issues.
- Making a tax payment.
- What if I can’t pay now?
- Understanding an IRS notice or letter.
- Contacting your local IRS office.
- The Taxpayer Advocate Service (TAS) Is Here To Help You
- 1. Who Are Employees?
- Publication 15-A - Additional Material
Publication 15-A (2020), Employer's Supplemental Tax Guide
(Supplement to Pub. 15, Employer's Tax Guide)
For use in 2020
For the latest information about developments related to Pub. 15-A, such as legislation enacted after it was published, go to IRS.gov/Pub15A.
2020 withholding tables. The discussion on the alternative methods for figuring federal income tax withholding and the Tables for Withholding on Distributions of Indian Gaming Profits to Tribal Members are no longer included in Pub.15-A. This information is now included in Pub. 15-T, Federal Income Tax Withholding Methods, along with the Percentage Method and Wage Bracket Method withholding tables. However, the IRS is no longer providing the Formula Tables for Percentage Method Withholding (for Automated Payroll Systems); Wage Bracket Percentage Method Tables (for Automated Payroll Systems); or the Combined Federal Income Tax, Employee Social Security Tax, and Employee Medicare Tax Withholding Tables.
New Form 1099-NEC. There is a new Form 1099-NEC to report nonemployee compensation paid in 2020. The 2020 Form 1099-NEC will be due February 1, 2021. For nonemployee compensation paid in 2019, continue to use Form 1099-MISC, which is due January 31, 2020. This revision of Pub. 15-A will continue to reference Form 1099-MISC because that is the form that is filed in 2020.
Social security and Medicare tax for 2020. The social security tax rate is 6.2% each for the employee and employer, unchanged from 2019. The social security wage base limit is $137,700.The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2019. There is no wage base limit for Medicare tax.Social security and Medicare taxes apply to the wages of household workers you pay $2,200 or more in cash wages in 2020. Social security and Medicare taxes apply to election workers who are paid $1,900 or more in cash or an equivalent form of compensation.
Disaster tax relief. Disaster tax relief is available for those impacted by disasters. For more information about disaster relief, go to IRS.gov/DisasterTaxRelief.
Moving expense reimbursements. Section 11048 of P.L. 115-97, Tax Cuts and Jobs Act, suspends the exclusion for qualified moving expense reimbursements from your employee’s income for tax years beginning after 2017 and before 2026. However, the exclusion is still available in the case of a member of the U.S. Armed Forces on active duty who moves because of a permanent change of station due to a military order. The exclusion applies only to reimbursement of moving expenses that the member could deduct if he or she had paid or incurred them without reimbursement. See Moving Expenses in Pub. 3, Armed Forces’ Tax Guide, for the definition of what constitutes a permanent change of station and to learn which moving expenses are deductible.
Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans. Qualified tax-exempt organizations that hire eligible unemployed veterans may be able to claim the work opportunity tax credit against their payroll tax liability using Form 5884-C. For more information, go to IRS.gov/WOTC.
COBRA premium assistance credit. Effective for tax periods beginning after 2013, the credit for COBRA premium assistance payments can't be claimed on Form 941, Employer's QUARTERLY Federal Tax Return (or Form 944, Employer's ANNUAL Federal Tax Return). Instead, after filing your Form 941 (or Form 944), file Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund (or Form 944-X, Adjusted Employer's ANNUAL Federal Tax Return or Claim for Refund) to claim the COBRA premium assistance credit. Filing a Form 941-X (or Form 944-X) before filing a Form 941 (or Form 944) for the return period may result in errors or delays in processing your Form 941-X (or Form 944-X). For more information, see the Instructions for Form 941 (or the Instructions for Form 944).
No federal income tax withholding on disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States. Disability payments (including Social Security Disability Insurance (SSDI) payments) for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) aren't included in income. Because federal income tax withholding is only required when a payment is includable in income, no federal income tax should be withheld from these payments. See Pub. 907, Tax Highlights for Persons With Disabilities.
Definition of marriage. A marriage of two individuals is recognized for federal tax purposes if the marriage is recognized by the state, possession, or territory of the United States in which the marriage is entered into, regardless of legal residence. Two individuals who enter into a relationship that is denominated as marriage under the laws of a foreign jurisdiction are recognized as married for federal tax purposes if the relationship would be recognized as marriage under the laws of at least one state, possession, or territory of the United States, regardless of legal residence. Individuals who have entered into a registered domestic partnership, civil union, or other similar relationship that isn't denominated as a marriage under the law of the state, possession, or territory of the United States where such relationship was entered into aren't lawfully married for federal tax purposes, regardless of legal residence.
Certification program for professional employer organizations (PEOs). The Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 required the IRS to establish a voluntary certification program for PEOs. PEOs handle various payroll administration and tax reporting responsibilities for their business clients and are typically paid a fee based on payroll costs. To become and remain certified under the certification program, certified professional employer organizations (CPEOs) must meet various requirements described in sections 3511 and 7705 and related published guidance. Certification as a CPEO may affect the employment tax liabilities of both the CPEO and its customers. A CPEO is generally treated for employment tax purposes as the employer of any individual who performs services for a customer of the CPEO and is covered by a contract described in section 7705(e)(2) between the CPEO and the customer (CPEO contract), but only for wages and other compensation paid to the individual by the CPEO. To become a CPEO, the organization must apply through the IRS Online Registration System. For more information or to apply to become a CPEO, go to IRS.gov/CPEO. Also, see Revenue Procedure 2017-14, 2017-3 I.R.B. 426, available at IRS.gov/irb/2017-03_IRB#RP-2017-14.
Outsourcing payroll tax duties. Generally, as an employer, you’re responsible to ensure that tax returns are filed and deposits and payments are made, even if you contract with a third party to perform these acts. You remain responsible if the third party fails to perform any required action. Before you choose to outsource any of your payroll and related tax duties (that is, withholding, reporting, and paying over social security, Medicare, FUTA, and income taxes) to a third-party payer, such as a payroll service provider or reporting agent, go to IRS.gov/OutsourcingPayrollDuties for helpful information on this topic.If a CPEO pays wages and other compensation to an individual performing services for you, and the services are covered by a contract described in section 7705(e)(2) between you and the CPEO (CPEO contract), then the CPEO is generally treated as the employer, but only for wages and other compensation paid to the individual by the CPEO. However, with respect to certain employees covered by a CPEO contract, you may also be treated as an employer of the employees and, consequently, may also be liable for federal employment taxes imposed or wages and other compensation paid by the CPEO to such employees.
Aggregate Form 941 filers. Agents and CPEOs must complete Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, when filing an aggregate Form 941. Aggregate Forms 941 are filed by agents approved by the IRS under section 3504 of the Internal Revenue Code. To request approval to act as an agent for an employer, the agent files Form 2678 with the IRS. Aggregate Forms 941 are also filed by CPEOs approved by the IRS under section 7705. CPEOs file Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement, to notify the IRS that they’ve started or ended a service contract with a client or customer.
Aggregate Form 940 filers. Agents and CPEOs must complete Schedule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers, when filing an aggregate Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Aggregate Forms 940 are filed by agents acting on behalf of home care service recipients who receive home care services through a program administered by a federal, state, or local government. To request approval to act as an agent on behalf of home care service recipients, the agent files Form 2678 with the IRS. Aggregate Forms 940 are also filed by CPEOs approved by the IRS under section 7705. CPEOs file Form 8973 to notify the IRS that they’ve started or ended a service contract with a client or customer.
You must receive written notice from the IRS to file Form 944. If you’ve been filing Forms 941 (or Forms 941-SS, Employer's QUARTERLY Federal Tax Return—American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands, or Formularios 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono), and believe your employment taxes for the calendar year will be $1,000 or less, and you would like to file Form 944 instead of Forms 941, you must contact the IRS during the first calendar quarter of the tax year to request to file Form 944. You must receive written notice from the IRS to file Form 944 instead of Forms 941 before you may file this form. For more information on requesting to file Form 944, including the methods and deadlines for making a request, see the Instructions for Form 944.
Employers can request to file Forms 941 instead of Form 944. If you received notice from the IRS to file Form 944 but would like to file Forms 941 instead, you must contact the IRS during the first calendar quarter of the tax year to request to file Forms 941. You must receive written notice from the IRS to file Forms 941 instead of Form 944 before you may file these forms. For more information on requesting to file Forms 941, including the methods and deadlines for making a request, see the Instructions for Form 944.
Federal tax deposits must be made by electronic funds transfer (EFT). You must use EFT to make all federal tax deposits. Generally, an EFT is made using the Electronic Federal Tax Payment System (EFTPS). If you don't want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. EFTPS is a free service provided by the Department of the Treasury. Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee.For more information on making federal tax deposits, see How To Deposit in Pub. 15. To get more information about EFTPS or to enroll in EFTPS, go to EFTPS.gov, or call 800-555-4477 or 800-733-4829 (TDD). Additional information about EFTPS is also available in Pub. 966.
Electronic filing and payment. Businesses can enjoy the benefits of filing and paying their federal taxes electronically. Whether you rely on a tax professional or handle your own taxes, the IRS offers you convenient programs to make filing and payment easier.Spend less time worrying about taxes and more time running your business. Use e-file and EFTPS to your benefit.
Electronic submission of Forms W-4, W-4P, W-4S, and W-4V. You may set up a system to electronically receive any or all of the following forms (and their Spanish versions, if available) from an employee or payee.
Form W-4, Employee's Withholding Certificate.
Form W-4P, Withholding Certificate for Pension or Annuity Payments.
Form W-4S, Request for Federal Income Tax Withholding From Sick Pay.
Form W-4V, Voluntary Withholding Request.
For each form that you establish an electronic submission system for, you must meet each of the following five requirements.
The electronic system must ensure that the information received by the payer is the information sent by the payee. The system must document all occasions of user access that result in a submission. In addition, the design and operation of the electronic system, including access procedures, must make it reasonably certain that the person accessing the system and submitting the form is the person identified on the form.
The electronic system must provide exactly the same information as the paper form.
The electronic submission must be signed with an electronic signature by the payee whose name is on the form. The electronic signature must be the final entry in the submission.
Upon request, you must furnish a hard copy of any completed electronic form to the IRS and a statement that, to the best of the payer's knowledge, the electronic form was submitted by the named payee. The hard copy of the electronic form must provide exactly the same information as, but need not be a facsimile of, the paper form. For Form W-4, the signature must be under penalty of perjury, and must contain the same language that appears on the paper version of the form. The electronic system must inform the employee that he or she must make a declaration contained in the perjury statement and that the declaration is made by signing the Form W-4.
You must also meet all recordkeeping requirements that apply to the paper forms.
For more information, see:
Regulations sections 31.3402(f)(5)-1(c) (for Form W-4), and
Announcement 99-6 (for Forms W-4P, W-4S, and W-4V). You can find Announcement 99-6 on page 24 of Internal Revenue Bulletin 1999-4 at IRS.gov/pub/irs-irbs/irb99-04.pdf.
If you maintain an electronic Form W-4 system, you should provide a field for employees who are eligible and want to claim an exemption from withholding to certify that they are exempt instead of writing "Exempt" below Step 4(c). You should also include the two conditions that taxpayers are certifying that they meet: "you had no federal income tax liability in 2019 and you expect to have no federal income tax liability in 2020". Additionally, you should provide a field for nonresident aliens to enter nonresident alien status.
Additional employment tax information. Go to IRS.gov/EmploymentTaxes for additional employment tax information.
Help for people with disabilities. You may call 800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability) with any employment tax questions. You may also use this number for assistance with unresolved tax problems.
Furnishing Form W-2 to employees electronically. You may set up a system to furnish Form W-2 electronically to employees. Each employee participating must consent (either electronically or by paper document) to receive his or her Form W-2 electronically, and you must notify the employee of all hardware and software requirements to receive the form. You may not send a Form W-2 electronically to any employee who doesn't consent or who has revoked consent previously provided.To furnish Forms W-2 electronically, you must meet the following disclosure requirements and provide a clear and conspicuous statement of each requirement to your employees.
The employee must be informed that he or she will receive a paper Form W-2 if consent isn't given to receive it electronically.
The employee must be informed of the scope and duration of the consent.
The employee must be informed of any procedure for obtaining a paper copy of his or her Form W-2 and whether or not the request for a paper statement is treated as a withdrawal of his or her consent to receiving his or her Form W-2 electronically.
The employee must be notified about how to withdraw a consent and the effective date and manner by which the employer will confirm the withdrawn consent. The employee must also be notified that the withdrawn consent doesn't apply to the previously issued Forms W-2.
The employee must be informed about any conditions under which electronic Forms W-2 will no longer be furnished (for example, termination of employment).
The employee must be informed of any procedures for updating his or her contact information that enables the employer to provide electronic Forms W-2.
The employer must notify the employee of any changes to the employer's contact information.
You must furnish electronic Forms W-2 by the same due date as the paper Forms W-2. For more information on furnishing Form W-2 to employees electronically, see Regulations section 31.6051-1(j).
Pub. 5146 explains employment tax examinations and appeal rights. Pub. 5146 provides employers with information on how the IRS selects employment tax returns to be examined, what happens during an exam, and what options an employer has in responding to the results of an exam, including how to appeal the results. Pub. 5146 also includes information on worker classification issues and tip exams.
Photographs of missing children. The IRS is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 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.
This publication supplements Pub.15. It contains specialized and detailed employment tax information supplementing the basic information provided in Pub.15. Pub. 15-B contains information about the employment tax treatment of various types of noncash compensation. Pub. 15-T contains the Percentage Method and Wage Bracket Method withholding tables, Tables for Withholding on Distributions of Indian Gaming Profits to Tribal Members, and a discussion on the alternative methods for figuring federal income tax withholding.
15-B Employer's Tax Guide to Fringe Benefits
15-T Federal Income Tax Withholding Methods
505 Tax Withholding and Estimated Tax
515 Withholding of Tax on Nonresident Aliens and Foreign Entities
583 Starting a Business and Keeping Records
1635 Employer Identification Number: Understanding Your EIN
Before you can know how to treat payments that you make to workers for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be:
An independent contractor,
A common-law employee,
A statutory employee, or
A statutory nonemployee.
This discussion explains these four categories. A later discussion, Employee or Independent Contractor in section 2, points out the differences between an independent contractor and an employee and gives examples from various types of occupations.
If an individual who works for you isn't an employee under the common-law rules (see section 2), you generally don't have to withhold federal income tax from that individual's pay. However, in some cases you may be required to withhold under the backup withholding requirements on these payments. See Pub. 15 for information on backup withholding.
People such as doctors, veterinarians, and auctioneers who work in an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
Under common-law rules, anyone who performs services for you is generally your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2.
If you have an employer-employee relationship, it makes no difference how it is labeled. The substance of the relationship, not the label, governs the worker's status. It doesn't matter whether the individual is employed full time or part time.
For employment tax purposes, no distinction is made between classes of employees. Superintendents, managers, and other supervisory personnel are all employees. An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, isn't considered an employee. A director of a corporation isn't an employee with respect to services performed as a director.
You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. However, the wages of certain employees may be exempt from one or more of these taxes. See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4).
If workers are independent contractors under the
common-law rules, such workers may nevertheless be treated as employees by statute, (also known as "statutory employees") for certain employment tax purposes. This would happen if they fall within any one of the following four categories and meet the three conditions described next under Social security and Medicare taxes .
A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity. See Salesperson in section 2.
There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if:
Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked, and
Their services are performed under a written contract providing that they won't be treated as employees for federal tax purposes.
An employer must generally withhold federal income taxes, withhold and pay over social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. An employer doesn't generally have to withhold or pay over any federal taxes on payments to independent contractors.
To determine whether an individual is an employee or an independent contractor under the common-law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. These facts are discussed next.
The following examples may help you properly classify your workers.
Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house. She didn't advance funds to help him carry on the work. She makes direct payments to the suppliers for all necessary materials. She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. She pays them an hourly rate and exercises almost constant supervision over the work. Jerry isn't free to transfer his assistants to other jobs. He may not work on other jobs while working for Wilma. He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. He and his assistants perform personal services for hourly wages. Jerry Jones and his assistants are employees of Wilma White.
Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. He uses his own tools and performs services in the order designated by the corporation and according to its specifications. The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. He doesn't have a place of business or hold himself out to perform similar services for others. Either party can end the services at any time. Milton Manning is an employee of the corporation.
Wallace Black agreed with the Sawdust Co. to supply the construction labor for a group of houses. The company agreed to pay all construction costs. However, he supplies all the tools and equipment. He performs personal services as a carpenter and mechanic for an hourly wage. He also acts as superintendent and foreman and engages other individuals to assist him. The company has the right to select, approve, or discharge any helper. A company representative makes frequent inspections of the construction site. When a house is finished, Wallace is paid a certain percentage of its costs. He isn't responsible for faults, defects of construction, or wasteful operation. At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. The company gives him a check for that amount from which he pays the assistants, although he isn't personally liable for their wages. Wallace Black and his assistants are employees of the Sawdust Co.
Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. A signed contract established a flat amount for the services rendered by Bill Plum. Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. He hires his own roofers who are treated as employees for federal employment tax purposes. If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. Bill Plum, doing business as Plum Roofing, is an independent contractor.
Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This isn't considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies that she obtained through advertisements. Vera is an independent contractor.
Rose Trucking contracts to deliver material for Forest, Inc., at $140 per ton. Rose Trucking isn't paid for any articles that aren't delivered. At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. All operating expenses, including insurance coverage, are paid by Jan Rose. All equipment is owned or rented by Jan and she is responsible for all maintenance. None of the drivers are provided by Forest, Inc. Jan Rose, operating as Rose Trucking, is an independent contractor.
Steve Smith, a computer programmer, is laid off when Megabyte, Inc., downsizes. Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. It isn't clear how long that it will take to complete the project, and Steve isn't guaranteed any minimum payment for the hours spent on the program. Megabyte provides Steve with no instructions beyond the specifications for the product itself. Steve and Megabyte have a written contract, which provides that Steve is considered to be an independent contractor, is required to pay federal and state taxes, and receives no benefits from Megabyte. Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. Steve works at home and isn't expected or allowed to attend meetings of the software development group. Steve is an independent contractor.
Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week and is on duty in Bob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She is required to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.
Sam Sparks performs auto repair services in the repair department of an auto sales company. He works regular hours and is paid on a percentage basis. He has no investment in the repair department. The sales company supplies all facilities, repair parts, and supplies; issues instructions on the amounts to be charged, parts to be used, and the time for completion of each job; and checks all estimates and repair orders. Sam is an employee of the sales company.
An auto sales agency furnishes space for Helen Bach to perform auto repair services. She provides her own tools, equipment, and supplies. She seeks out business from insurance adjusters and other individuals and does all of the body and paint work that comes to the agency. She hires and discharges her own helpers, determines her own and her helpers' working hours, quotes prices for repair work, makes all necessary adjustments, assumes all losses from uncollectible accounts, and receives, as compensation for her services, a large percentage of the gross collections from the auto repair shop. Helen is an independent contractor and the helpers are her employees.
Donna Yuma is a sole practitioner who rents office space and pays for the following items: telephone, computer, on-line legal research linkup, fax machine, and photocopier. Donna buys office supplies and pays bar dues and membership dues for three other professional organizations. Donna has a part-time receptionist who also does the bookkeeping. She pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. The bills include charges for long distance calls, on-line research time, fax charges, photocopies, postage, and travel, costs for which the corporations have agreed to reimburse her. Donna is an independent contractor.
Tom Spruce rents a cab from Taft Cab Co. for $150 per day. He pays the costs of maintaining and operating the cab. Tom Spruce keeps all fares that he receives from customers. Although he receives the benefit of Taft's two-way radio communication equipment, dispatcher, and advertising, these items benefit both Taft and Tom Spruce. Tom Spruce is an independent contractor.
To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. If a salesperson who works for you doesn't meet the tests for a common-law employee, discussed earlier in this section, you don't have to withhold federal income tax from his or her pay (see Statutory Employees in section 1). However, even if a salesperson isn't an employee under the usual common-law rules for income tax withholding, his or her pay may still be subject to social security, Medicare, and FUTA taxes as a statutory employee.
To determine whether a salesperson is an employee for social security, Medicare, and FUTA tax purposes, the salesperson must meet all eight elements of the statutory employee test. A salesperson is a statutory employee for social security, Medicare, and FUTA tax purposes if he or she:
Works full time for one person or company except, possibly, for sideline sales activities on behalf of some other person;
Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works;
Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments;
Sells merchandise for resale, or supplies for use in the customer's business;
Agrees to do substantially all of this work personally;
Has no substantial investment in the facilities used to do the work, other than in facilities for transportation;
Maintains a continuing relationship with the person or company for which he or she works; and
Isn't an employee under common-law rules.
Many nonprofit organizations are exempt from federal income tax. Although they don't have to pay federal income tax themselves, they must still withhold federal income tax from the pay of their employees. However, there are special social security, Medicare, and FUTA tax rules that apply to the wages that they pay their employees.
An organization wholly owned by a state or its political subdivision should contact the appropriate state official for information about reporting and getting social security and Medicare coverage for its employees.
Special rules apply to the treatment of ministers for social security and Medicare tax purposes. An exemption from social security and Medicare taxes is available for ministers and certain other religious workers and members of certain recognized religious sects. For more information on getting an exemption, see Pub. 517.
Pub. 15 provides a general discussion of taxable wages. Pub. 15-B discusses fringe benefits. The following topics supplement those discussions.
If an employee is given a temporary work assignment away from his or her regular place of work, certain travel expenses reimbursed or paid directly by the employer in accordance with an accountable plan (see section 5 in Pub. 15) may be excludable from the employee’s wages. Generally, a temporary work assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. If the employee’s new work assignment is indefinite, any living expenses reimbursed or paid by the employer (other than qualified moving expenses paid to a member of the U.S. Armed Forces on active duty who moves because of a permanent change of station due to a military order) must be included in the employee’s wages as compensation. For the travel expenses to be excludable:
The new work location must be outside of the city or general area of the employee’s regular work place or post of duty,
The travel expenses must otherwise be allowed as a deduction by the employee, and
The expenses must be for the period during which the employee is at the temporary work location.
If you reimburse or pay any personal expenses of an employee during his or her temporary work assignment, such as expenses for home leave for family members or for vacations, these amounts must be included in the employee's wages. See chapter 1 of Pub. 463, Travel, Entertainment, Gift, and Car Expenses, and section 5 of Pub. 15 for more information. These rules generally apply to temporary work assignments both inside and outside of the United States.
Don't withhold federal income, social security, or Medicare taxes on the fair market value of an employee achievement award if it is excludable from your employee's gross income. To be excludable from your employee's gross income, the award must be tangible personal property given to an employee for length of service or safety achievement, awarded as part of a meaningful presentation, and awarded under circumstances that don't indicate that the payment is disguised compensation. Excludable employee achievement awards also aren't subject to FUTA tax.
The exclusion doesn’t apply to awards of cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements granting only the right to select and receive tangible personal property from a limited assortment of items preselected or preapproved by you). The exclusion also doesn’t apply to vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.
Only amounts that you pay as a qualified scholarship to a candidate for a degree may be excluded from the recipient's gross income. A qualified scholarship is any amount granted as a scholarship or fellowship that is used for:
Tuition and fees required to enroll in, or to attend, an educational institution, or
Fees, books, supplies, and equipment that are required for courses at the educational institution.
The exclusion from income doesn't apply to the portion of any amount received that represents payment for teaching, research, or other services required as a condition of receiving the scholarship or tuition reduction. These amounts are reportable on Form W-2. However, the exclusion will still apply for any amount, despite any service condition attached to the amount, received under the National Health Service Corps Scholarship Program; the Armed Forces Health Professions Scholarship and Financial Assistance Program; and a comprehensive student work-learning-service program operated by a work college, as defined in section 448(e) of the Higher Education Act of 1965.
Any amounts that you pay for room and board aren't excludable from the recipient's gross income. A qualified scholarship isn't subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. For more information, see Pub. 970, Tax Benefits for Education.
If you provide outplacement services to your employees to help them find new employment (such as career counseling, resume assistance, or skills assessment), the value of these benefits may be income to them and subject to all withholding taxes. However, the value of these services won't be subject to any employment taxes if:
You derive a substantial business benefit from providing the services (such as improved employee morale or business image) separate from the benefit that you would receive from the mere payment of additional compensation, and
The employee would be able to deduct the cost of the services as employee business expenses if he or she had paid for them.
However, if you receive no additional benefit from providing the services, or if the services aren't provided on the basis of employee need, then the value of the services is treated as wages and is subject to federal income tax withholding and social security and Medicare taxes. Similarly, if an employee receives the outplacement services in exchange for reduced severance pay (or other taxable compensation), then the amount the severance pay is reduced is treated as wages for employment tax purposes.
Payments made under a voluntary guarantee to employees for idle time (any time during which an employee performs no services) are wages for the purposes of social security, Medicare, and FUTA taxes, and federal income tax withholding.
Treat back pay as wages in the year paid and withhold and pay employment taxes as required. If back pay was awarded by a court or government agency to enforce a federal or state statute protecting an employee's right to employment or wages, special rules apply for reporting those wages to the Social Security Administration. These rules also apply to litigation actions and settlement agreements or agency directives that are resolved out of court and not under a court decree or order. Examples of pertinent statutes include, but aren't limited to, the National Labor Relations Act, Fair Labor Standards Act, Equal Pay Act, and Age Discrimination in Employment Act. See Pub. 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, and Form SSA-131, Employer Report of Special Wage Payments, for details.
If you pay, under a plan, supplemental unemployment compensation benefits to a former employee, all or part of the payments may be taxable and subject to federal income tax withholding, depending on how the plan is funded. Amounts that represent a return to the employee of amounts previously subject to tax aren't taxable and aren't subject to withholding. You should withhold federal income tax on the taxable part of the payments made, under a plan, to an employee who is involuntarily separated because of a reduction in force, discontinuance of a plant or operation, or other similar condition. It doesn't matter whether the separation is temporary or permanent.
There are special rules that apply in determining whether supplemental unemployment compensation benefits are excluded from wages for social security, Medicare, and FUTA tax purposes. To be excluded from wages for such purposes, the benefits must meet the following requirements.
Benefits are paid only to unemployed former employees who are laid off by the employer.
Eligibility for benefits depends on meeting prescribed conditions after termination.
The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state law, and the amount of regular weekly pay.
The right to benefits doesn't accrue until a prescribed period after termination.
Benefits aren't attributable to the performance of particular services.
No employee has any right to the benefits until qualified and eligible to receive benefits.
Benefits may not be paid in a lump sum.
Withholding on taxable supplemental unemployment compensation benefits must be based on the withholding certificate (Form W-4) that the employee gave to you.
For more information, see Revenue Ruling 90-72, 1990-36 I.R.B. 13.
A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. Under the agreement, the corporation agrees to pay certain amounts to its key personnel in the event of a change in ownership or control of the corporation. Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. See Regulations section 1.280G-1 for more information.
No deduction is allowed to the corporation for any excess parachute payment. To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. A parachute payment for purposes of section 280G is any payment that meets all of the following.
The payment is in the nature of compensation.
The payment is to, or for the benefit of, a disqualified individual. A disqualified individual is anyone who at any time during the 12-month period prior to and ending on the date of the change in ownership or control of the corporation (the disqualified individual determination period) was an employee or independent contractor and was, in regard to that corporation, a shareholder, an officer, or highly compensated individual.
The payment is contingent on a change in ownership of the corporation, the effective control of the corporation, or the ownership of a substantial portion of the assets of the corporation.
The payment has an aggregate present value of at least three times the individual's base amount. The base amount is the average annual compensation for service includible in the individual's gross income over the most recent 5 taxable years.
An excess parachute payment amount is the excess of any parachute payment over the base amount. For more information, see Regulations section 1.280G-1. The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. If the recipient is an employee, the 20% excise tax is to be withheld by the corporation.
An officer of a corporation receives a golden parachute payment of $400,000. This is more than three times greater than his or her average compensation of $100,000 over the previous 5-year period. The excess parachute payment is $300,000 ($400,000 minus $100,000). The corporation can't deduct the $300,000 and must withhold the excise tax of $60,000 (20% of $300,000).
In general, if an employer lends an employee more than $10,000 at an interest rate less than the current applicable federal rate (AFR), the difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee. This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax.
This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. Include it in compensation on Form W-2 (or Form 1099-MISC for an independent contractor). The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. You can get these rates by visiting IRS.gov and entering "AFR" in the search box. For more information, see section 7872 and its related regulations.
If you establish a leave sharing plan for your employees that allows them to transfer leave to other employees for medical emergencies, the amounts paid to the recipients of the leave are considered wages. These amounts are includible in the gross income of the recipients and are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. Don't include these amounts in the wages of the transferors. These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies.
In addition, you may establish a leave-sharing plan that allows your employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. Under such programs, the IRS won’t assert that a leave donor who deposits leave in the employer sponsored leave bank under a major disaster leave-sharing program has income, wages, compensation or rail wages for the deposited leave, if the plan treats the employer’s payments to the leave recipient as wages or compensation for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), the Railroad Retirement Act (RRTA), the Railroad Unemployment Repayment Tax (RURT), and the federal income tax withholding, unless excluded by another provision of law. See Notice 2006-59, 2006-28 I.R.B. 60, available at IRS.gov/irb/2006-28_IRB#NOT-2006-59 for what constitutes a major disaster and other rules.
Section 409A provides that all amounts deferred under a nonqualified deferred compensation (NQDC) plan for all tax years are currently includible in gross income (to the extent the amounts deferred are not subject to a substantial risk of forfeiture and not previously included in gross income) and subject to additional taxes, unless certain requirements are met pertaining to, among other things, elections to defer compensation and distributions under an NQDC plan. Section 409A also includes rules that apply to certain trusts or similar arrangements associated with NQDC plans if the trusts or arrangements are located outside of the United States, are restricted to the provision of benefits in connection with a decline in the financial health of the plan sponsor, or contributions are made to the trust during certain periods such as when a qualified plan of the service recipient is underfunded. Employers must withhold federal income tax (but not the additional Section 409A taxes) on any amount includible in gross income under section 409A. Income included under section 409A from an NQDC plan must be reported on Form W-2 or on Form 1099-MISC, whichever applies. Amounts deferred during the year under an NQDC plan subject to section 409A may also be reported on the Form W-2 or Form 1099-MISC, but this is not required. For more information, see the Instructions for Forms W-2 and W-3 and the Instructions for Form 1099-MISC. These reporting rules don't affect the application or reporting of social security, Medicare, or FUTA taxes.
The provisions don't prevent the inclusion of amounts in income or wages under other provisions of the Internal Revenue Code or common-law principles, such as when amounts are actually or constructively received or irrevocably contributed to a separate fund. For more information about nonqualified deferred compensation plans, see Regulations sections 1.409A-1 through 1.409A-6. Notice 2008-113 provides guidance on the correction of certain operation failures of an NQDC plan. Notice 2008-113, 2008-51 I.R.B. 1305, is available at IRS.gov/irb/2008-51_IRB#NOT-2008-113. Also see Notice 2010-6, 2010-3 I.R.B. 275, available at IRS.gov/irb/2010-03_IRB#NOT-2010-6 and Notice 2010-80, 2010-51 I.R.B. 853, available at IRS.gov/irb/2010-51_IRB#NOT-2010-80.
Employer payments made by a public educational institution or a tax-exempt organization to purchase a tax-sheltered annuity for an employee (annual deferrals) are included in the employee's social security and Medicare wages, if the payments are made because of a salary reduction agreement. However, they aren't included in box 1 on Form W-2 in the year the deferrals are made and aren't subject to federal income tax withholding. See Regulations section 31.3121(a)(5)-2 for the definition of a salary reduction agreement.
An employer's SEP contributions to an employee's individual retirement arrangement (IRA) are excluded from the employee's gross income. These excluded amounts aren't subject to social security, Medicare, or FUTA taxes, or federal income tax withholding. However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. See Pub. 560 for more information about SEPs.
Employer and employee contributions to a savings incentive match plan for employees (SIMPLE) retirement account (subject to limitations) are excludable from the employee's income and are exempt from federal income tax withholding. An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. However, an employee's salary reduction contributions to a SIMPLE are subject to social security, Medicare, and FUTA taxes. For more information about SIMPLE retirement plans, see Pub. 560.
Special rules apply to the reporting of sick pay payments to employees. How these payments are reported depends on whether the payments are made by the employer or a third party, such as an insurance company.
Sick pay is usually subject to social security, Medicare, and FUTA taxes. For exceptions, see Social Security, Medicare, and FUTA Taxes on Sick Pay , later in this section. Sick pay may also be subject to either mandatory or voluntary federal income tax withholding, depending on who pays it.
Sick pay generally means any amount paid under a plan because of an employee's temporary absence from work due to injury, sickness, or disability. It may be paid by either the employer or a third party, such as an insurance company. Sick pay includes both short- and long-term benefits. It is often expressed as a percentage of the employee's regular wages.
Sick pay doesn't include the following payments.
Disability retirement payments. Disability retirement payments aren't sick pay and aren't discussed in this section. Those payments are subject to the rules for federal income tax withholding from pensions and annuities. See section 8.
Workers' compensation. Payments because of a work-related injury or sickness that are made under a workers' compensation law aren't sick pay and aren't subject to employment taxes. But see Payments in the nature of workers' compensation—public employees next.
Payments in the nature of workers' compensation—public employees. State and local government employees, such as police officers and firefighters, sometimes receive payments due to an injury in the line of duty under a statute that isn't the general workers' compensation law of a state. If the statute limits benefits to work-related injuries or sickness and doesn't base payments on the employee's age, length of service, or prior contributions, the statute is "in the nature of" a workers' compensation law. Payments under a statute in the nature of a workers' compensation law aren't sick pay and aren't subject to employment taxes. For more information, see Regulations section 31.3121(a)(2)-1.
Medical expense payments. Payments under a definite plan or system for medical and hospitalization expenses, or for insurance covering these expenses, aren't sick pay and aren't subject to employment taxes.
Payments unrelated to absence from work. Accident or health insurance payments unrelated to absence from work aren't sick pay and aren't subject to employment taxes. These include payments for:
Permanent loss of a member or function of the body,
Permanent loss of the use of a member or function of the body, or
Permanent disfigurement of the body.
Example. Donald was injured in a car accident and lost an eye. Under a policy paid for by Donald's employer, Delta Insurance Co. paid Donald $20,000 as compensation for the loss of his eye. Because the payment was determined by the type of injury and was unrelated to Donald's absence from work, it isn't sick pay and isn't subject to federal employment taxes.
A sick pay plan is a plan or system established by an employer under which sick pay is available to employees generally or to a class or classes of employees. This doesn't include a situation in which benefits are provided on a discretionary or occasional basis with merely an intention to aid particular employees in time of need.
You have a sick pay plan or system if the plan is in writing or is otherwise made known to employees, such as by a bulletin board notice or your long and established practice. Some indications that you have a sick pay plan or system include references to the plan or system in the contract of employment, employer contributions to a plan, or segregated accounts for the payment of benefits.
The requirements for federal income tax withholding on sick pay and the methods for figuring it differ depending on whether the sick pay is paid by:
An agent of the employer (defined earlier in this section), or
A third party that isn't the employer's agent.
This section discusses who is liable for depositing social security, Medicare, FUTA, and withheld federal income taxes on sick pay. These taxes must be deposited under the same rules that apply to deposits of taxes on regular wage payments. See Pub. 15 for information on the deposit rules.
This section also explains how sick pay should be reported on Forms W-2, W-3, 940, and 941 (or Form 944).
If you or your agent (defined earlier in this section) make sick pay payments, you deposit taxes and file Forms W-2, W-3, 940, and 941 (or Form 944) under the same rules that apply to regular wage payments.
However, any agreement between the parties may require your agent to carry out responsibilities that would otherwise have been borne by you. In this situation, your agent should use its own name and EIN (rather than yours) for the responsibilities that it has assumed.
The depositing and reporting rules for a third party that isn't your agent depend on whether liability has been transferred as discussed under Third party not employer's agent , earlier in this section.
To figure the due dates and amounts of its deposits of employment taxes, a third party should combine:
The liability for the wages paid to its own employees, and
The liability for payments it made to all employees of all its clients. This doesn't include any liability transferred to the employer.
Note. The following example is for wages paid in 2019.
Dave, an employee of Edgewood Corporation, was seriously injured in a car accident on January 1, 2019. Dave's last day of work was December 31, 2018. The accident wasn't job related.
Key, an insurance company that wasn't an agent of the employer, paid Dave $2,000 sick pay each month for 10 months, beginning in January 2019. Dave submitted a Form W-4S to Key, requesting $210 be withheld from each payment for federal income tax. Dave received no payments from Edgewood, his employer, from January 2019 through October 2019. Dave returned to work on November 1, 2019.
For the policy year in which the car accident occurred, Dave paid a part of the premiums for his coverage, and Edgewood paid the remaining part. The plan was, therefore, a "contributory plan." During the 3 policy years before the calendar year of the accident, Edgewood paid 70% of the total of the net premiums for its employees' insurance coverage, and its employees paid 30%.
|THIRD PARTY SICK PAY – NOT AS AN AGENT AND LIABILITY TRANSFERRED TO EMPLOYER|
|Employer Responsibilities||Third Party Responsibilities|
|Withhold Employee Taxes|
|Income||No||Yes, if Form W-4S is submitted|
|Deposit Employee Taxes|
|Income||No||Yes — Using Third Party EIN|
|Social Security||No||Yes — Using Third Party EIN|
|Medicare||No||Yes — Using Third Party EIN|
|Deposit Employer Taxes|
|Social Security||Yes — Using Employer EIN||No|
|Medicare||Yes — Using Employer EIN||No|
|FUTA||Yes — Using Employer EIN||No|
|Report Employee Wage and Taxes on Form 941|
|Income||Report Taxable Wages||Report Tax Withheld|
|Social Security||*Report Taxable Wages||*Report Taxable Wages|
|Medicare||*Report Taxable Wages||*Report Taxable Wages|
|*Adjustment on line 8 for employee taxes deposited by third party.||*Adjustment on line 8 for employer taxes deposited by employer.|
|Report Employee Wage and Taxes on Form W-2*|
|Income||Yes||No — File Form 8922|
|Social Security||Yes||No — File Form 8922|
|Medicare||Yes||No — File Form 8922|
|*See the instructions earlier if operating under the Optional rule for Form W-2 .|
If two or more related corporations employ the same individual at the same time and pay this individual through a common paymaster that is one of the corporations, the corporations are considered to be a single employer. They have to pay, in total, no more in social security tax than a single employer would pay.
Each corporation must pay its own part of the employment taxes and may deduct only its own part of the wages. The deductions won't be allowed unless the corporation reimburses the common paymaster for the wage and tax payments. See Regulations section 31.3121(s)-1 for more information. The common paymaster is responsible for filing information and tax returns and issuing Forms W-2 with respect to wages it is considered to have paid as a common paymaster.
Employers and payers must use Form 2678 to request approval for an agent to file returns and make deposits or payments of their employment or other withholding taxes. See Revenue Procedure 2013-39, 2013-52 I.R.B. 830, available at IRS.gov/irb/2013-52_IRB#RP-2013-39; Revenue Procedure 84-33, 1984-1 C.B. 502; and the General Instructions for Forms W-2 and W-3 for procedures and reporting requirements. Form 2678 doesn't apply to FUTA taxes reportable on Form 940 unless the employer is a home care service recipient receiving home care services through a program administered by a federal, state, or local government agency.
Agents filing an aggregate Form 940 must file Schedule R (Form 940). Agents filing an aggregate Form 941 must file Schedule R (Form 941).
For more information on third-party payer arrangements, including agents with an approved Form 2678, reporting agents, and CPEOs, see section 16 of Pub. 15.
The information provided in this section doesn't take into account an employer that chooses to pay the Additional Medicare Tax on behalf of the employee.
If you pay your employee's social security and Medicare taxes without deducting them from the employee's pay, you must include the amount of the payments in the employee's wages for federal income tax withholding and social security, Medicare, and FUTA taxes. This increase in the employee's wages for your payment of the employee's social security and Medicare taxes is also subject to employee social security and Medicare taxes. This again increases the amount of the additional taxes you must pay.
To figure the employee's increased wages in this situation, divide the stated pay (the amount that you pay without taking into account your payment of employee social security and Medicare taxes) by a factor for that year. This factor is determined by subtracting from 1 the combined employee social security and Medicare tax rate for the year that the wages are paid. For 2020, the factor is 0.9235 (1 − 0.0765). If the stated pay is more than $127,165.95 (2020 wage base $137,700 × 0.9235), follow the procedure described under Stated pay of more than $127,165.95 in 2020 below.
The United States has bilateral social security agreements with many countries to eliminate dual taxation and coverage under two social security systems. Under these agreements, sometimes known as totalization agreements, employees generally must pay social security taxes only to the country where they work. Employees and employers who are subject to foreign social security taxes under these agreements are potentially exempt from U.S. social security taxes, including the Medicare portion. For more information, go to SSA.gov/international, or see Pub. 519, U.S. Tax Guide for Aliens.
Generally, federal income tax withholding applies to the taxable part of payments made from pension, profit-sharing, stock bonus, annuity, certain deferred compensation plans, individual retirement arrangements (IRAs), and commercial annuities. Don't withhold income taxes from amounts totally exempt from tax. If part of a distribution is taxable and part is nontaxable, withhold income taxes only on the part subject to tax when known. The method and rate of withholding depends on (a) the kind of payment, (b) whether the payments are to be delivered outside the United States and its possessions, and (c) whether the payee is a nonresident alien individual, a nonresident alien beneficiary, or a foreign estate. Qualified distributions from Roth IRAs and Roth 401(k)s are nontaxable and, therefore, not subject to withholding. See Payments to Foreign Persons and Payments Outside the United States , later in this section, for special withholding rules that apply to payments outside the United States and payments to foreign persons.
The recipient of certain pension or annuity payments can choose not to have federal income tax withheld from the payments by using line 1 of Form W-4P. For an estate, the election to have no federal income tax withheld can be made by the executor or personal representative of the decedent. The estate's EIN should be entered in the area reserved for "Your social security number" on Form W-4P.
Federal income tax must be withheld from eligible rollover distributions. See Eligible Rollover Distribution—20% Withholding , later in this section.
Periodic payments are those made in installments at regular intervals over a period of more than 1 year. They may be paid annually, quarterly, monthly, etc. Withholding from periodic payments of a pension or annuity is generally figured in the same manner as withholding from wages. However, it doesn’t matter if the Form W-4P is from before 2020 or is a 2020 Form W-4P. In either case, for the appropriate computational method to figure federal income tax withholding on periodic payments, see section 5 of
If the recipient wants income tax withheld, he or she must designate the number of withholding allowances on Form W-4P, line 2, and can designate an additional amount to be withheld on line 3. If the recipient doesn't want any federal income tax withheld from his or her periodic payments, he or she can check the box on Form W-4P, line 1, and submit the form to you. If the recipient doesn't submit Form W-4P, you must withhold on periodic payments as if the recipient were married claiming three withholding allowances. Generally, this means that tax will be withheld if the pension or annuity is at least $2,095 a month.
If you receive a Form W-4P that doesn't contain the recipient's correct taxpayer identification number (TIN), you must withhold as if the recipient were single claiming zero withholding allowances even if the recipient attempts to choose not to have income tax withheld.
See section 5 of Pub. 15-T for the appropriate computational method to figure federal income tax withholding on periodic payments if the recipient doesn’t submit Form W-4P or you receive a Form W-4P that doesn’t contain the recipient’s correct TIN.
There are some kinds of periodic payments for which the recipient can't use Form W-4P because they are already defined as wages subject to federal income tax withholding. These include retirement pay for service in the U.S. Armed Forces and payments from certain nonqualified deferred compensation plans and deferred compensation plans of exempt organizations described in section 457.
The recipient's Form W-4P stays in effect until he or she changes or revokes it. You must notify recipients each year of their right to choose not to have federal income tax withheld or to change their previous choice.
You must withhold at a flat 10% rate from nonperiodic payments (but see Eligible Rollover Distribution—20% Withholding next) unless the recipient chooses not to have income tax withheld (if permitted). Distributions from an IRA that are payable on demand are treated as nonperiodic payments. A recipient can choose not to have income tax withheld from a nonperiodic payment by submitting Form W-4P (containing his or her correct TIN) and checking the box on line 1. Generally, the choice not to have federal income tax withheld will apply to any later payment from the same plan. A recipient can't use line 2 for nonperiodic payments, but he or she may use line 3 to specify an additional amount that he or she wants withheld.
If a recipient submits a Form W-4P that doesn't contain his or her correct TIN, you can't honor his or her request not to have income tax withheld and you must withhold 10% of the payment for federal income tax.
Distributions from eligible retirement plans (other than IRAs), such as qualified plans, 401(k) plans, section 457(b) plans maintained by a governmental employer, section 403(a) annuity plans or section 403(b) tax-sheltered annuities that are eligible to be rolled over tax free to an IRA or another eligible retirement plan, are subject to a flat 20% withholding rate. The 20% withholding rate is required and a recipient can't choose to have less federal income tax withheld from eligible rollover distributions. However, you shouldn't withhold federal income tax if the entire distribution is transferred in a direct rollover to a traditional IRA or another eligible retirement plan.
Unless the recipient is a nonresident alien, withholding in the manner described earlier is required on any periodic or nonperiodic payments that are delivered outside the United States and its possessions. A recipient can't choose not to have federal income tax withheld.
In the absence of a treaty exemption, nonresident aliens, nonresident alien beneficiaries, and foreign estates generally are subject to a 30% withholding tax under section 1441 on the taxable portion of a periodic or nonperiodic pension or annuity payment that is from U.S. sources. However, many tax treaties provide that private pensions and annuities are exempt from withholding and tax. Also, payments from certain pension plans are exempt from withholding even if no tax treaty applies. See Pub. 515 and Pub. 519. A foreign person should submit Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), to you before receiving any payments. The Form W-8BEN must contain the foreign person's TIN to support a withholding exemption. A TIN for this purpose means a U.S. TIN (SSN or individual taxpayer identification number (ITIN)). However, for a claim based on a tax treaty, a foreign TIN may be substituted for a U.S. TIN.
Special rules may apply to nonresident aliens who relinquished U.S. citizenship or ceased to be long-term residents of the United States after June 16, 2008. For more information, see section 5 of Notice 2009-85, 2009-45 I.R.B. 598, available at IRS.gov/irb/2009-45_IRB#NOT-2009-85. Also see Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits.
By January 31 of the next year, you must furnish a statement on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., showing the total amount of the recipient's pension or annuity payments and the total federal income tax you withheld during the prior year. Report income tax withheld on Form 945, Annual Return of Withheld Federal Income Tax, not on Forms 941 or Form 944.
If the recipient is a foreign person who has provided you with Form W-8BEN, you instead must furnish a statement to the recipient on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, by March 15 for the prior year. Report federal income tax withheld on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
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TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.
The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.
TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:
Your problem is causing financial difficulty for you, your family, or your business;
You face (or your business is facing) an immediate threat of adverse action; or
You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.
TAS has offices in every state, the District of Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/Contact-Us. You can also call them at 877-777-4778.
TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to them at IRS.gov/SAMS.
TAS also has a website, Tax Reform Changes, which shows you how the new tax law may change your future tax filings and helps you plan for these changes. The information is categorized by tax topic in the order of the IRS Form 1040 or 1040-SR. Go to TaxChanges.us for more information.
- Back pay, Back Pay
- Below-market rate loans, Interest-Free and Below-Market-Interest-Rate Loans
- Electronic Form W-2, Reminders
- Employee achievement awards, Employee Achievement Awards
- Employee or contractor
- Employee's taxes paid by employer, Employee's Portion of Taxes Paid by Employer
- Employees defined, 1. Who Are Employees?
- Employees misclassification, Misclassification of Employees
- Excessive termination payments (golden parachute), Golden Parachute Payments
- Exempt organizations, 3. Employees of Exempt Organizations
- Golden parachute, Golden Parachute Payments
- Identity theft, Resolving tax-related identity theft issues.
- Idle time, Withholding for Idle Time
- Independent contractors, Independent Contractors
- Interest-free loans, Interest-Free and Below-Market-Interest-Rate Loans
- International social security agreements, International Social Security Agreements
- Leave sharing plans, Leave Sharing Plans
- Loans, interest-free or below-market rate, Interest-Free and Below-Market-Interest-Rate Loans
- Nonqualified plans, Nonqualified Deferred Compensation Plans
- Real estate agents, Licensed real estate agents.
- Religious exemptions, 4. Religious Exemptions and Special Rules for Ministers
- Reporting agents, Agent With an Approved Form 2678
- Scholarship payments, Scholarship and Fellowship Payments
- Sick pay, 6. Sick Pay Reporting
- SIMPLE retirement plans, SIMPLE Retirement Plans
- Simplified employee pension, Contributions to a Simplified Employee Pension (SEP)
- Statutory employees, Statutory Employees
- Statutory nonemployees, Statutory Nonemployees
- Supplemental unemployment benefits, Supplemental Unemployment Compensation Benefits
- Tax help, How To Get Tax Help
- Tax-exempt organizations, 3. Employees of Exempt Organizations
- Tax-sheltered annuities, Tax-Sheltered Annuities
- Technical service specialists, Technical service specialists.
- Third-party sick pay, Sick Pay Paid by Third Party
- Third-party sick pay recap, Form 8922, Third-Party Sick Pay Recap.