If you receive a W-2
from your employer, you are considered an employee. Your earnings will be subject to withholding for federal income, social security, and Medicare taxes. If you live or work in a state with state income tax, you may be subject to withholding for state income taxes also. In addition to your periodic salary or wages other income received from your employer may also be considered taxable income and it should be included on your W-2
and reported on your income tax return.
Advance commissions or other earnings:
If you receive commissions or other compensation for services to be performed in the future you are taxed on this income when received. If these advances are repaid by you in a later year, you may take an itemized deduction on Schedule A
for the reimbursement.
Allowances and Reimbursements:
If you receive a travel or other allowance under a non-accountable plan, that allowance is taxable income to you. With a non-accountable plan you do not account to your employer for the expenditure of the amounts received.
If you receive a reimbursement in excess of your actual expenses, the excess is taxable income to you. For example, employers frequently reimburse employees for moving costs when the company transfers the employee. Sometimes the employer will reimburse the employee for costs associated with the move that are not deductible moving expenses under IRS rules. These reimbursements will be taxable income to you.
Back Pay Awards:
If you receive a settlement or judgment for back pay these amounts are taxable income to you including amounts for damages and life and health insurance premiums.
Bonuses and Awards:
If you receive a bonus or award for outstanding work (or for other reasons) this is taxable income to you. This includes cash awards as well as prizes such as vacations or other goods and services. The amount of income for these noncash prizes is their fair market value. A promise to give you a bonus or award is not taxable income until the bonus is made available to you.
Employee Achievement Award:
If you receive tangible personal property as an award for length of service or safety achievements the value of the award may be excluded from your income if the cost to your employer is less than $1,600. If it is not a "qualified plan award" the limit is $400. Your employer can tell you if it is a qualified plan award. This dollar limit is an annual limit for all awards. You cannot exclude two awards valued at $1,000 each as that would exceed the $1,600 dollar limit.
Tangible personal property is property having a physical existence other than real estate. Items such as televisions, jewelry, watches, and furniture are tangible personal property. Cash and gift certificates received are considered taxable income.
The award should be made as a part of a meaningful presentation with no significant likelihood that the award is disguised pay. There are two situations in which the award is not excluded from taxation:
Government Cost of Living Allowances:
- If it is a length of service award received for less than 5 years of service or if you have received another length-of-service award in the last 4 years.
- A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee OR if more than 10% of eligible employees received safety achievement awards during the year.
This is compensation you receive as an incentive for accepting a less desirable post of duty and are considered a part of your compensation. However, they are not considered a part of your income if you are a federal civilian employee or a federal court employee stationed in Alaska, Hawaii, or outside the United States. This applies to federal government employees only.
Nonqualified Deferred Compensation Plans:
Normally this income is not taxable compensation. It is reported by your employer on your W-2, Box 12, code Y
. However, if at any time during the tax year the plan fails to meet certain requirements, all amounts deferred under the plan for the current and all past years becomes taxable in the current year. This amount will be included on your W-2, Box 1
. It will also be reflected in Box 12, code Z
. A deferred compensation plan is one in which you and your employer agree that a portion of your compensation package will be paid at a later date.
Note Received for Services:
If your employer gives you a secured note as payment for your services you must include the fair market value of the note in your income for the year. The fair market value is normally the discounted value of the note. A secured note in one in which the employer pledges some asset as security to assure payment.
When you receive payment for the note each payment consists of two parts. One part is recovery of the fair market value of the note that you reported as income when the note was received. This portion of the payment is not included in income. The other part of each payment is considered interest and is included in your income.
If you receive a nonnegotiable unsecured note as payment for your services, you do not report any income until payments are made to you.
Amounts received as severance pay are taxable when received, including a lump-sum payment for cancellation of your employment contract.
If you accept a reduced amount of severance pay so you can receive outplacement services the reduced amount is taxable income. However, the value of these services can be deducted as a miscellaneous itemized deduction on Schedule A.
Pay you receive from your employer while you are sick is included in your income. In addition, you must include in your income any sick pay benefits from:
- A welfare fund
- A state sickness or disability fund
- An association of employers or employees
- An insurance company if your employer paid for the plan.
If you paid the premiums on an accident or health policy, the benefits received under the policy are not taxable.
Social Security and Medicare Taxes:
If you and your employer agree that your employer pays your social security and Medicare without deducting them from your gross wages, this amount is taxable income to you.
Stock Appreciation Rights:
You do not include the value of a stock appreciation right granted by your employer until you use or exercise the right. When you use the right you receive a cash payment equal to the fair market value of the stock of the date of use minus the value on the date the right was granted. The amount of cash payment you receive is income in the year you receive the cash.