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1040a 2012

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1040a 2012

1040a 2012 Publication 15-B - Main Content Table of Contents 1. 1040a 2012 Fringe Benefit OverviewAre Fringe Benefits Taxable? Cafeteria Plans Simple Cafeteria Plans 2. 1040a 2012 Fringe Benefit Exclusion RulesAccident and Health Benefits Achievement Awards Adoption Assistance Athletic Facilities De Minimis (Minimal) Benefits Dependent Care Assistance Educational Assistance Employee Discounts Employee Stock Options Employer-Provided Cell Phones Group-Term Life Insurance Coverage Health Savings Accounts Lodging on Your Business Premises Meals Moving Expense Reimbursements No-Additional-Cost Services Retirement Planning Services Transportation (Commuting) Benefits Tuition Reduction Working Condition Benefits 3. 1040a 2012 Fringe Benefit Valuation RulesGeneral Valuation Rule Cents-Per-Mile Rule Commuting Rule Lease Value Rule Unsafe Conditions Commuting Rule 4. 1040a 2012 Rules for Withholding, Depositing, and ReportingTransfer of property. 1040a 2012 Amount of deposit. 1040a 2012 Limitation. 1040a 2012 Conformity rules. 1040a 2012 Election not to withhold income tax. 1040a 2012 How To Get Tax Help 1. 1040a 2012 Fringe Benefit Overview A fringe benefit is a form of pay for the performance of services. 1040a 2012 For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. 1040a 2012 Performance of services. 1040a 2012   A person who performs services for you does not have to be your employee. 1040a 2012 A person may perform services for you as an independent contractor, partner, or director. 1040a 2012 Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services. 1040a 2012 Provider of benefit. 1040a 2012   You are the provider of a fringe benefit if it is provided for services performed for you. 1040a 2012 You are considered the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee for services the employee performs for you. 1040a 2012 For example, if, in exchange for goods or services, your customer provides day care services as a fringe benefit to your employees for services they provide for you as their employer, then you are the provider of this fringe benefit even though the customer is actually providing the day care. 1040a 2012 Recipient of benefit. 1040a 2012   The person who performs services for you is considered the recipient of a fringe benefit provided for those services. 1040a 2012 That person may be considered the recipient even if the benefit is provided to someone who did not perform services for you. 1040a 2012 For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family. 1040a 2012 Are Fringe Benefits Taxable? Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. 1040a 2012 Section 2 discusses the exclusions that apply to certain fringe benefits. 1040a 2012 Any benefit not excluded under the rules discussed in section 2 is taxable. 1040a 2012 Including taxable benefits in pay. 1040a 2012   You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts. 1040a 2012 Any amount the law excludes from pay. 1040a 2012 Any amount the recipient paid for the benefit. 1040a 2012 The rules used to determine the value of a fringe benefit are discussed in section 3. 1040a 2012   If the recipient of a taxable fringe benefit is your employee, the benefit is subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. 1040a 2012 However, you can use special rules to withhold, deposit, and report the employment taxes. 1040a 2012 These rules are discussed in section 4. 1040a 2012   If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. 1040a 2012 However, you may have to report the benefit on one of the following information returns. 1040a 2012 If the recipient receives the benefit as: Use: An independent contractor Form 1099-MISC, Miscellaneous Income A partner Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040a 2012 For more information, see the instructions for the forms listed above. 1040a 2012 Cafeteria Plans A cafeteria plan, including a flexible spending arrangement, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. 1040a 2012 If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable. 1040a 2012 Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. 1040a 2012 However, a cafeteria plan can include a qualified 401(k) plan as a benefit. 1040a 2012 Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay. 1040a 2012 Qualified benefits. 1040a 2012   A cafeteria plan can include the following benefits discussed in section 2. 1040a 2012 Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance). 1040a 2012 Adoption assistance. 1040a 2012 Dependent care assistance. 1040a 2012 Group-term life insurance coverage (including costs that cannot be excluded from wages). 1040a 2012 Health savings accounts (HSAs). 1040a 2012 Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services. 1040a 2012 Benefits not allowed. 1040a 2012   A cafeteria plan cannot include the following benefits discussed in section 2. 1040a 2012 Archer MSAs. 1040a 2012 See Accident and Health Benefits in section 2. 1040a 2012 Athletic facilities. 1040a 2012 De minimis (minimal) benefits. 1040a 2012 Educational assistance. 1040a 2012 Employee discounts. 1040a 2012 Employer-provided cell phones. 1040a 2012 Lodging on your business premises. 1040a 2012 Meals. 1040a 2012 Moving expense reimbursements. 1040a 2012 No-additional-cost services. 1040a 2012 Transportation (commuting) benefits. 1040a 2012 Tuition reduction. 1040a 2012 Working condition benefits. 1040a 2012 It also cannot include scholarships or fellowships (discussed in Publication 970, Tax Benefits for Education). 1040a 2012 $2,500 limit on a health flexible spending arrangement (FSA). 1040a 2012   For plan years beginning after December 31, 2012, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,500. 1040a 2012 For plan years beginning after December 31, 2013, the limit is unchanged at $2,500. 1040a 2012   A cafeteria plan offering a health FSA must be amended to specify the $2,500 limit (or any lower limit set by the employer). 1040a 2012 While cafeteria plans generally must be amended on a prospective basis, an amendment that is adopted on or before December 31, 2014, may be made effective retroactively, provided that in operation the cafeteria plan meets the limit for plan years beginning after December 31, 2012. 1040a 2012 A cafeteria plan that does not limit health FSA contributions to the dollar limit is not a cafeteria plan and all benefits offered under the plan are includible in the employee's gross income. 1040a 2012   For more information, see Notice 2012-40, 2012-26 I. 1040a 2012 R. 1040a 2012 B. 1040a 2012 1046, available at www. 1040a 2012 irs. 1040a 2012 gov/irb/2012-26_IRB/ar09. 1040a 2012 html. 1040a 2012 Employee. 1040a 2012   For these plans, treat the following individuals as employees. 1040a 2012 A current common-law employee. 1040a 2012 See section 2 in Publication 15 (Circular E) for more information. 1040a 2012 A full-time life insurance agent who is a current statutory employee. 1040a 2012 A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040a 2012 Exception for S corporation shareholders. 1040a 2012   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. 1040a 2012 A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040a 2012 Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040a 2012 Plans that favor highly compensated employees. 1040a 2012   If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. 1040a 2012 A plan you maintain under a collective bargaining agreement does not favor highly compensated employees. 1040a 2012   A highly compensated employee for this purpose is any of the following employees. 1040a 2012 An officer. 1040a 2012 A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. 1040a 2012 An employee who is highly compensated based on the facts and circumstances. 1040a 2012 A spouse or dependent of a person described in (1), (2), or (3). 1040a 2012 Plans that favor key employees. 1040a 2012   If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. 1040a 2012 A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. 1040a 2012 However, a plan you maintain under a collective bargaining agreement does not favor key employees. 1040a 2012   A key employee during 2014 is generally an employee who is either of the following. 1040a 2012 An officer having annual pay of more than $170,000. 1040a 2012 An employee who for 2014 is either of the following. 1040a 2012 A 5% owner of your business. 1040a 2012 A 1% owner of your business whose annual pay was more than $150,000. 1040a 2012 Simple Cafeteria Plans Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. 1040a 2012 Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan. 1040a 2012 Eligible employer. 1040a 2012   You are an eligible employer if you employ an average of 100 or fewer employees during either of the 2 preceding years. 1040a 2012 If your business was not in existence throughout the preceding year, you are eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. 1040a 2012 If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you are considered an eligible employer for any subsequent year as long as you do not employ an average of 200 or more employees in a subsequent year. 1040a 2012 Eligibility and participation requirements. 1040a 2012   These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. 1040a 2012 You may elect to exclude from the plan employees who: Are under age 21 before the close of the plan year, Have less than 1 year of service with you as of any day during the plan year, Are covered under a collective bargaining agreement, or Are nonresident aliens working outside the United States whose income did not come from a U. 1040a 2012 S. 1040a 2012 source. 1040a 2012 Contribution requirements. 1040a 2012   You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to: A uniform percentage (not less than 2%) of the employee’s compensation for the plan year, or An amount which is at least 6% of the employee’s compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less. 1040a 2012 If the contribution requirements are met using option (2), the rate of contribution to any salary reduction contribution of a highly compensated or key employee can not be greater than the rate of contribution to any other employee. 1040a 2012 More information. 1040a 2012   For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations. 1040a 2012 2. 1040a 2012 Fringe Benefit Exclusion Rules This section discusses the exclusion rules that apply to fringe benefits. 1040a 2012 These rules exclude all or part of the value of certain benefits from the recipient's pay. 1040a 2012 The excluded benefits are not subject to federal income tax withholding. 1040a 2012 Also, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not reported on Form W-2. 1040a 2012 This section discusses the exclusion rules for the following fringe benefits. 1040a 2012 Accident and health benefits. 1040a 2012 Achievement awards. 1040a 2012 Adoption assistance. 1040a 2012 Athletic facilities. 1040a 2012 De minimis (minimal) benefits. 1040a 2012 Dependent care assistance. 1040a 2012 Educational assistance. 1040a 2012 Employee discounts. 1040a 2012 Employee stock options. 1040a 2012 Employer-provided cell phones. 1040a 2012 Group-term life insurance coverage. 1040a 2012 Health savings accounts (HSAs). 1040a 2012 Lodging on your business premises. 1040a 2012 Meals. 1040a 2012 Moving expense reimbursements. 1040a 2012 No-additional-cost services. 1040a 2012 Retirement planning services. 1040a 2012 Transportation (commuting) benefits. 1040a 2012 Tuition reduction. 1040a 2012 Working condition benefits. 1040a 2012 See Table 2-1, later, for an overview of the employment tax treatment of these benefits. 1040a 2012 Table 2-1. 1040a 2012 Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section. 1040a 2012 ) Treatment Under Employment Taxes Type of Fringe Benefit Income Tax Withholding Social Security and Medicare (including Additional Medicare Tax when wages are paid in excess of $200,000) Federal Unemployment (FUTA) Accident and health benefits Exempt1,2, except for long-term care benefits provided through a flexible spending or similar arrangement. 1040a 2012 Exempt, except for certain payments to S corporation employees who are 2% shareholders. 1040a 2012 Exempt Achievement awards Exempt1 up to $1,600 for qualified plan awards ($400 for nonqualified awards). 1040a 2012 Adoption assistance Exempt1,3 Taxable Taxable Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children and the facility is operated by the employer on premises owned or leased by the employer. 1040a 2012 De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). 1040a 2012 Educational assistance Exempt up to $5,250 of benefits each year. 1040a 2012 (See Educational Assistance , later in this section. 1040a 2012 ) Employee discounts Exempt3 up to certain limits. 1040a 2012 (See Employee Discounts , later in this section. 1040a 2012 ) Employee stock options See Employee Stock Options , later in this section. 1040a 2012 Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes. 1040a 2012 Group-term life insurance coverage Exempt Exempt1,4, 7 up to cost of $50,000 of coverage. 1040a 2012 (Special rules apply to former employees. 1040a 2012 ) Exempt Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. 1040a 2012 (See Health Savings Accounts , later in this section. 1040a 2012 ) Lodging on your business premises Exempt1 if furnished for your convenience as a condition of employment. 1040a 2012 Meals Exempt if furnished on your business premises for your convenience. 1040a 2012 Exempt if de minimis. 1040a 2012 Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them. 1040a 2012 No-additional-cost services Exempt3 Exempt3 Exempt3 Retirement planning services Exempt5 Exempt5 Exempt5 Transportation (commuting) benefits Exempt1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($130), qualified parking ($250), or qualified bicycle commuting reimbursement6 ($20). 1040a 2012 (See Transportation (Commuting) Benefits , later in this section. 1040a 2012 ) Exempt if de minimis. 1040a 2012 Tuition reduction Exempt3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). 1040a 2012 Working condition benefits Exempt Exempt Exempt 1 Exemption does not apply to S corporation employees who are 2% shareholders. 1040a 2012 2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. 1040a 2012 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. 1040a 2012 4 Exemption does not apply to certain key employees under a plan that favors those employees. 1040a 2012 5 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. 1040a 2012 6 If the employee receives a qualified bicycle commuting reimbursement in a qualified bicycle commuting month, the employee cannot receive commuter highway vehicle, transit pass, or qualified parking benefits in that same month. 1040a 2012 7 You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. 1040a 2012 Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. 1040a 2012 Also, show it in box 12 with code “C. 1040a 2012 ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. 1040a 2012 Accident and Health Benefits This exclusion applies to contributions you make to an accident or health plan for an employee, including the following. 1040a 2012 Contributions to the cost of accident or health insurance including qualified long-term care insurance. 1040a 2012 Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits. 1040a 2012 Contributions to Archer MSAs or health savings accounts (discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans). 1040a 2012 This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following. 1040a 2012 Payments or reimbursements of medical expenses. 1040a 2012 Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg). 1040a 2012 The payments must be figured without regard to any period of absence from work. 1040a 2012 Accident or health plan. 1040a 2012   This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27) in the event of personal injury or sickness. 1040a 2012 The plan may be insured or noninsured and does not need to be in writing. 1040a 2012 Employee. 1040a 2012   For this exclusion, treat the following individuals as employees. 1040a 2012 A current common-law employee. 1040a 2012 A full-time life insurance agent who is a current statutory employee. 1040a 2012 A retired employee. 1040a 2012 A former employee you maintain coverage for based on the employment relationship. 1040a 2012 A widow or widower of an individual who died while an employee. 1040a 2012 A widow or widower of a retired employee. 1040a 2012 For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040a 2012 Special rule for certain government plans. 1040a 2012   For certain government accident and health plans, payments to a deceased plan participant's beneficiary may qualify for the exclusion from gross income if the other requirements for exclusion are met. 1040a 2012 See section 105(j) for details. 1040a 2012 Exception for S corporation shareholders. 1040a 2012   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. 1040a 2012 A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040a 2012 Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040a 2012 Exclusion from wages. 1040a 2012   You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages. 1040a 2012 Exception for certain long-term care benefits. 1040a 2012   You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. 1040a 2012 This is a benefit program that reimburses specified expenses up to a maximum amount that is reasonably available to the employee and is less than five times the total cost of the insurance. 1040a 2012 However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. 1040a 2012 S corporation shareholders. 1040a 2012   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee's wages subject to federal income tax withholding. 1040a 2012 However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. 1040a 2012 Exception for highly compensated employees. 1040a 2012   If your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must include all or part of the amounts you pay to these employees in their wages subject to federal income tax withholding. 1040a 2012 However, you can exclude these amounts (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. 1040a 2012   A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health insurance policy. 1040a 2012   A highly compensated employee for this exception is any of the following individuals. 1040a 2012 One of the five highest paid officers. 1040a 2012 An employee who owns (directly or indirectly) more than 10% in value of the employer's stock. 1040a 2012 An employee who is among the highest paid 25% of all employees (other than those who can be excluded from the plan). 1040a 2012   For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations. 1040a 2012 COBRA premiums. 1040a 2012   The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). 1040a 2012 The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary. 1040a 2012 Achievement Awards This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. 1040a 2012 The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. 1040a 2012 The award must meet the requirements for employee achievement awards discussed in chapter 2 of Publication 535, Business Expenses. 1040a 2012 Employee. 1040a 2012   For this exclusion, treat the following individuals as employees. 1040a 2012 A current employee. 1040a 2012 A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service as an employee. 1040a 2012 A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040a 2012 Exception for S corporation shareholders. 1040a 2012   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. 1040a 2012 A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040a 2012 Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040a 2012 Exclusion from wages. 1040a 2012   You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. 1040a 2012 The excludable annual amount is $1,600 ($400 for awards that are not “qualified plan awards”). 1040a 2012 See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards. 1040a 2012    To determine for 2014 whether an achievement award is a “qualified plan award” under the deduction rules described in Publication 535, treat any employee who received more than $115,000 in pay for 2013 as a highly compensated employee. 1040a 2012   If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts. 1040a 2012 The part of the cost that is more than your allowable deduction (up to the value of the awards). 1040a 2012 The amount by which the value of the awards exceeds your allowable deduction. 1040a 2012 Exclude the remaining value of the awards from the employee's wages. 1040a 2012 Adoption Assistance An adoption assistance program is a separate written plan of an employer that meets all of the following requirements. 1040a 2012 It benefits employees who qualify under rules set up by you, which do not favor highly compensated employees or their dependents. 1040a 2012 To determine whether your plan meets this test, do not consider employees excluded from your plan who are covered by a collective bargaining agreement, if there is evidence that adoption assistance was a subject of good-faith bargaining. 1040a 2012 It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). 1040a 2012 A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. 1040a 2012 You give reasonable notice of the plan to eligible employees. 1040a 2012 Employees provide reasonable substantiation that payments or reimbursements are for qualifying expenses. 1040a 2012 For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. 1040a 2012 The employee was a 5% owner at any time during the year or the preceding year. 1040a 2012 The employee received more than $115,000 in pay for the preceding year. 1040a 2012 You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040a 2012 You must exclude all payments or reimbursements you make under an adoption assistance program for an employee's qualified adoption expenses from the employee's wages subject to federal income tax withholding. 1040a 2012 However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. 1040a 2012 For more information, see the Instructions for Form 8839, Qualified Adoption Expenses. 1040a 2012 You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance program for each employee for the year in box 12 of the employee's Form W-2. 1040a 2012 Use code “T” to identify this amount. 1040a 2012 Exception for S corporation shareholders. 1040a 2012   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. 1040a 2012 A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040a 2012 Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, including using the benefit as a reduction in distributions to the 2% shareholder. 1040a 2012 Athletic Facilities You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. 1040a 2012 For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, has not attained the age of 25. 1040a 2012 On-premises facility. 1040a 2012   The athletic facility must be located on premises you own or lease. 1040a 2012 It does not have to be located on your business premises. 1040a 2012 However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort. 1040a 2012 Employee. 1040a 2012   For this exclusion, treat the following individuals as employees. 1040a 2012 A current employee. 1040a 2012 A former employee who retired or left on disability. 1040a 2012 A widow or widower of an individual who died while an employee. 1040a 2012 A widow or widower of a former employee who retired or left on disability. 1040a 2012 A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040a 2012 A partner who performs services for a partnership. 1040a 2012 De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. 1040a 2012 A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. 1040a 2012 Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare. 1040a 2012 Examples of de minimis benefits include the following. 1040a 2012 Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. 1040a 2012 See Employer-Provided Cell Phones , later in this section, for details. 1040a 2012 Occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes. 1040a 2012 Holiday gifts, other than cash, with a low fair market value. 1040a 2012 Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount is not more than $2,000. 1040a 2012 Meals. 1040a 2012 See Meals , later in this section, for details. 1040a 2012 Occasional parties or picnics for employees and their guests. 1040a 2012 Occasional tickets for theater or sporting events. 1040a 2012 Transportation fare. 1040a 2012 See Transportation (Commuting) Benefits , later in this section, for details. 1040a 2012 Employee. 1040a 2012   For this exclusion, treat any recipient of a de minimis benefit as an employee. 1040a 2012 Dependent Care Assistance This exclusion applies to household and dependent care services you directly or indirectly pay for or provide to an employee under a dependent care assistance program that covers only your employees. 1040a 2012 The services must be for a qualifying person's care and must be provided to allow the employee to work. 1040a 2012 These requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services. 1040a 2012 For more information, see Qualifying Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses. 1040a 2012 Employee. 1040a 2012   For this exclusion, treat the following individuals as employees. 1040a 2012 A current employee. 1040a 2012 A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040a 2012 Yourself (if you are a sole proprietor). 1040a 2012 A partner who performs services for a partnership. 1040a 2012 Exclusion from wages. 1040a 2012   You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the employee's wages if you reasonably believe that the employee can exclude the benefits from gross income. 1040a 2012   An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. 1040a 2012 This limit is reduced to $2,500 for married employees filing separate returns. 1040a 2012   However, the exclusion cannot be more than the smaller of the earned income of either the employee or employee's spouse. 1040a 2012 Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or herself. 1040a 2012 For more information on the earned income limit, see Publication 503. 1040a 2012 Exception for highly compensated employees. 1040a 2012   You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program do not favor highly compensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code. 1040a 2012   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. 1040a 2012 The employee was a 5% owner at any time during the year or the preceding year. 1040a 2012 The employee received more than $115,000 in pay for the preceding year. 1040a 2012 You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040a 2012 Form W-2. 1040a 2012   Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2. 1040a 2012 Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5. 1040a 2012 Report both the nontaxable portion of assistance (up to $5,000) and any assistance above the amount that is non-taxable to the employee. 1040a 2012 Example. 1040a 2012   Company A provides a dependent care assistance flexible spending arrangement to its employees through a cafeteria plan. 1040a 2012 In addition, it provides occasional on-site dependent care to its employees at no cost. 1040a 2012 Emily, an employee of company A, had $4,500 deducted from her pay for the dependent care flexible spending arrangement. 1040a 2012 In addition, Emily used the on-site dependent care several times. 1040a 2012 The fair market value of the on-site care was $700. 1040a 2012 Emily's Form W-2 should report $5,200 of dependent care assistance in box 10 ($4,500 flexible spending arrangement plus $700 on-site dependent care). 1040a 2012 Boxes 1, 3, and 5 should include $200 (the amount in excess of the nontaxable assistance), and applicable taxes should be withheld on that amount. 1040a 2012 Educational Assistance This exclusion applies to educational assistance you provide to employees under an educational assistance program. 1040a 2012 The exclusion also applies to graduate level courses. 1040a 2012 Educational assistance means amounts you pay or incur for your employees' education expenses. 1040a 2012 These expenses generally include the cost of books, equipment, fees, supplies, and tuition. 1040a 2012 However, these expenses do not include the cost of a course or other education involving sports, games, or hobbies, unless the education: Has a reasonable relationship to your business, or Is required as part of a degree program. 1040a 2012 Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. 1040a 2012 Nor do they include the cost of lodging, meals, or transportation. 1040a 2012 Educational assistance program. 1040a 2012   An educational assistance program is a separate written plan that provides educational assistance only to your employees. 1040a 2012 The program qualifies only if all of the following tests are met. 1040a 2012 The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. 1040a 2012 To determine whether your program meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining. 1040a 2012 The program does not provide more than 5% of its benefits during the year for shareholders or owners. 1040a 2012 A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. 1040a 2012 The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. 1040a 2012 You give reasonable notice of the program to eligible employees. 1040a 2012 Your program can cover former employees if their employment is the reason for the coverage. 1040a 2012   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. 1040a 2012 The employee was a 5% owner at any time during the year or the preceding year. 1040a 2012 The employee received more than $115,000 in pay for the preceding year. 1040a 2012 You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040a 2012 Employee. 1040a 2012   For this exclusion, treat the following individuals as employees. 1040a 2012 A current employee. 1040a 2012 A former employee who retired, left on disability, or was laid off. 1040a 2012 A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040a 2012 Yourself (if you are a sole proprietor). 1040a 2012 A partner who performs services for a partnership. 1040a 2012 Exclusion from wages. 1040a 2012   You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year. 1040a 2012 Assistance over $5,250. 1040a 2012   If you do not have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. 1040a 2012 Working condition benefits may be excluded from wages. 1040a 2012 Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense. 1040a 2012 See Working Condition Benefits , later, in this section. 1040a 2012 Employee Discounts This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. 1040a 2012 However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds). 1040a 2012 Employee. 1040a 2012   For this exclusion, treat the following individuals as employees. 1040a 2012 A current employee. 1040a 2012 A former employee who retired or left on disability. 1040a 2012 A widow or widower of an individual who died while an employee. 1040a 2012 A widow or widower of an employee who retired or left on disability. 1040a 2012 A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040a 2012 A partner who performs services for a partnership. 1040a 2012 Exclusion from wages. 1040a 2012   You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up to the following limits. 1040a 2012 For a discount on services, 20% of the price you charge nonemployee customers for the service. 1040a 2012 For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property. 1040a 2012   Determine your gross profit percentage in the line of business based on all property you offer to customers (including employee customers) and your experience during the tax year immediately before the tax year in which the discount is available. 1040a 2012 To figure your gross profit percentage, subtract the total cost of the property from the total sales price of the property and divide the result by the total sales price of the property. 1040a 2012 Exception for highly compensated employees. 1040a 2012   You cannot exclude from the wages of a highly compensated employee any part of the value of a discount that is not available on the same terms to one of the following groups. 1040a 2012 All of your employees. 1040a 2012 A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees. 1040a 2012   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. 1040a 2012 The employee was a 5% owner at any time during the year or the preceding year. 1040a 2012 The employee received more than $115,000 in pay for the preceding year. 1040a 2012 You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040a 2012 Employee Stock Options There are three kinds of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified) stock options. 1040a 2012 Wages for social security, Medicare, and federal unemployment (FUTA) taxes do not include remuneration resulting from the exercise, after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or from any disposition of stock acquired by exercising such an option. 1040a 2012 The IRS will not apply these taxes to an exercise before October 23, 2004, of an incentive stock option or an employee stock purchase plan option or to a disposition of stock acquired by such exercise. 1040a 2012 Additionally, federal income tax withholding is not required on the income resulting from a disqualifying disposition of stock acquired by the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or on income equal to the discount portion of stock acquired by the exercise, after October 22, 2004, of an employee stock purchase plan option resulting from any disposition of the stock. 1040a 2012 The IRS will not apply federal income tax withholding upon the disposition of stock acquired by the exercise, before October 23, 2004, of an incentive stock option or an employee stock purchase plan option. 1040a 2012 However, the employer must report as income in box 1 of Form W-2, (a) the discount portion of stock acquired by the exercise of an employee stock purchase plan option upon disposition of the stock, and (b) the spread (between the exercise price and the fair market value of the stock at the time of exercise) upon a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option. 1040a 2012 An employer must report the excess of the fair market value of stock received upon exercise of a nonstatutory stock option over the amount paid for the stock option on Form W-2 in boxes 1, 3 (up to the social security wage base), 5, and in box 12 using the code “V. 1040a 2012 ” See Regulations section 1. 1040a 2012 83-7. 1040a 2012 An employee who transfers his or her interest in nonstatutory stock options to the employee's former spouse incident to a divorce is not required to include an amount in gross income upon the transfer. 1040a 2012 The former spouse, rather than the employee, is required to include an amount in gross income when the former spouse exercises the stock options. 1040a 2012 See Revenue Ruling 2002-22 and Revenue Ruling 2004-60 for details. 1040a 2012 You can find Revenue Ruling 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at www. 1040a 2012 irs. 1040a 2012 gov/pub/irs-irbs/irb02-19. 1040a 2012 pdf. 1040a 2012 See Revenue Ruling 2004-60, 2004-24 I. 1040a 2012 R. 1040a 2012 B. 1040a 2012 1051, available at www. 1040a 2012 irs. 1040a 2012 gov/irb/2004-24_IRB/ar13. 1040a 2012 html. 1040a 2012 For more information about employee stock options, see sections 421, 422, and 423 of the Internal Revenue Code and their related regulations. 1040a 2012 Employer-Provided Cell Phones The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. 1040a 2012 Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit. 1040a 2012 For the rules relating to these types of benefits, see De Minimis (Minimal) Benefits , earlier in this section, and Working Condition Benefits , later in this section. 1040a 2012 Noncompensatory business purposes. 1040a 2012   You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. 1040a 2012 Examples of substantial business reasons include the employer's: Need to contact the employee at all times for work-related emergencies, Requirement that the employee be available to speak with clients at times when the employee is away from the office, and Need to speak with clients located in other time zones at times outside the employee's normal workday. 1040a 2012 Cell phones provided to promote goodwill, boost morale, or attract prospective employees. 1040a 2012   You cannot exclude from an employee's wages the value of a cell phone provided to promote goodwill of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee. 1040a 2012 Additional information. 1040a 2012   For additional information on the tax treatment of employer-provided cell phones, see Notice 2011-72, 2011-38 I. 1040a 2012 R. 1040a 2012 B. 1040a 2012 407, available at  www. 1040a 2012 irs. 1040a 2012 gov/irb/2011-38_IRB/ar07. 1040a 2012 html. 1040a 2012 Group-Term Life Insurance Coverage This exclusion applies to life insurance coverage that meets all the following conditions. 1040a 2012 It provides a general death benefit that is not included in income. 1040a 2012 You provide it to a group of employees. 1040a 2012 See The 10-employee rule , later. 1040a 2012 It provides an amount of insurance to each employee based on a formula that prevents individual selection. 1040a 2012 This formula must use factors such as the employee's age, years of service, pay, or position. 1040a 2012 You provide it under a policy you directly or indirectly carry. 1040a 2012 Even if you do not pay any of the policy's cost, you are considered to carry it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other employee more than, the cost of his or her insurance. 1040a 2012 Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit , later. 1040a 2012 Group-term life insurance does not include the following insurance. 1040a 2012 Insurance that does not provide general death benefits, such as travel insurance or a policy providing only accidental death benefits. 1040a 2012 Life insurance on the life of your employee's spouse or dependent. 1040a 2012 However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. 1040a 2012 See De Minimis (Minimal) Benefits , earlier in this section. 1040a 2012 Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 policy year, such as paid-up or cash surrender value), unless certain requirements are met. 1040a 2012 See Regulations section 1. 1040a 2012 79-1 for details. 1040a 2012 Employee. 1040a 2012   For this exclusion, treat the following individuals as employees. 1040a 2012 A current common-law employee. 1040a 2012 A full-time life insurance agent who is a current statutory employee. 1040a 2012 An individual who was formerly your employee under (1) or (2). 1040a 2012 A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction and control. 1040a 2012 Exception for S corporation shareholders. 1040a 2012   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. 1040a 2012 A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040a 2012 Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040a 2012 The 10-employee rule. 1040a 2012   Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year. 1040a 2012   For this rule, count employees who choose not to receive the insurance unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. 1040a 2012 For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. 1040a 2012 However, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it. 1040a 2012 A permanent benefit is an economic value extending beyond one policy year (for example, a paid-up or cash-surrender value) that is provided under a life insurance policy. 1040a 2012 Exceptions. 1040a 2012   Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance. 1040a 2012   Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met. 1040a 2012 If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that does not require a physical. 1040a 2012 You provide the insurance to all your full-time employees or, if the insurer requires the evidence mentioned in (1), to all full-time employees who provide evidence the insurer accepts. 1040a 2012 You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements. 1040a 2012 See Regulations section 1. 1040a 2012 79-1 for details. 1040a 2012   Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met. 1040a 2012 You provide the insurance under a common plan covering your employees and the employees of at least one other employer who is not related to you. 1040a 2012 The insurance is restricted to, but mandatory for, all your employees who belong to, or are represented by, an organization (such as a union) that carries on substantial activities besides obtaining insurance. 1040a 2012 Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance that employee gets. 1040a 2012   To apply either exception, do not consider employees who were denied insurance for any of the following reasons. 1040a 2012 They were 65 or older. 1040a 2012 They customarily work 20 hours or less a week or 5 months or less in a calendar year. 1040a 2012 They have not been employed for the waiting period given in the policy. 1040a 2012 This waiting period cannot be more than 6 months. 1040a 2012 Exclusion from wages. 1040a 2012   You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. 1040a 2012 You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. 1040a 2012 In addition, you do not have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee. 1040a 2012 Coverage over the limit. 1040a 2012   You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. 1040a 2012 Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. 1040a 2012 Also, show it in box 12 with code “C. 1040a 2012 ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. 1040a 2012   Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of all insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in Table 2-2. 1040a 2012 For all coverage provided within the calendar year, use the employee's age on the last day of the employee's tax year. 1040a 2012 You must prorate the cost from the table if less than a full month of coverage is involved. 1040a 2012 Table 2-2. 1040a 2012 Cost Per $1,000 of Protection For 1 Month Age Cost Under 25 $ . 1040a 2012 05 25 through 29 . 1040a 2012 06 30 through 34 . 1040a 2012 08 35 through 39 . 1040a 2012 09 40 through 44 . 1040a 2012 10 45 through 49 . 1040a 2012 15 50 through 54 . 1040a 2012 23 55 through 59 . 1040a 2012 43 60 through 64 . 1040a 2012 66 65 through 69 1. 1040a 2012 27 70 and older 2. 1040a 2012 06 You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of full months' coverage at that cost. 1040a 2012 Example. 1040a 2012 Tom's employer provides him with group-term life insurance coverage of $200,000. 1040a 2012 Tom is 45 years old, is not a key employee, and pays $100 per year toward the cost of the insurance. 1040a 2012 Tom's employer must include $170 in his wages. 1040a 2012 The $200,000 of insurance coverage is reduced by $50,000. 1040a 2012 The yearly cost of $150,000 of coverage is $270 ($. 1040a 2012 15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. 1040a 2012 The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. 1040a 2012 The employer also enters $170 in box 12 with code “C. 1040a 2012 ” Coverage for dependents. 1040a 2012   Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable from income as a de minimis fringe benefit if the face amount is not more than $2,000. 1040a 2012 If the face amount is greater than $2,000, the entire cost of the dependent coverage must be included in income unless the amount over $2,000 is purchased with employee contributions on an after-tax basis. 1040a 2012 The cost of the insurance is determined by using Table 2-2. 1040a 2012 Former employees. 1040a 2012   When group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes on that period of coverage is paid by the former employee with his or her tax return and is not collected by the employer. 1040a 2012 You are not required to collect those taxes. 1040a 2012 Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. 1040a 2012 Report those uncollected amounts separately in box 12 of Form W-2 using codes “M” and “N. 1040a 2012 ” See the General Instructions for Forms W-2 and W-3 and the Instructions for Form 941. 1040a 2012 Exception for key employees. 1040a 2012   Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. 1040a 2012 This exception generally does not apply to church plans. 1040a 2012 When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. 1040a 2012 Include the cost in boxes 1, 3, and 5 of Form W-2. 1040a 2012 However, you do not have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee. 1040a 2012   For this purpose, the cost of the insurance is the greater of the following amounts. 1040a 2012 The premiums you pay for the employee's insurance. 1040a 2012 See Regulations section 1. 1040a 2012 79-4T(Q&A 6) for more information. 1040a 2012 The cost you figure using Table 2-2. 1040a 2012   For this exclusion, a key employee during 2014 is an employee or former employee who is one of the following individuals. 1040a 2012 See section 416(i) of the Internal Revenue Code for more information. 1040a 2012 An officer having annual pay of more than $170,000. 1040a 2012 An individual who for 2014 was either of the following. 1040a 2012 A 5% owner of your business. 1040a 2012 A 1% owner of your business whose annual pay was more than $150,000. 1040a 2012   A former employee who was a key employee upon retirement or separation from service is also a key employee. 1040a 2012   Your plan does not favor key employees as to participation if at least one of the following is true. 1040a 2012 It benefits at least 70% of your employees. 1040a 2012 At least 85% of the participating employees are not key employees. 1040a 2012 It benefits employees who qualify under a set of rules you set up that do not favor key employees. 1040a 2012   Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans. 1040a 2012   When applying this test, do not consider employees who: Have not completed 3 years of service, Are part-time or seasonal, Are nonresident aliens who receive no U. 1040a 2012 S. 1040a 2012 source earned income from you, or Are not included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives. 1040a 2012   Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. 1040a 2012 Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. 1040a 2012 S corporation shareholders. 1040a 2012   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. 1040a 2012 When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. 1040a 2012 Include the cost in boxes 1, 3, and 5 of Form W-2. 1040a 2012 However, you do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder. 1040a 2012 Health Savings Accounts A Health Savings Account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. 1040a 2012 Any contributions that you make to an HSA become the employee's property and cannot be withdrawn by you. 1040a 2012 Contributions to the account are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. 1040a 2012 The medical expenses must not be reimbursable by insurance or other sources and their payment from HSA funds (distribution) will not give rise to a medical expense deduction on the individual's federal income tax return. 1040a 2012 For more information about HSAs, visit the Department of Treasury's website at www. 1040a 2012 treasury. 1040a 2012 gov and enter “HSA” in the search box. 1040a 2012 Eligibility. 1040a 2012   A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care. 1040a 2012 For calendar year 2014, a qualifying HDHP must have a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,350 for self-only coverage and $12,700 for family coverage. 1040a 2012   There are no income limits that restrict an individual's eligibility to contribute to an HSA nor is there a requirement that the account owner have earned income to make a contribution. 1040a 2012 Exceptions. 1040a 2012   An individual is not a qualified individual if he or she can be claimed as a dependent on another person's tax return. 1040a 2012 Also, an employee's participation in a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) generally disqualifies the individual (and employer) from making contributions to his or her HSA. 1040a 2012 However, an individual may qualify to participate in an HSA if he or she is participating in only a limited-purpose FSA or HRA or a post-deductible FSA. 1040a 2012 For more information, see Other employee health plans in Publication 969. 1040a 2012 Employer contributions. 1040a 2012   Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. 1040a 2012 For 2014, you can contribute up to $3,300 for self-only coverage or $6,550 for family coverage to a qualified individual's HSA. 1040a 2012   The contribution amounts listed above are increased by $1,000 for a qualified individual who is age 55 or older at any time during the year. 1040a 2012 For two qualified individuals who are married to each other and who each are age 55 or older at any time during the year, each spouse's contribution limit is increased by $1,000 provided each spouse has a separate HSA. 1040a 2012 No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B. 1040a 2012 Nondiscrimination rules. 1040a 2012    Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. 1040a 2012 Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs. 1040a 2012   For guidance on employer comparable contributions to HSAs under section 4980G in instances where an employee has not established an HSA by December 31 and in instances where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses, see Regulations section 54. 1040a 2012 4980G-4. 1040a 2012 Exception. 1040a 2012   The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee. 1040a 2012 A highly compensated employee for 2014 is an employee who meets either of the following tests. 1040a 2012 The employee was a 5% owner at any time during the year or the preceding year. 1040a 2012 The employee received more than $115,000 in pay for the preceding year. 1040a 2012 You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040a 2012 Partnerships and S corporations. 1040a 2012   Partners and 2% shareholders of an S corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. 1040a 2012 Employer contributions to the HSA of a bona fide partner or 2% shareholder are treated as distributions or guaranteed payments as determined by the facts and circumstances. 1040a 2012 Cafeteria plans. 1040a 2012   You may contribute to an employee's HSA using a cafeteria plan and your contributions are not subject to the statutory comparability rules. 1040a 2012 However, cafeteria plan nondiscrimination rules still apply. 1040a 2012 For example, contributions under a cafeteria plan to employee HSAs cannot be greater for higher-paid employees than they are for lower-paid employees. 1040a 2012 Contributions that favor lower-paid employees are not prohibited. 1040a 2012 Reporting requirements. 1040a 2012   You must report your contributions to an employee's HSA in box 12 of Form W-2 using code “W. 1040a 2012 ” The trustee or custodian of the HSA, generally a bank or insurance company, reports distributions from the HSA using Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. 1040a 2012 Lodging on Your Business Premises You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests. 1040a 2012 It is furnished on your business premises. 1040a 2012 It is furnished for your convenience. 1040a 2012 The employee must accept it as a condition of employment. 1040a 2012 Different tests may apply to lodging furnished by educational institutions. 1040a 2012 See section 119(d) of the Internal Revenue Code for details. 1040a 2012 The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging. 1040a 2012 On your business premises. 1040a 2012   For this exclusion, your business premises is generally your employee's place of work. 1040a 2012 For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations. 1040a 2012 For your convenience. 1040a 2012   Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. 1040a 2012 You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. 1040a 2012 This is true even if a law or an employment contract provides that the lodging is furnished as pay. 1040a 2012 However, a written statement that the lodging is furnished for your convenience is not sufficient. 1040a 2012 Condition of employment. 1040a 2012   Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. 1040a 2012 Examples include employees who must be available at all times and employees who could not perform their required duties without being furnished the lodging. 1040a 2012   It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment. 1040a 2012 Example. 1040a 2012 A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. 1040a 2012 If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment. 1040a 2012 S corporation shareholders. 1040a 2012   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. 1040a 2012 A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040a 2012 Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040a 2012 Meals This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises. 1040a 2012 De Minimis Meals You can exclude any occasional meal or meal money you provide to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that accounting for it would be unreasonable or administratively impracticable. 1040a 2012 The exclusion applies, for example, to the following items. 1040a 2012 Coffee, doughnuts, or soft drinks. 1040a 2012 Occasional meals or meal money provided to enable an employee to work overtime. 1040a 2012 However, the exclusion does not apply to meal money figured on the basis of hours worked. 1040a 2012 Occasional parties or picnics for employees and their guests. 1040a 2012 This exclusion also applies to meals you provide at an employer-operated eating facility for employees if the annual revenue from the facility equals or exceeds the direct costs of the facility. 1040a 2012 For this purpose, your revenue from providing a meal is considered equal to the facility's direct operating costs to provide that meal if its value can be excluded from an employee's wages as explained under Meals on Your Business Premises , later. 1040a 2012 If food or beverages you furnish to employees qualify as a de minimis benefit, you can deduct their full cost. 1040a 2012 The 50% limit on deductions for the cost of meals does not apply. 1040a 2012 The deduction limit on meals is discussed in chapter 2 of Publication 535. 1040a 2012 Employee. 1040a 2012   For this exclusion, treat any recipient of a de minimis meal as
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The 1040a 2012

1040a 2012 Publication 525 - Main Content Table of Contents Employee CompensationBabysitting. 1040a 2012 Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment IncomeRents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous IncomeBartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income RepaymentsMethod 1. 1040a 2012 Method 2. 1040a 2012 How To Get Tax HelpLow Income Taxpayer Clinics Employee Compensation In most cases, you must include in gross income everything you receive in payment for personal services. 1040a 2012 In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. 1040a 2012 You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. 1040a 2012 Include all your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive Form W-2, or you receive a Form W-2 that does not include all pay that should be included on the Form W-2. 1040a 2012 If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. 1040a 2012 These wages must be included on line 7 of Form 1040. 1040a 2012 See Form 8919 for more information. 1040a 2012 Childcare providers. 1040a 2012   If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. 1040a 2012 If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. 1040a 2012 You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. 1040a 2012 Babysitting. 1040a 2012   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. 1040a 2012 Bankruptcy. 1040a 2012   If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. 1040a 2012 Your W-2 will show your total wages and withheld income tax for the year. 1040a 2012 On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. 1040a 2012 Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. 1040a 2012 If you receive other information returns (such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income. 1040a 2012   The only exception is for purposes of figuring your self-employment tax, if you are self-employed. 1040a 2012 For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. 1040a 2012   You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. 1040a 2012 The statement must show the allocation and describe the method used to make the allocation. 1040a 2012 For a sample of this statement and other information, see Notice 2006-83, 2006-40 I. 1040a 2012 R. 1040a 2012 B. 1040a 2012 596, available at www. 1040a 2012 irs. 1040a 2012 gov/irb/2006-40_IRB/ar12. 1040a 2012 html. 1040a 2012 Miscellaneous Compensation This section discusses many types of employee compensation. 1040a 2012 The subjects are arranged in alphabetical order. 1040a 2012 Advance commissions and other earnings. 1040a 2012   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. 1040a 2012    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. 1040a 2012 If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Itemized Deductions, or you may be able to take a credit for that year. 1040a 2012 See Repayments , later. 1040a 2012 Allowances and reimbursements. 1040a 2012    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. 1040a 2012 If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. 1040a 2012 Back pay awards. 1040a 2012   Include in income amounts you are awarded in a settlement or judgment for back pay. 1040a 2012 These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. 1040a 2012 They should be reported to you by your employer on Form W-2. 1040a 2012 Bonuses and awards. 1040a 2012    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. 1040a 2012 These include prizes such as vacation trips for meeting sales goals. 1040a 2012 If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. 1040a 2012 However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. 1040a 2012 Employee achievement award. 1040a 2012   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. 1040a 2012 However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. 1040a 2012 Your employer can tell you whether your award is a qualified plan award. 1040a 2012 Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. 1040a 2012   However, the exclusion does not apply to the following awards. 1040a 2012 A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. 1040a 2012 A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. 1040a 2012 Example. 1040a 2012 Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. 1040a 2012 Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. 1040a 2012 However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 − $1,600) in his income. 1040a 2012 Differential wage payments. 1040a 2012   This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. 1040a 2012 These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. 1040a 2012 The payments are reported as wages on Form W-2. 1040a 2012 Government cost-of-living allowances. 1040a 2012   Most payments received by U. 1040a 2012 S. 1040a 2012 Government civilian employees for working abroad are taxable. 1040a 2012 However, certain cost-of-living allowances are tax free. 1040a 2012 Publication 516, U. 1040a 2012 S. 1040a 2012 Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. 1040a 2012 Nonqualified deferred compensation plans. 1040a 2012   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. 1040a 2012 This amount is shown on Form W-2, box 12, using code Y. 1040a 2012 This amount is not included in your income. 1040a 2012   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. 1040a 2012 This amount is included in your wages shown on Form W-2, box 1. 1040a 2012 It is also shown on Form W-2, box 12, using code Z. 1040a 2012 Nonqualified deferred compensation plans of nonqualified entities. 1040a 2012   In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. 1040a 2012 For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax. 1040a 2012 A partnership unless substantially all of its income is allocated to persons other than: Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and Tax-exempt organizations. 1040a 2012 Note received for services. 1040a 2012   If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. 1040a 2012 When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. 1040a 2012 Do not include that part again in your income. 1040a 2012 Include the rest of the payment in your income in the year of payment. 1040a 2012   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. 1040a 2012 Severance pay. 1040a 2012   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. 1040a 2012 Accrued leave payment. 1040a 2012   If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. 1040a 2012   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. 1040a 2012 You can reduce gross wages by the amount you repaid in the same tax year in which you received it. 1040a 2012 Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2. 1040a 2012 Outplacement services. 1040a 2012   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. 1040a 2012    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). 1040a 2012 Sick pay. 1040a 2012   Pay you receive from your employer while you are sick or injured is part of your salary or wages. 1040a 2012 In addition, you must include in your income sick pay benefits received from any of the following payers. 1040a 2012 A welfare fund. 1040a 2012 A state sickness or disability fund. 1040a 2012 An association of employers or employees. 1040a 2012 An insurance company, if your employer paid for the plan. 1040a 2012 However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. 1040a 2012 For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. 1040a 2012 Social security and Medicare taxes paid by employer. 1040a 2012   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. 1040a 2012 The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. 1040a 2012 However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. 1040a 2012 Stock appreciation rights. 1040a 2012   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. 1040a 2012 When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. 1040a 2012 You include the cash payment in income in the year you use the right. 1040a 2012 Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. 1040a 2012 Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. 1040a 2012 See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income. 1040a 2012 Recipient of fringe benefit. 1040a 2012   You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. 1040a 2012 You are considered to be the recipient even if it is given to another person, such as a member of your family. 1040a 2012 An example is a car your employer gives to your spouse for services you perform. 1040a 2012 The car is considered to have been provided to you and not to your spouse. 1040a 2012   You do not have to be an employee of the provider to be a recipient of a fringe benefit. 1040a 2012 If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit. 1040a 2012 Provider of benefit. 1040a 2012   Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. 1040a 2012 The provider can be a client or customer of an independent contractor. 1040a 2012 Accounting period. 1040a 2012   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. 1040a 2012 Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. 1040a 2012 The general rule: benefits are reported for a full calendar year (January 1–December 31). 1040a 2012 The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. 1040a 2012 For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. 1040a 2012 Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. 1040a 2012   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). 1040a 2012 Form W-2. 1040a 2012   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. 1040a 2012 Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). 1040a 2012 However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). 1040a 2012 Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. 1040a 2012 Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits . 1040a 2012 For information on the items covered in this section, other than Long-term care coverage , see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. 1040a 2012 Long-term care coverage. 1040a 2012   Contributions by your employer to provide coverage for long-term care services generally are not included in your income. 1040a 2012 However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. 1040a 2012 This amount will be reported as wages in box 1 of your Form W-2. 1040a 2012 Archer MSA contributions. 1040a 2012    Contributions by your employer to your Archer MSA generally are not included in your income. 1040a 2012 Their total will be reported in box 12 of Form W-2, with code R. 1040a 2012 You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. 1040a 2012 File the form with your return. 1040a 2012 Health flexible spending arrangement (health FSA). 1040a 2012   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. 1040a 2012   Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. 1040a 2012 The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. 1040a 2012 For more information, see Notice 2012-40, 2012-26 I. 1040a 2012 R. 1040a 2012 B. 1040a 2012 1046, available at www. 1040a 2012 irs. 1040a 2012 gov/irb/2012-26 IRB/ar09. 1040a 2012 html. 1040a 2012 Health reimbursement arrangement (HRA). 1040a 2012   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. 1040a 2012 Health savings accounts (HSA). 1040a 2012   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. 1040a 2012 Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. 1040a 2012 Contributions made by your employer are not included in your income. 1040a 2012 Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. 1040a 2012 Distributions not used for qualified medical expenses are included in your income. 1040a 2012 See Publication 969 for the requirements of an HSA. 1040a 2012   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. 1040a 2012 The contributions are treated as a distribution of money and are not included in the partner's gross income. 1040a 2012 Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. 1040a 2012 In both situations, the partner can deduct the contribution made to the partner's HSA. 1040a 2012   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. 1040a 2012 The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. 1040a 2012 Qualified HSA funding distribution. 1040a 2012   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. 1040a 2012 See Publication 590, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions. 1040a 2012 Failure to maintain eligibility. 1040a 2012   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. 1040a 2012 If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. 1040a 2012 This income is also subject to an additional 10% tax. 1040a 2012 Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. 1040a 2012 See Instructions for Form 8839, Qualified Adoption Expenses, for more information. 1040a 2012 Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. 1040a 2012 They also are included as social security and Medicare wages in boxes 3 and 5. 1040a 2012 However, they are not included as wages in box 1. 1040a 2012 To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. 1040a 2012 File the form with your return. 1040a 2012 Athletic Facilities If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. 1040a 2012 The gym must be used primarily by employees, their spouses, and their dependent children. 1040a 2012 If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation. 1040a 2012 De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. 1040a 2012 In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. 1040a 2012 Also see Employee Discounts , later. 1040a 2012 Holiday gifts. 1040a 2012   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. 1040a 2012 However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. 1040a 2012 Dependent Care Benefits If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. 1040a 2012 Dependent care benefits include: Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer. 1040a 2012 The amount you can exclude is limited to the lesser of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). 1040a 2012 Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. 1040a 2012 Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. 1040a 2012 To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. 1040a 2012 See the Instructions for Form 2441 for more information. 1040a 2012 Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. 1040a 2012 For more information, see Publication 970. 1040a 2012 Employee Discounts If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. 1040a 2012 The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. 1040a 2012 However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). 1040a 2012 The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage. 1040a 2012 For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. 1040a 2012 (Ask your employer for this percentage. 1040a 2012 ) For a discount on services, 20%. 1040a 2012 Financial Counseling Fees Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. 1040a 2012 If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit). 1040a 2012 Qualified retirement planning services paid for you by your employer may be excluded from your income. 1040a 2012 For more information, see Retirement Planning Services , later. 1040a 2012 Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. 1040a 2012 However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. 1040a 2012 For exceptions to this rule, see Entire cost excluded , and Entire cost taxed , later. 1040a 2012 If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. 1040a 2012 Also, it is shown separately in box 12 with code C. 1040a 2012 Group-term life insurance. 1040a 2012   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. 1040a 2012 Permanent benefits. 1040a 2012   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. 1040a 2012 Your employer should be able to tell you the amount to include in your income. 1040a 2012 Accidental death benefits. 1040a 2012   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. 1040a 2012 Former employer. 1040a 2012   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. 1040a 2012 Also, it is shown separately in box 12 with code C. 1040a 2012 Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. 1040a 2012 You must pay these taxes with your income tax return. 1040a 2012 Include them on line 60, Form 1040, and follow the instructions forline 60. 1040a 2012 For more information, see the Instructions for Form 1040. 1040a 2012 Two or more employers. 1040a 2012   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. 1040a 2012 If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. 1040a 2012 You must figure how much to include in your income. 1040a 2012 Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. 1040a 2012 Figuring the taxable cost. 1040a 2012    Use the following worksheet to figure the amount to include in your income. 1040a 2012   If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. 1040a 2012 However, you cannot reduce the amount to include in your income by: Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded . 1040a 2012 Worksheet 1. 1040a 2012 Figuring the Cost of Group-Term Life Insurance To Include in Income 1. 1040a 2012 Enter the total amount of your insurance coverage from your employer(s) 1. 1040a 2012   2. 1040a 2012 Limit on exclusion for employer-provided group-term life insurance coverage 2. 1040a 2012 50,000 3. 1040a 2012 Subtract line 2 from line 1 3. 1040a 2012   4. 1040a 2012 Divide line 3 by $1,000. 1040a 2012 Figure to the nearest tenth 4. 1040a 2012   5. 1040a 2012 Go to Table 1. 1040a 2012 Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. 1040a 2012   6. 1040a 2012 Multiply line 4 by line 5 6. 1040a 2012     7. 1040a 2012 Enter the number of full months of coverage at this cost 7. 1040a 2012   8. 1040a 2012 Multiply line 6 by line 7 8. 1040a 2012   9. 1040a 2012 Enter the premiums you paid per month 9. 1040a 2012       10. 1040a 2012 Enter the number of months you paid the  premiums 10. 1040a 2012       11. 1040a 2012 Multiply line 9 by line 10. 1040a 2012 11. 1040a 2012   12. 1040a 2012 Subtract line 11 from line 8. 1040a 2012 Include this amount in your income as wages 12. 1040a 2012   Table 1. 1040a 2012 Cost of $1,000 of Group-Term Life Insurance for One Month   Age Cost     Under 25 $ . 1040a 2012 05     25 through 29 . 1040a 2012 06     30 through 34 . 1040a 2012 08     35 through 39 . 1040a 2012 09     40 through 44 . 1040a 2012 10     45 through 49 . 1040a 2012 15     50 through 54 . 1040a 2012 23     55 through 59 . 1040a 2012 43     60 through 64 . 1040a 2012 66     65 through 69 1. 1040a 2012 27     70 and older 2. 1040a 2012 06   Example. 1040a 2012 You are 51 years old and work for employers A and B. 1040a 2012 Both employers provide group-term life insurance coverage for you for the entire year. 1040a 2012 Your coverage is $35,000 with employer A and $45,000 with employer B. 1040a 2012 You pay premiums of $4. 1040a 2012 15 a month under the employer B group plan. 1040a 2012 You figure the amount to include in your income as follows. 1040a 2012   Worksheet 1. 1040a 2012 Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. 1040a 2012 Enter the total amount of your insurance coverage from your employer(s) 1. 1040a 2012 80,000 2. 1040a 2012 Limit on exclusion for employer-provided group-term life insurance coverage 2. 1040a 2012 50,000 3. 1040a 2012 Subtract line 2 from line 1 3. 1040a 2012 30,000 4. 1040a 2012 Divide line 3 by $1,000. 1040a 2012 Figure to the nearest tenth 4. 1040a 2012 30. 1040a 2012 0 5. 1040a 2012 Go to Table 1. 1040a 2012 Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. 1040a 2012 . 1040a 2012 23 6. 1040a 2012 Multiply line 4 by line 5 6. 1040a 2012 6. 1040a 2012 90 7. 1040a 2012 Enter the number of full months of coverage at this cost. 1040a 2012 7. 1040a 2012 12 8. 1040a 2012 Multiply line 6 by line 7 8. 1040a 2012 82. 1040a 2012 80 9. 1040a 2012 Enter the premiums you paid per month 9. 1040a 2012 4. 1040a 2012 15     10. 1040a 2012 Enter the number of months you paid the premiums 10. 1040a 2012 12     11. 1040a 2012 Multiply line 9 by line 10. 1040a 2012 11. 1040a 2012 49. 1040a 2012 80 12. 1040a 2012 Subtract line 11 from line 8. 1040a 2012 Include this amount in your income as wages 12. 1040a 2012 33. 1040a 2012 00 The total amount to include in income for the cost of excess group-term life insurance is $33. 1040a 2012 Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. 1040a 2012 You must add it to the wages shown on your Forms W-2 and include the total on your return. 1040a 2012 Entire cost excluded. 1040a 2012   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. 1040a 2012 You are permanently and totally disabled and have ended your employment. 1040a 2012 Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. 1040a 2012 A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. 1040a 2012 (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. 1040a 2012 ) The plan existed on January 1, 1984, and: You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. 1040a 2012 Entire cost taxed. 1040a 2012   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. 1040a 2012 The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. 1040a 2012 You are a key employee and your employer's plan discriminates in favor of key employees. 1040a 2012 Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. 1040a 2012 The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. 1040a 2012 The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. 1040a 2012 (You must accept it in order to be able to properly perform your duties. 1040a 2012 ) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. 1040a 2012 See De Minimis (Minimal) Benefits , earlier. 1040a 2012 Faculty lodging. 1040a 2012   If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions given earlier, you still may not have to include the value of the lodging in income. 1040a 2012 However, the lodging must be qualified campus lodging, and you must pay an adequate rent. 1040a 2012 Academic health center. 1040a 2012   This is an organization that meets the following conditions. 1040a 2012 Its principal purpose or function is to provide medical or hospital care or medical education or research. 1040a 2012 It receives payments for graduate medical education under the Social Security Act. 1040a 2012 One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. 1040a 2012 Qualified campus lodging. 1040a 2012   Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. 1040a 2012 The lodging must be located on or near a campus of the educational institution or academic health center. 1040a 2012 Adequate rent. 1040a 2012   The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: 5% of the appraised value of the lodging, or The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. 1040a 2012 If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. 1040a 2012   The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. 1040a 2012 Example. 1040a 2012 Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. 1040a 2012 The house is appraised at $200,000. 1040a 2012 The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. 1040a 2012 Carl pays an annual rent of $11,000. 1040a 2012 Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). 1040a 2012 If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000). 1040a 2012 Moving Expense Reimbursements In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. 1040a 2012 See Publication 521 for more information. 1040a 2012 No-Additional-Cost Services The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service). 1040a 2012 In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. 1040a 2012 Example. 1040a 2012 You are employed as a flight attendant for a company that owns both an airline and a hotel chain. 1040a 2012 Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. 1040a 2012 The value of the personal flight is not included in your income. 1040a 2012 However, the value of the hotel room is included in your income because you do not work in the hotel business. 1040a 2012 Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. 1040a 2012 Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. 1040a 2012 You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. 1040a 2012 Also, see Financial Counseling Fees , earlier. 1040a 2012 Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. 1040a 2012 A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. 1040a 2012 Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. 1040a 2012 However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. 1040a 2012 Exclusion limit. 1040a 2012   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. 1040a 2012   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. 1040a 2012   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. 1040a 2012   If the benefits have a value that is more than these limits, the excess must be included in your income. 1040a 2012 You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. 1040a 2012 Commuter highway vehicle. 1040a 2012   This is a highway vehicle that seats at least six adults (not including the driver). 1040a 2012 At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). 1040a 2012 Transit pass. 1040a 2012   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. 1040a 2012 Qualified parking. 1040a 2012   This is parking provided to an employee at or near the employer's place of business. 1040a 2012 It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. 1040a 2012 It does not include parking at or near the employee's home. 1040a 2012 Qualified bicycle commuting. 1040a 2012   This is reimbursement based on the number of qualified bicycle commuting months for the year. 1040a 2012 A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. 1040a 2012 The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. 1040a 2012 Tuition Reduction You can exclude a qualified tuition reduction from your income. 1040a 2012 This is the amount of a reduction in tuition: For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children. 1040a 2012 For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution. 1040a 2012 Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. 1040a 2012 For more information, see Publication 970. 1040a 2012 Working Condition Benefits If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income. 1040a 2012 Example. 1040a 2012 You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. 1040a 2012 The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself. 1040a 2012 Valuation of Fringe Benefits If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. 1040a 2012 For an exception, see Group-Term Life Insurance , earlier. 1040a 2012 General valuation rule. 1040a 2012   You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law. 1040a 2012 If you pay fair market value for a fringe benefit, no amount is included in your income. 1040a 2012 Fair market value. 1040a 2012   The fair market value of a fringe benefit is determined by all the facts and circumstances. 1040a 2012 It is the amount you would have to pay a third party to buy or lease the benefit. 1040a 2012 This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. 1040a 2012 Employer-provided vehicles. 1040a 2012   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit. 1040a 2012   Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. 1040a 2012 An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. 1040a 2012 The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. 1040a 2012 Flights on employer-provided aircraft. 1040a 2012   Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party. 1040a 2012   If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. 1040a 2012 The division must be based on all the facts, including which employee or employees control the use of the aircraft. 1040a 2012 Special valuation rules. 1040a 2012   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. 1040a 2012 If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. 1040a 2012 You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. 1040a 2012   If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. 1040a 2012 The special valuation rules are the following. 1040a 2012 The automobile lease rule. 1040a 2012 The vehicle cents-per-mile rule. 1040a 2012 The commuting rule. 1040a 2012 The unsafe conditions commuting rule. 1040a 2012 The employer-operated eating-facility rule. 1040a 2012   For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. 1040a 2012    For information on the non-commercial flight and commercial flight valuation rules, see sections 1. 1040a 2012 61-21(g) and 1. 1040a 2012 61-21(h) of the regulations. 1040a 2012 Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. 1040a 2012 (Your employer can tell you whether your retirement plan is qualified. 1040a 2012 ) However, the cost of life insurance coverage included in the plan may have to be included. 1040a 2012 See Group-Term Life Insurance , earlier, under Fringe Benefits. 1040a 2012 If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. 1040a 2012 However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. 1040a 2012 For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U. 1040a 2012 S. 1040a 2012 Civil Service Retirement Benefits, if you are a federal employee or retiree). 1040a 2012 Elective Deferrals If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. 1040a 2012 The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. 1040a 2012 An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. 1040a 2012 However, it is included in wages subject to social security and Medicare taxes. 1040a 2012 Elective deferrals include elective contributions to the following retirement plans. 1040a 2012 Cash or deferred arrangements (section 401(k) plans). 1040a 2012 The Thrift Savings Plan for federal employees. 1040a 2012 Salary reduction simplified employee pension plans (SARSEP). 1040a 2012 Savings incentive match plans for employees (SIMPLE plans). 1040a 2012 Tax-sheltered annuity plans (403(b) plans). 1040a 2012 Section 501(c)(18)(D) plans. 1040a 2012 (But see Reporting by employer , later. 1040a 2012 ) Section 457 plans. 1040a 2012 Qualified automatic contribution arrangements. 1040a 2012   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. 1040a 2012 You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. 1040a 2012 The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. 1040a 2012   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. 1040a 2012 Overall limit on deferrals. 1040a 2012   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3), earlier. 1040a 2012 The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. 1040a 2012 Amounts deferred under specific plan limits are part of the overall limit on deferrals. 1040a 2012   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. 1040a 2012 However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. 1040a 2012 Catch-up contributions. 1040a 2012   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. 1040a 2012 For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans. 1040a 2012   For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in chapter 2 of Publication 560, Retirement Plans for Small Business. 1040a 2012 SIMPLE plans, see How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590. 1040a 2012 Section 457 plans, see Limit for deferrals under section 457 plans , later. 1040a 2012 Limit for deferrals under SIMPLE plans. 1040a 2012   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $12,000 in 2013. 1040a 2012 Amounts you defer under a SIMPLE plan count toward the overall limit ($17,500 for 2013) and may affect the amount you can defer under other elective deferral plans. 1040a 2012 Limit for tax-sheltered annuities. 1040a 2012   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2013 generally is $17,500. 1040a 2012 However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts. 1040a 2012 $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. 1040a 2012   If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013. 1040a 2012   For more information, see Publication 571. 1040a 2012 Limit for deferral under section 501(c)(18) plans. 1040a 2012   If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. 1040a 2012 Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($17,500 in 2013) and may affect the amount you can defer under other elective deferral plans. 1040a 2012 Limit for deferrals under section 457 plans. 1040a 2012   If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $17,500 in 2013. 1040a 2012 However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. 1040a 2012 See Increased limit , later. 1040a 2012 Includible compensation. 1040a 2012   This is the pay you received for the year from the employer who maintained the section 457 plan. 1040a 2012 In most cases, it includes all the following payments. 1040a 2012 Wages and salaries. 1040a 2012 Fees for professional services. 1040a 2012 The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that is not included in your income. 1040a 2012 Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. 1040a 2012 Commissions and tips. 1040a 2012 Fringe benefits. 1040a 2012 Bonuses. 1040a 2012 Employer contributions (elective deferrals) to: The section 457 plan. 1040a 2012 Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. 1040a 2012 A salary reduction simplified employee pension (SARSEP). 1040a 2012 A tax-sheltered annuity (section 403(b) plan). 1040a 2012 A savings incentive match plan for employees (SIMPLE plan). 1040a 2012 A section 125 cafeteria plan. 1040a 2012   Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts. 1040a 2012 Your wages as defined for income tax withholding purposes. 1040a 2012 Your wages as reported in box 1 of Form W-2. 1040a 2012 Your wages that are subject to social security withholding (including elective deferrals). 1040a 2012 Increased limit. 1040a 2012   During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: Twice the annual limit ($35,000 for 2013), or The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions). 1040a 2012 Catch-up contributions. 1040a 2012   You generally can have additional elective deferrals made to your governmental section 457 plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions. 1040a 2012 If you qualify, your limit can be the lesser of your includible compensation or $17,500, plus $5,500. 1040a 2012 However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher. 1040a 2012 Designated Roth contributions. 1040a 2012   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. 1040a 2012 Designated Roth contributions are treated as elective deferrals, except that they are included in income. 1040a 2012 Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. 1040a 2012   Qualified distributions from a Roth plan are not included in income. 1040a 2012 In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution. 1040a 2012 Reporting by employer. 1040a 2012   Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. 1040a 2012 Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. 1040a 2012 Section 501(c)(18)(D) contributions. 1040a 2012   Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. 1040a 2012 The amount you contributed should be identified with code “H” in box 12. 1040a 2012 You may deduct the amount deferred subject to the limits that apply. 1040a 2012 Include your deduction in the total on Form 1040, line 36. 1040a 2012 Enter the amount and “501(c)(18)(D)” on the dotted line next to line 36. 1040a 2012 Designated Roth contributions. 1040a 2012    These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. 1040a 2012 Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. 1040a 2012 Excess deferrals. 1040a 2012   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. 1040a 2012 If the plan permits, the excess amount will be distributed to you. 1040a 2012 If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. 1040a 2012 You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. 1040a 2012 The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. 1040a 2012   You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. 1040a 2012 File Form 1040 to add the excess deferral amount to your wages on line 7. 1040a 2012 Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. 1040a 2012 Excess not distributed. 1040a 2012   If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. 1040a 2012 Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. 1040a 2012 Excess distributed to you. 1040a 2012   If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. 1040a 2012 If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. 1040a 2012 Any income on the excess deferral taken out is taxable in the tax year in which you take it out. 1040a 2012 If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. 1040a 2012    You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. 1040a 2012 Use the following rules to report a corrective distribution shown on Form 1099-R for 2013. 1040a 2012 If the distribution was for a 2013 excess deferral, your Form 1099-R should have the code “8” in box 7. 1040a 2012 Add the excess deferral amount to your wages on your 2013 tax return. 1040a 2012 If the distribution was for a 2013 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. 1040a 2012 Do not add this amount to your wages on your 2013 return. 1040a 2012 If the distribution was for a 2012 excess deferral, your Form 1099-R should have the code “P” in box 7. 1040a 2012 If you did not add the excess deferral amount to your wages on your 2012 tax return, you must file an amended return on Form 1040X, Amended U. 1040a 2012 S. 1040a 2012 Individual Income Tax Return. 1040a 2012 If you did not receive the distribution by April 15, 2013, you also must add it to your wages on your 2013 tax return. 1040a 2012 If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code “8” in box 7. 1040a 2012 Add the income amount to your wages on your 2013 income tax return, regardless of when the excess deferral was made. 1040a 2012 Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. 1040a 2012 Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution. 1040a 2012 ”    Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. 1040a 2012 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. 1040a 2012 Excess Contributions If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees. 1040a 2012 If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. 1040a 2012 You must include the excess contributions in your income as wages on Form 1040, line 7. 1040a 2012 You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. 1040a 2012 If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. 1040a 2012 The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. 1040a 2012 You should receive a Form 1099-R for the year the excess contributions are distributed to you. 1040a 2012 Add the distribution to your wages for that year. 1040a 2012 Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. 1040a 2012 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. 1040a 2012 Excess Annual Additions The amount contributed in 2013 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $51,000. 1040a 2012 Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions. 1040a 2012 A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. 1040a 2012 A corrective payment consisting of your after-tax contributions is not taxable. 1040a 2012 If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code “E” in box 7. 1040a 2012 Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. 1040a 2012 Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A. 1040a 2012 Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. 1040a 2012 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. 1040a 2012 Stock Options If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. 1040a 2012 The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. 1040a 2012 Your employer can tell you which kind of option you hold. 1040a 2012 Nonstatutory Stock Options Grant of option. 1040a 2012   If you are granted a nonstatutory stock option, you may have income when you receive the option. 1040a 2012 The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. 1040a 2012 The fair market value of an option can be readily determined if it is actively traded on an established market. 1040a 2012    The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. 1040a 2012 You can transfer the option. 1040a 2012 You can exercise the option immediately in full. 1040a 2012 The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. 1040a 2012 The fair market value of the option privilege can be readily determined. 1040a 2012 The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. 1040a 2012 For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. 1040a 2012 The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. 1040a 2012 If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. 1040a 2012 For more information on the excise tax, see Internal Revenue Code section 4985. 1040a 2012 Option with readily determinable value. 1040a 2012   If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. 1040a 2012 See Restricted Property , later, for rules on how much income to include and when to include it. 1040a 2012 However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option. 1040a 2012 Option without readily determinable value. 1040a 2012   If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. 1040a 2012    Exercise or transfer of option. 1040a 2012   When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. 1040a 2012 Option with readily determinable value. 1040a 2012   When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. 1040a 2012 Option without readily determinable value. 1040a 2012   When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted prope