20 Ways To Motivate Someone Without Money

(Part 1 of 2)

As many businesses face economic challenges, more and more employers are looking for unique ways to keep their staff motivated without spending a ton of money. If you are in the same position, then you might find this e-tip of particular interest. 

More Money Does NOT Equal To Happier Employees.

Unfortunately, many novice managers feel that the more money you pay someone, the happier they will be. Although a solid and reasonable compensation plan is critical to attracting and keeping key personnel, paying additional monies is not always the only answer, and in many cases, not even the best answer. To help motivate your employees, we have listed below 10 of 20 tips that will help you keep your team satisfied and happy.  

Motivate Your Employees Without Raising Their Pay (Part 1 Of 2):

1. Give A Leadership Position - Give deserving people a leadership role to reward their performance and develop their leadership skills…even if it is for a temporary project. A great place to start is to give a person a leadership role by allowing them to lead a meeting or handle a project by themselves.

2. Provide A Career/Learning Path - Most people need to know that there is a potential opportunity for growth. Be sure to tell people that the policy is to promote from within. Doing so will send a positive message to everyone that advanced career opportunities can come from within the organization.

3. Create A Nice Working Environment - It is no surprise that a recent industry study revealed that employees rank good working conditions high on their list of "must haves;" therefore, you must take the overall working environment seriously.

4. Implement One-On-One Mentoring - Internal mentoring is a free employee development program that costs only time. When mentoring someone, it is important to provide positive feedback during both your one-on-one sessions as well as in the public workspace. Whenever you recognize and encourage employees in public, it acts as a positive shot-in-the-arm for others who are close enough to hear what you are saying.

5. Create A Team Mentality - The fastest way to make this happen is to take a picture of everyone on your entire staff – do not forget to include yourself. After the pictures are taken, you need to hang them in a visible spot. Psychology professionals haveconfirmed that most people like to see themselves as part of a team and value an image of reference.

6. Provide Training - Internal training sessions enhance the performance and productivity of your staff. Also, "tune-up" training sessions completed after regular training sessions serve to reinforce the original content taught. You can hire a consultant or involve people at the company who have an aptitude in what is being taught.

7. Recognize Your Employees - When someone has accomplished something, your recognition is critical to reinforcing the positive side of things. If you do not give enough recognition, you are missing out on the most inexpensive form of reinforcement.

8. Initiate A Special Ovation - An easy but effective method of motivating someone is to give a round of applause for certain achievements. You can do this at meetings, company-sponsored social gatherings, a luncheon or just in the office.

9. Assign Job Titles - When you consider a job title for an employee, be creative but appropriate. Ask your staff to give you their input for the correct title of a position. The right title is important and allows a person to feel proud of their position with the company.

10. Give Immediate Praise For Doing Something Good - When there is a reason for praising someone, do not wait to recognize their effort. In fact, why not start now? Look for someone doing something well and praise them; after all, immediacy equals effectiveness.

Executive Summary: As you can see, there are many ways to motivate your employees , which do not require money. You can implement one or all of these tips at little to no cost to your business. Moreover, by keeping people motivated, your company will see an increase in productivity and employee retention.

P.S. Don't forget…in our next e-tip, you will have 10 more tips for motivating employees.

Now, more than ever before, many business professionals like you are turning to us due to our expertise in payroll taxes, business services, related IRS codes and, of course, payroll processing.

Should you want to learn more about us and the ancillary business services we can offer you and your employees, please feel free to contact us today.

Thank you in advance for your business.

 Corporate Office: (877) 480-2626

www.custompayroll.com

No matter what your opinion is of our social security system, one thing we both can agree on is the need to have a secondary source of income at retirement. And as part of our suite of services, we can provide you and your employees with a customized retirement plan where your funds are electronically transferred to maximize you and your employees' earning potential.

Finally, A Retirement Plan You And Your Employees Will Be Bragging About.

Our custom 401(k) retirement plan solution can offer you a score of benefits from:  

• Seamless Payroll Data Integration
• Customized Plan Design Options
• Availability Of Enrollment Services
• Experienced Record Keeping Services
• Competitive Plan Administration Fees
• Streamlined System Technology
• Special Discounts For Combined Administration, Payroll And Investment Services

How Much Is

'Cyber-Slacking'

 Costing Your Business? 

It is all too common to stroll by an employee's desk and catch him/her browsing the Internet — obviously, for personal use rather than business-related research. In fact, the American Management Association (AMA) discovered that 68% of businesses lose money and time on employees who are "cyber-slacking." 

Cyber-slacking is the use of work-provided internet access for personal enjoyment while maintaining the appearance of being productive. The trouble with cyber-slacking, unfortunately, is that it comes in a variety of different shapes and sizes. Worse yet, it is typically carried out on software that businesses rely on, such as e-mail and web browsers. 

The Five Most Common Forms Of Cyber-Slacking Are: 

1. Chat rooms/instant messaging 
2. E-mail correspondence to personal contacts
3. Online gambling
4. Online stock trading
5. Web browsing, primarily to news and sports websites

How Much Is Cyber-Slacking Costing Your Business?

Of course, not all cyber-slacking starts intentionally. Often enough, employees log online to look up something business-related, but, through a series of "wiki moments," they find themselves viewing websites that stopped being work related several clicks ago. However, the bottom line is that cyber-slacking is nothing but costly. 

Now Read About This Study. 

In a study conducted by surfControl, a web-filtering software maker, it was revealed that if 1,000 employees engage in personal web surfing for only one hour a day it would cost that organization up to $35 million a year. 

Combat Cyber-Slacking Effectively.

One obvious way to combat cyber-slacking is to monitor Internet usage, but this can be tricky. This is why we suggest including Internet usage policies in your employee handbook. These policies should define which types of websites are considered inappropriate as well as address excessive Internet usage. Furthermore, the consequences for violating these policies should be clearly outlined. Consequences can range from docked pay to having computer privileges restricted.

If you do choose to monitor employee computer usage, be sure to consult with an attorney in order to avoid any legal risks relating to rights to privacy.

Executive Summary: As powerful a tool as the Internet is, especially for businesses, it is also a vehicle for distraction and procrastination. Everyday software, such as e-mail clients and web browsers, provide a temptation for employees to catch up on news or read about their favorite sports heroes.

In order to effectively combat cyber-slacking, employers should take preventative measures by writing Internet usage policies into their employee handbooks. And, instead of monitoring the sites employees visit, employers should evaluate how much time employees spend online in order to better address concerns about productivity.

Now, more than ever before, many business professionals like you are turning to us due to our expertise in payroll taxes, business services, related IRS codes and, of course, payroll processing.

Should you want to learn more about us and the ancillary business services we can offer you and your employees, please feel free to contact us today.

Thank you in advance for your business.

 Corporate Office: (877) 480-2626

P.S. To learn more about our suite of business services, visit us online at: www.CustomPayroll.com

7 Tips For Preventing On

The Job Time Clock Abuse

Every company is aware of time clock abuse, but each company handles this issue differently. Furthermore, wasted company time can come from many areas, such as stretched-out lunch breaks, unjustified sick leaves and excessive socializing among co-workers.

Recent studies have shown that the average worker wastes two to three weeks annually just on preparing to start work and on non-work related interruptions throughout the day. Also, hourly employees often waste company time by waiting a few minutes before they clock out. Experts estimate that the typical worker wastes well over five weeks of company time each year.

Here Are 7 Tips For Curbing Time Clock Abuse In Your Workplace: 

Tip #1: Educate Your Employees About Time Clock Abuse – Define what time clock abuse is and discuss the company policies that govern it with your employees. Make sure that they understand how serious the company takes time theft.

Tip #2: Ask Employees For Their Ideas - Make use of a "suggestion box" and place it in a high traffic area, like the lunchroom. Reward any employees who come up with the best ideas for time clock management.

Tip #3: Change Lunch Break Time – Changing one-hour lunches to half-hour lunches will discourage employees from running personal errands. Also, they will tend to stay in the building, which increases the likelihood that they will come back to work on time. The advantage for the employees is that they can leave a half an hour earlier.

Tip #4: Don't Overstaff Your Company – Rather than hiring full-time employees to cover the workload year-round, use temporary help for peak production periods. This will help you to better control employees' paid hours during the off-peak times, because your company will not be overstaffed.

Tip #5: Review Your Company's Overtime Rules – Overtime is another form of time clock abuse. Time thieves can change records to show false overtime hours worked instead of actual time worked.

Tip #6: Warn Time Clock Abusers – Call offenders into your office, and make them aware that they are abusing time. Give them suggestions on how to correct this behavior and a warning that there will be consequences for repeated offenses. For repeat offenders, use write-ups or even termination to remedy the issue.

Tip #7: Reward Correct Time Clock Use – Acknowledge and reward employees who properly manage the time clock. For example, you could give those employees bonuses, gift cards, extra vacation time or even allow them to leave early on a Friday.

Executive Summary:  Clearly communicating with employees about time clock abuse and the company policies surrounding it will substantially reduce payroll costs. Remember, if the employees understand the rules, they are more likely to follow them. This will lead to higher profits for the company and increased employee productivity.

Now, more than ever before, many business professionals like you are turning to us due to our expertise in payroll taxes, business services, related IRS codes and, of course, payroll processing.

Should you want to learn more about us and the ancillary business services we can offer you and your employees, please feel free to contact us today.

Thank you in advance for your business.

 Corporate Office: (877) 480-2626

P.S. To learn more about our suite of business services, visit us online at: www.CustomPayroll.com 

At least that is what the letter from the IRS says.  First thing, don’t panic.  Quoting Daniel J. Pilla’s study for the Cato Institute “About 40 percent of the revenues the IRS collects through penalty assessments are abated when citizens challenge the penalties.”

So we now know the odds are good that the IRS is wrong or will blink first.  What do we do?

The normal problems with payroll taxes are.

Failure to File.
Taxes under reported.
Taxes under deposited.
Taxes deposited late.

Any of these can create a situation where the services charges penalties and interest against a business and then sucks up subsequent tax deposits creating additional late and short payments simply exacerbating the situation.  We will get to that later.

Read the notice from the IRS.  It should tell you why they are charging a penalty and interest and how it is calculated.  If the notice does not lay out that information, you have missed the first notice from the IRS.  That is not at all unusual.  If you don’t have the first notice call the IRS and get all the information from them.  Also ask them to fax you a “Statement of Account” for the period and type of tax in effect.  This will show you what they have on the IRS file, without regard to whether it is correct or not.
Failure to file.

The IRS says you never filed a return and they have created a return for you.  They will estimate taxes due in an amount they know exceeds what would be reasonably due based on your account.  They do this to get your attention.  Many people, if the estimated amount were too low, would just pay it.  The IRS does not want that to happen so they always over estimate if they create a “Substitute Return” and file it for you.

The answer to that is to send a copy of the return.  If you filed it certified mail send a copy of the receipt when it was sent proving the date and a copy of the return receipt showing it was received.  One tip is never sending more than one return in an envelope.  The clerk opening the envelope may staple them together and only the top return will ever be reported as being received.  If you didn’t send it certified in your accompanying letter talk about your history of filing on time and this one was surely just misrouted.  If you have collateral proof of the filing date like a cancelled check that was sent with the return quote that information or even include copies.  If the return was due on the 15th and the check attached cleared your bank on the 18th that is pretty convincing that the report was actually there by the 15th.
Taxes under reported.

Find out why they say that.  Have they transposed a number when they hand entered the return?  That happens with regularity.  Have they just pulled a number out of their hat?  That happens periodically.  Once we received two notices for two different customers on the same day saying they had overpaid their 940 taxes and offering them each a refund of over $36,000.00 each.  The total 940 tax deposits for the two clients combined were less than $2000.00.  And no, I did not let them apply for and receive the checks.

Again send the IRS a copy of the return that you filed.  If the return is wrong then send the IRS a corrected form such as a 941-C to correct the original filing.  For instance, if you put second quarter figures on the third quarter report.  There won’t be a penalty for late filing if in fact you filed an original return on time even if it was incorrect.  A tip is if you cannot prepare the actual return on time, estimate it and file it.  Then file a corrected return when you can, this avoids a late filing fee.
Taxes under deposited.

They say you made fewer or smaller deposits than you reported.  Check their list and dates of deposits against yours.  Don’t accept their word for when it was made.  You have the proof in your files.  We have noticed a real problem recently. EFTPS payments are not being shown with the date in the electronic file the same as on the “IRS Statement of Account.”  How some programmer messed that up is beyond me.  So prepare the data showing your proof that the payments were made on time, bank deposit slips, EFTPS confirmations or whatever proof you have.  Package up copies and send them to the IRS with a letter of explanation, and a request for them to update their records.

If in fact you missed a deposit, it happens, make it immediately and ask for abatement anyway.  Site valid reasons why the deposit could have been inadvertently missed.  Discuss steps you have taken to make sure it won’t happen again.
Taxes deposited late.

See taxes under deposited and do the same thing with dates.  Document and send letters.  Don’t give up.  Just because the first person at the IRS turns you down literally means nothing.  They almost always turn down the first request for abatement of a penalty.  Dealing with the IRS is a long series of no’s followed by a single yes.  When you do get the yes, shut up and walk away.

One of the favorite tricks of the IRS involves a string of deposits.  Let’s say you were suppose to make 12 deposits of $1000.00 each the 15th of each month starting Feb 15 and ending Jan 15th for January through December.  The second deposit is missing, and the check never got cashed.  You don’t know what happened.  The IRS will take the third payment and apply it to the second month’s taxes but it is late so they charge a penalty.  Now the fourth month’s deposit gets applied to the third month’s taxes but it is also a month late so there is another late paying penalty.  You will quickly have 10 late payment penalties and the 12th month penalized as not being paid at all.  The penalties exceed the taxes missing.  The service cannot due this though they will try.  If you designate the third deposit for the third month taxes they must apply the payment there regardless.  If they don’t record them that way you can force them to do so, it is their regulations that say they must follow it.  Accept the penalty only on the one month and then ask for abatement anyway.  If you have never had a late payment the IRS is suppose to give you a free one anyway.

If you have a valid business reason that a penalty has occurred in spite of good due diligence on your part the IRS is suppose to abate the penalty.  Understand that IRS employees may be gauged by how much revenue they bring in (the IRS vehemently denies this but ex IRS employees don’t always).  When that is true they don’t want to abate penalties regardless.  Another trick they have is to offer a reduced penalty as a favor, when in fact they should have zeroed it out.  Or they will offer to abate penalties on two quarters if you pay the third.  It is normally not a good idea to accept these offers.  You can do better.  Keep writing letters and filing documents at the higher and higher levels until one person gets reasonable and says yes.  Then take that yes and run.

Can an ordinary citizen do this?  Sure!  Is it easier for a payroll tax professional?  Sure!  The IRS is far more likely to listen to a CPA than a citizen.  The CPA knows what buttons to push and how to go to the next level.  An ordinary citizen may not.  The CPA is far less likely to get emotionally involved than the citizen whose pocket is being emptied.

Your payroll service provider should have CPAs on staff to handle these situations for you.  If not, seriously consider a payroll service provider that does.  Because when, not if, the IRS crews up your regular CPA will charge you full rate to solve problems that should be solved by your payroll provider for free.

Payroll outsourcing saves a company more than just time and money, even though that may be reason enough to outsource. Read seven other reasons to outsource payroll.
Article:

Why outsource your payroll?

Get the best in payroll processing for less.
Deflect unwanted and unwarranted government interference.
Protection from check fraud artists who could/would raid your bank account.
Take advantage of Tax Credits that you may not even know exist.
Upgrade privacy for you and your employees.
Take a vacation.
Call on payroll tax experts at no charge.
Save time.
Save money.

A payroll-outsource company is constantly upgrading and improving their ability to provide the best service for you. They upgrade their software and systems on a regular basis. They of course have to keep up with the changes in the law of all 15,000 plus payroll-taxing entities as they happen. A payroll outsourcing company must be able to print out any updated form as needed or they will have to do it by hand. This is a chore they do not want to undertake with many clients to complete them for.

Occasionally everyone misses a deposit or filing deadline, forgets a form or otherwise makes a mistake that results in a penalty that YOU have to spend a great deal of time resolving and usually end up paying the penalty anyway. Outsource payroll companies greatly minimize the chance that your company will pay any penalties or interest due to missed deposits, late filings, bad calculations or other clerical and computational errors of your payroll taxes. If a payroll outsourcing company makes a mistake, THEY are responsible for the research and costs. They have much more practice in doing this kind of work and make very few mistakes; otherwise, they do not last very long in the business. A good outsource payroll company should deposit your payroll taxes and file all your payroll tax reports – on time, every time. After all, they are not processing taxes for just one company; they are filing for hundreds of companies.

When you use a payroll company to process your payroll, you reduce the number of checks that you write substantially. This not only lowers your accounting costs by reducing the size and complexity of your bank reconciliation; it can also reduce your banking fees. It reduces the checks that can fall in to the hands of check fraud specialists. Check fraud is the largest dollar value crime in the country year after year. The Nilson Report indicates that check fraud exceeds $20 billion dollars a year and the American Bankers Association recently stated that check fraud losses are growing by 25% per year. Payroll processing companies hire specialists to consult about reducing fraud. A good outsourcing company should be able to discuss numerous devices that they use to protect themselves and their clients from fraud.

Keywords: outsource payroll, payroll service, paperless payroll, Internet payroll, payroll expert

IRS regulations now allow it to dictate to an employer the withholding rate for an employee without regard to the employee’s W-4 or situation. This needs to be read by every employer!
Article:

The IRS has set up a program where it can dictate to an employer what an employee can withhold from their paycheck for Federal Income Tax purposes without any input from the employee and without a court order.

Under the new Withholding Compliance Program, the IRS can issue a “lock-in letter” specifying what the withholding rate is for an employee regardless of the employee’s W4. The employer is then required to do the following:

Furnish a copy of the lock-in letter to the employee upon receipt (though the first letter in our hands said ten days).
Impose the new IRS dictated withholding rate 60 days after the date of the letter.
Fax (the letter actually says mail or fax) a letter on Company Letterhead to the Internal Revenue Service if the employee is no longer employed.
Continue the lock-in process on gained employees based on the transferred W-4 and lock-in letter from a predecessor.
Ensure safeguards are in place to prevent employees from increasing their allowances electronically.
Maintain the withholding amount specified in the lock-in letter. There could be a penalty if the employer fails to honor the lock-in requirement and the employer could be liable for the amount of tax that should have been withheld.
Remind employees that the notice they received tells them how to contact the IRS if they want to change the withholding status and allowances from single/zero and the information they will need to supply. That information includes: Form W-4 and worksheets; most current pay stub for each job; number of allowances claimed on current Forms W-4; and the social security numbers and dates of birth for any children and proof of any deductions they want to use to claim additional withholding allowances.

There are several chilling points in the most recent IRS article released June 30, 2006. These points are above and beyond the actual regulations issued last year with little fanfare.

The article specifically references single/zero as the status and allowances that the lock-in letter will have on it, no other option.
Penalties could be imposed on the employer for at least the amount of tax not collected, additional penalties and interest will, of course, be extra.
All employee self service software modules will have to be controlled to allow the employer to lock out changes by a particular employees.

Other point that are not specifically addressed by the IRS include:

The employer is responsible for this lock-in rate forever. If any change in the employee’s circumstances change such as a marriage, a baby or a home purchase, the employer will have to check their files back to date of hire to make sure they can allow a new W-4 form from the employee to go into effect.
The IRS does not define what circumstances, other than “serious underreporting,” that will cause a lock-in letter to be issued in the first place.
The IRS gives no guidance to employees on exactly what will cause the IRS to modify a lock-in letter. Neither does it tell the employee what kind of time frame to expect a change from the IRS after a request and documentation are submitted.
The “Transferred W-4 and lock-in letter from a predecessor” phrase does not appear anywhere else in a search of the IRS internet site. Therefor no employer has any idea of what it actually means. If you acquire a company or merge with another company are you responsible to know the status of every employee back to date of hire in reference to a lock-in letter?
Finally the IRS nowhere tells the employer how, when or why it will modify a lock-in letter. Nor does it discuss what the responsibilities the employer has when and if the IRS does modify it. The IRS really leaves the employer in the dark on changes.

Employers need to be aware of the above changes in the law and make the necessary adjustments to their systems to prevent oversights from happening. The initial letter to the employer is fairly straight forward but the unlimited time frame and enormous potential penalties make it imperative that every employer upgrade or install a system to track this information perfectly.

Keywords: IRS, Internal Revenue Services, Payroll, payroll withholding, lock-in letter, FIT withholding, W-4

Following is IRS Publication 525.  This is the general publication covering taxable and non taxable compensation.  The IRS provides that all income received from an employer, no matter what form it is , is taxable.  Except where the Internal Revenue code exempts it from being taxable. Publication 525 – Main Contents

Table of Contents Employee Compensation Baby-sitting. Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain Employees Clergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment Income Rents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury Benefits Disability Pensions Long-Term Care Insurance Contracts Workers’ Compensation Other Sickness and Injury Benefits Miscellaneous Income Bartering Canceled Debts Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income Repayments Method 1. Method 2. Employee Compensation Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. You should receive a Form W–2, Wage and Tax Statement, from your employer showing the pay you received for your services. Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you do not receive a Form W–2. Childcare providers.    If you provide child care, 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. 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. 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. Baby-sitting.    If you baby-sit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Miscellaneous Compensation This section discusses many types of employee compensation. The subjects are arranged in alphabetical order. Advance commissions and other earnings.   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. 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. If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. See Repayments, later. Allowances and reimbursements.    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, get Publication 463, Travel, Entertainment, Gift, and Car Expenses. If you are reimbursed for moving expenses, get Publication 521, Moving Expenses. Back pay awards.    Include in income amounts you are awarded in a settlement or judgment for back pay. These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W–2. Bonuses and awards.    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W–2. These include prizes such as vacation trips for meeting sales goals. 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. 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. Employee achievement award.   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. 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. Your employer can tell you whether your award is a qualified plan award. 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. However, the exclusion does not apply to the following awards. 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. 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. Example. Ben Green received three employee achievement awards during the year: a non-qualified 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. Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. 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. Government cost-of-living allowances.    Cost-of-living allowances generally are included in your income. However, they are not included in your income if you are a federal civilian employee or a federal court employee who is stationed in Alaska, Hawaii, or outside the United States. Allowances and differentials that increase your basic pay as an incentive for taking a less desirable post of duty are part of your compensation and must be included in income. For example, your compensation includes Foreign Post, Foreign Service, and Overseas Tropical differentials. For more information, get Publication 516, U.S. Government Civilian Employees Stationed Abroad. Note received for services.    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. 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. Do not include that part again in your income. Include the rest of the payment in your income in the year of payment. 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. Severance pay.    Amounts you receive as severance pay are taxable. A lump-sum payment for cancellation of your employment contract must be included in your income in the tax year you receive it. Accrued leave payment.   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. 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. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. 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. Outplacement services.   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in resumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. 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% limit) on Schedule A (Form 1040). Sick pay.    Pay you receive from your employer while you are sick or injured is part of your salary or wages. In addition, you must include in your income sick pay benefits received from any of the following payers. 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. However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. Social security and Medicare taxes paid by employer.    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. The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. Stock appreciation rights.    Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. 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. You include the cash payment in income in the year you use the right. Fringe Benefits Fringe benefits you receive 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. 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. See Valuation of Fringe Benefits, later in this discussion, for information on how to determine the amount to include in income. Recipient of fringe benefit.    You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. You are considered to be the recipient even if it is given to another person, such as a member of your family. An example is a car your employer gives to your spouse for services you perform. The car is considered to have been provided to you and not to your spouse. You do not have to be an employee of the provider to be a recipient of a fringe benefit. If you are a partner, director, or independent contractor, you can also be the recipient of a fringe benefit. Provider of benefit.    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. The provider can be a client or customer of an independent contractor. Accounting period.    You must use the same accounting period your employer uses to report your taxable non-cash fringe benefits. Your employer has the option to report taxable non-cash fringe benefits by using either of the following rules. The general rule: benefits are reported for a full calendar year (January 1 – December 31). 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. 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. 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. 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). Form W–2.    Your employer reports your taxable fringe benefits in box 1 (Wages, tips, other compensation) of Form W–2. The total value of your fringe benefits may also be noted in box 12. The value of your fringe benefits may be added to your other compensation on one Form W–2, or you may receive a separate Form W–2 showing just the value of your fringe benefits in box 1 with a notation in box 12. Accident or Health Plan Generally, the value of accident or health plan coverage provided to you by your employer is not included in your income. Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits. Long-term care coverage.    Contributions by your employer to provide coverage for long-term care services generally are not included in your income. However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. This amount will be reported as wages in box 1 of your Form W–2. Archer MSA contributions.    Contributions by your employer to your Archer MSA generally are not included in your income. Their total will be reported in box 12 of Form W–2 with code R. You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. File the form with your return. 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. See Publication 968, Tax Benefits for Adoption, for more information. Adoption benefits are reported by your employer in box 12 of Form W–2 with code T. They also are included as social security and Medicare wages in boxes 3 and 5. However, they are not included as wages in box 1. To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839, Qualified Adoption Expenses. File the form with your return. 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. The gym must be used primarily by employees, their spouses, and their dependent children. 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. 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. Generally, 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. Also see Employee Discounts, later. Holiday gifts.    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. 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. 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. 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. 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). 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. Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W–2. To claim the exclusion, you must complete either Part III of Form 2441, Child and Dependent Care Expenses, or Part III of Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers. (You cannot use Form 1040EZ.) See the instructions for Form 2441 or Schedule 2 (Form 1040A) for more information. Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. The exclusion applies to undergraduate and graduate-level courses. For more information, get Publication 970. 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. 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. However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). The exclusion is limited to the price charged non-employee customers multiplied by the following percentage. 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. (Ask your employer for this percentage.) For a discount on services, 20%. 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. 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% limit). Qualified retirement planning services paid for you by your employer may be excluded from your income. For more information, see Retirement Planning Services, later. Group-Term Life Insurance Generally, 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. 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. For exceptions to this rule, see Entire cost excluded, and Entire cost taxed, later. 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. It is also shown separately in box 12 with code C. Group-term life insurance.   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. Permanent benefits.    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. Your employer should be able to tell you the amount to include in your income. Accidental death benefits.   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. Former employer.   If your former employer provides 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. Also, it is shown separately in box 12 with code C. Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. You must pay these taxes with your income tax return. Include them in your total tax on line 60, Form 1040, and enter “UT” and the amount of the taxes on the dotted line next to line 60. Two or more employers.   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. 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. You must figure how much to include in your income. 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. Figuring the taxable cost.   Use the following worksheet to figure the amount to include in your income. Worksheet 1. Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Enter the total amount of your insurance coverage from your employer(s) 1. 2. Limit on exclusion for employer-provided group-term life insurance coverage 2. 50,000 3. Subtract line 2 from line 1 3. 4. Divide line 3 by $1,000. Figure to the nearest tenth 4. 5. Go to Table 1. 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. 6. Multiply line 4 by line 5 6. 7. Enter the number of full months of coverage at this cost 7. 8. Multiply line 6 by line 7 8. 9. Enter the premiums you paid per month 9. 10. Enter the number of months you paid the premiums 10. 11. Multiply line 9 by line 10. 11. 12. Subtract line 11 from line 8. Include this amount in your income as wages 12. Age Cost Under 25  $ .05 25 through 29 .06 30 through 34  .08 35 through 39  .09 40 through 44  .10 45 through 49  .15 50 through 54  .23 55 through 59  .43 60 through 64  .66 65 through 69  1.27 70 and older  2.06 If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you would otherwise include in your income. 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. Example. You are 51 years old and work for employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with employer A and $45,000 with employer B. You pay premiums of $4.15 a month under the employer B group plan. You figure the amount to include in your income as follows. Worksheet 1. Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. Enter the total amount of your insurance coverage from your employer(s) 1. 80,000 2. Limit on exclusion for employer-provided group-term life insurance coverage 2. 50,000 3. Subtract line 2 from line 1 3. 30,000 4. Divide line 3 by $1,000. Figure to the nearest tenth 4. 30.0 5. Go to Table 1. 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. .23 6. Multiply line 4 by line 5 6. 6.90 7. Enter the number of full months of coverage at this cost. 7. 12 8. Multiply line 6 by line 7 8. 82.80 9. Enter the premiums you paid per month 9. 4.15 10. Enter the number of months you paid the premiums 10. 12 11. Multiply line 9 by line 10. 11. 49.80 12. Subtract line 11 from line 8. Include this amount in your income as wages 12. 33.00 The total amount to include in income for the cost of excess group-term life insurance is $33. 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. You must add it to the wages shown on your Forms W–2 and include the total on your return. Entire cost excluded.   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. You are permanently and totally disabled and have ended your employment. Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. 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. (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.) 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. Entire cost taxed.   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. The insurance is provided by your employer through a qualified employees’ trust, such as a pension trust or a qualified annuity plan. You are a key employee and your employer’s plan discriminates in favor of key employees. 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. The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. (You must accept it in order to be able to properly perform your duties.) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. See De Minimis (Minimal) Benefits, earlier. Faculty lodging.    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 above, you still may not have to include the value of the lodging in income. However, the lodging must be qualified campus lodging, and you must pay an adequate rent. Academic health center.   This is an organization that meets the following conditions. Its principal purpose or function is to provide medical or hospital care or medical education or research. It receives payments for graduate medical education under the Social Security Act. One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. Qualified campus lodging.   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. The lodging must be located on or near a campus of the educational institution or academic health center. Adequate rent.   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. If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. Example. Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. The house is appraised at $100,000. The average rent paid for comparable university lodging by persons other than employees or students is $7,000 a year. Carl pays an annual rent of $5,500. 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% × $100,000 = $5,000). If Carl paid annual rent of only $4,000, he would have to include $1,000 in his income ($5,000 – $4,000). Moving Expense Reimbursements Generally, 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. Get Publication 521 for more information. 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). Generally, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. Example. You are employed as a flight attendant for a company that owns both an airline and a hotel chain. 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. The value of the personal flight is not included in your income. However, the value of the hotel room is included in your income because you do not work in the hotel business. 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. 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. You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Also, see Financial Counseling Fees, earlier. Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. 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, or Qualified parking. Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. 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. Exclusion limit.   The exclusion for commuter highway vehicle transportation and transit pass fringe benefits cannot be more than a total of $100 a month. The exclusion for the qualified parking fringe benefit cannot be more than $190 a month. If the benefits have a value that is more than these limits, the excess must be included in your income. Commuter highway vehicle.   This is a highway vehicle that seats at least six adults (not including the driver). 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). Transit pass.   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. Qualified parking.   This is parking provided to an employee at or near the employer’s place of business. 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. It does not include parking at or near the employee’s home. Tuition Reduction You can exclude a qualified tuition reduction from your income. 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. 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. 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. For more information, get Publication 970. 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. Example. You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. 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. 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. For an exception, see Group-Term Life Insurance, earlier. General valuation rule.   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. If you pay fair market value for a fringe benefit, no amount is included in your income. Fair market value.   The fair market value of a fringe benefit is determined by all the facts and circumstances. It is the amount you would have to pay a third party to buy or lease the benefit. This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. Employer-provided vehicles.   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable non-cash fringe benefit. 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. 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. 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. Flights on employer-provided aircraft.   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. If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. The division must be based on all the facts, including which employee or employees control the use of the aircraft. Special valuation rules.   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. 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. The special valuation rules are the following. The automobile lease rule. The vehicle cents-per-mile rule. The commuting rule. The unsafe conditions commuting rule. The employer-operated eating-facility rule. For more information on these rules, see Publication 15–B, Employer’s Tax Guide to Fringe Benefits. For information on the non-commercial flight and commercial flight valuation rules, see sections 1.61–21(g) and 1.61–21(h) of the regulations. Retirement Plan Contributions Your employer’s contributions to a qualified retirement plan for you are not included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included. See Group-Term Life Insurance, earlier, under Fringe Benefits. If your employer pays into a non-qualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. 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. 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. The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. It is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to social security and Medicare taxes. Elective deferrals include elective contributions to the following retirement plans. Cash or deferred arrangements (section 401(k) plans). The Thrift Savings Plan for federal employees. Salary reduction simplified employee pension plans (SARSEP). Savings incentive match plans for employees (SIMPLE plans). Tax-sheltered annuity plans (403(b) plans). Section 501(c)(18)(D) plans. (But see Reporting by employer, later.) Section 457 plans. Overall limit on deferrals.   For 2003, you generally should not have deferred more than a total of $12,000 of contributions to the plans listed in (1) through (6) above. You should not have deferred more than the lesser of your includible compensation (defined later) or $12,000 of contributions to the plan listed in (7) above (section 457 plan). Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Catch-up contributions.   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans (403(b) Plans). For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in Publication 560, Retirement Plans for Small Business. Simple plans, see How Much Can Be Contributed to a SIMPLE IRA on Your Behalf in chapter 3 of Publication 590, Individual Retirement Arrangements (IRAs). Section 457 plans, see Limit for deferrals under section 457 plans, later. Limit for deferrals under SIMPLE plans.   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $8,000 in 2003. Amounts you defer under a SIMPLE plan count toward the overall limit ($12,000 for 2003) and may affect the amount you can defer under other elective deferral plans. Limit for deferrals under section 457 plans.   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 $12,000. However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. See Increased limit, later. Includible compensation.   This is the pay you received for the year from the employer who maintained the section 457 plan. It generally includes all the following payments. Wages and salaries. Fees for professional services. The value of any employer-provided qualified transportation fringe benefit (defined under Transportation, earlier) that is not included in your income. Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. Commissions and tips. Fringe benefits. Bonuses. Employer contributions (elective deferrals) to: The section 457 plan. Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. A salary reduction simplified employee pension (SARSEP). A tax-sheltered annuity (section 403(b) plan). A savings incentive match plan for employees (SIMPLE plan). A section 125 cafeteria plan. Instead of using the amounts listed above to determine your includible compensation, your employer can use any of the following amounts. Your wages as defined for income tax withholding purposes. Your wages as reported in box 1 of Form W–2, Wage and Tax Statement. Your wages that are subject to social security withholding (including elective deferrals). Increased limit.   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 dollar limit for the year, or The limit for prior years minus the amount you deferred in prior years plus the lesser of: Your includible compensation for the current year, or The dollar limit for the current year. Catch-up contributions.   You generally can have additional elective deferrals made to your 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. If you qualify, your limit can be the lesser of your includible compensation or $12,000 ($13,000 for 2004), plus $2,000 ($3,000 for 2004). However, if you are within 3 years of retirement age and your plan provides the increased limit earlier, that limit may be higher. Limit for tax-sheltered annuities.   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2003 generally is $12,000 ($13,000 for 2004). 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. $3,000. $15,000, reduced by increases to the overall limit that you were allowed in earlier years because of this years-of-service rule. $5,000 times your number of years of service for the organization, minus the total elective deferrals under the plan for earlier years. Reporting by employer.   Your employer generally should not include elective deferrals in your wages in box 1 of Form W–2. Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. Section 501(c)(18)(D) contributions.   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. The amount you contributed should be identified with code “H” in box 12. You may deduct the amount deferred subject to the limits that apply. Include your deduction in the total on line 33 (Form 1040). Enter the amount and “501(c)(18)(D)” on the dotted line next to line 33. Excess deferrals.   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. If the plan permits, the excess amount will be distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. The plan must then pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. You must include the excess deferral in your income for the year of the deferral. File Form 1040 to add the excess deferral amount to your wages on line 7. Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. Excess not distributed.   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. 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. Excess distributed to you.   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. If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Any income on the excess deferral taken out is taxable in the tax year in which you take it out. 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. You should receive a Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year in which the excess deferral is distributed to you. Use the following rules to report a corrective distribution shown on Form 1099–R for 2003. If the distribution was for a 2003 excess deferral, your Form 1099–R should have the code “8” in box 7. Add the excess deferral amount to your wages on your 2003 tax return. If the distribution was for a 2002 excess deferral, your Form 1099–R should have the code “P” in box 7. If you did not add the excess deferral amount to your wages on your 2002 tax return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return. If you did not receive the distribution by April 15, 2003, you also must add it to your wages on your 2003 tax return. If the distribution was for a 2001 excess deferral, your Form 1099–R should have the code “D” in box 7. If you did not add the excess deferral amount to your wages on your 2001 tax return, you must file an amended return on Form 1040X. You also must add it to your wages on your 2003 income tax return. If the distribution was for the income earned on an excess deferral, your Form 1099–R should have the code “8” in box 7. Add the income amount to your wages on your 2003 income tax return, regardless of when the excess deferral was made. 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. Include the loss as a negative amount on line 21 (Form 1040) and identify it as “Loss on Excess Deferral Distribution.” 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. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. 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 nonhighly compensated employees. 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. You must include the excess contributions in your income as wages on line 7 of Form 1040. You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. If you receive excess contributions from a 401(k) plan and any income earned on the contributions within 2½ months after the close of the plan year, you must include them in your income in the year of the contribution. If you receive them later, or receive less than $100 excess contributions, include the excess contributions and earnings in your income in the year distributed. If the excess contributions are recharacterized, you must include them in income in the year a corrective distribution would have occurred. For a SARSEP, the employer must notify you by March 15 following the year in which excess contributions are made that you must withdraw the excess and earnings. You must include the excess contributions in your income in the year of the contribution (or the year of the notification if less than $100) and include the earnings in your income in the year withdrawn. You should receive a Form 1099–R for the year in which the excess contributions are distributed to you (or are recharacterized). Add excess contributions or earnings shown on Form 1099–R for 2003 to your wages on your 2003 tax return if code “8” is in box 7. If code “P” or “D” is in box 7, you may have to file an amended 2002 or 2001 return on Form 1040X to add the excess contributions or earnings to your wages in the year of the contribution. 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. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Excess Annual Additions The amount contributed in 2003 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $40,000. 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. 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. A corrective payment consisting of your after-tax contributions is not taxable. 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. Report the total payment shown in box 1 of Form 1099–R on line 16a of Form 1040 or line 12a of Form 1040A. Report the taxable amount shown in box 2a of Form 1099–R on line 16b of Form 1040 or line 12b of Form 1040A. 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. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Stock Options If you receive a non-statutory option to buy or sell stock or other property as payment for your services, you usually will have income when you receive the option, 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. However, if your option is a statutory stock option (defined later), you will not have any income until you sell or exchange your stock. Your employer can tell you which kind of option you hold. Non-statutory Stock Options If you are granted a non-statutory stock option, 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. The fair market value of an option can be readily determined if it is actively traded on an established market. 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. You can transfer the option. You can exercise the option immediately in full. 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. The fair market value of the option privilege can be readily determined. 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. 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. 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. Option with readily determined value.   If you receive a non-statutory stock option that has a readily determined fair market value at the time it is granted to you, the option is treated like other property received as compensation. See Restricted Property, later, for rules on how much income to include and when to include it. 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 non-statutory option. Option without readily determined value.   If the fair market value of the option is not readily determined at the time it is granted to you (even if it is determined later), you do not have income until you transfer or exercise the option. When you exercise this kind of option, the restricted property rules apply to the property received. The amount to include in your income is the difference between the amount you pay for the property and its fair market value when it becomes substantially vested. Your basis in the property you acquire under the option is the amount you pay for it plus any amount you must include in your gross income under this rule. For more information on restricted property, see Restricted Property, later. If you transferred this kind of option in an arm’s-length transaction, you must include in your income the money or other property you received for the transfer, as if you had exercised the option. This does not apply to a transfer of the option to a related person after July 1, 2003. See Temporary Regulations section 1.83–7T for the definition of a related person. Tax form.   If you receive compensation from employer-provided non-statutory stock options, it is reported in box 1 of Form W–2. It is also reported in box 12 using code “V.” If you are a non-employee spouse and you exercise non-statutory stock options you received incident to a divorce, the income is reported to you on Form 1099–MISC, Miscellaneous Income, in box 3. Statutory Stock Options There are two kinds of statutory stock options. Incentive stock options (ISOs), and Options granted under employee stock purchase plans. For either kind of option, you must be an employee of the company granting the option, or a related company, at all times beginning with the date the option is granted, until 3 months before you exercise the option (for an incentive stock option, 1 year before if you are disabled). Also, the option must be nontransferable except at death. If you do not meet the employment requirements, or you receive a transferable option, your option is a non-statutory stock option. See Non-statutory Stock Options, earlier in this discussion. If you receive a statutory stock option, do not include any amount in your income either when the option is granted or when you exercise it. You have taxable income or deductible loss when you sell the stock that you bought by exercising the option. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss and report it on Schedule D (Form 1040), Capital Gains and Losses, for the year of the sale. However, you may have ordinary income for the year that you sell or otherwise dispose of the stock in either of the following situations. You do not meet the holding period requirement. This situation applies only if you sell the stock within 1 year after its transfer to you or within 2 years after the option was granted. You meet the holding period requirement but the option was granted under an employee stock purchase plan for an option price that was less than the stock’s fair market value at that time. Report your ordinary income as wages on line 7, Form 1040, for the year of the sale. Incentive stock options (ISOs).   If you sell stock acquired by exercising an ISO and meet the holding period requirement, your gain or loss from the sale is capital gain or loss. If you do not meet the holding period requirement and you have a gain from the sale, the gain is ordinary income up to the amount by which the stock’s fair market value when you exercised the option exceeded the option price. Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss and you do not have any ordinary income. Example. Your employer, X Corporation, granted you an ISO on March 11, 2001, to buy 100 shares of X Corporation stock at $10 a share, its fair market value at the time. You exercised the option on January 17, 2002, when the stock was selling on the open market for $12 a share. On January 24, 2003, you sold the stock for $15 a share. Although you held the stock for more than a year, less than 2 years had passed from the time you were granted the option. In 2003, you must report the difference between the option price ($10) and the value of the stock when you exercised the option ($12) as wages. The rest of your gain is capital gain, figured as follows: Selling price ($15 × 100 shares)  $ 1,500 Purchase price ($10 × 100 shares)  -1,000 Gain  $ 500 Amount reported as wages [($12 × 100 shares) - $1,000]  – 200 Amount reported as capital gain $ 300 Alternative minimum tax (AMT).   For the AMT, you must treat stock acquired through the exercise of an ISO as if no special treatment applied. This means that, when your rights in the stock are transferable or no longer subject to a substantial risk of forfeiture, you must include as an adjustment in figuring alternative minimum taxable income the amount by which the fair market value of the stock exceeds the option price. Enter this adjustment on line 13 of Form 6251, Alternative Minimum Tax—Individuals. Increase your AMT basis in any stock you acquire by exercising the ISO by the amount of the adjustment. However, no adjustment is required if you dispose of the stock in the same year you exercise the option. See Restricted Property, later, for more information. Your AMT basis in stock acquired through an ISO is likely to differ from your regular tax basis. Therefore, keep adequate records for both the AMT and regular tax so that you can figure your adjusted gain or loss. Example. The facts are the same as in the previous example. On January 17, 2003, when the stock was selling on the open market for $14 a share, your rights to the stock first became transferable. You include $400 ($1,400 value when your rights first became transferable minus $1,000 purchase price) as an adjustment on line 13 of Form 6251. Employee stock purchase plan.    If you sold stock acquired by exercising an option granted under an employee stock purchase plan, determine your ordinary income and your capital gain or loss as follows. Option granted at a discount.   If at the time the option was granted, the option price per share was less than 100% (but not less than 85%) of the fair market value of the share, and you dispose of the share after meeting the holding period requirement, or you die while owning the share, you must include in your income as compensation, the lesser of: The amount, if any, by which the price paid under the option was exceeded by the fair market value of the share at the time the option was granted, or The amount, if any, by which the price paid under the option was exceeded by the fair market value of the share at the time of the disposition or death. For this purpose, if the option price was not fixed or determinable at the time the option was granted, the option price is figured as if the option had been exercised at the time it was granted. Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss, and you do not have any ordinary income. Example. Your employer, Y Corporation, granted you an option under its employee stock purchase plan to buy 100 shares of stock of Y Corporation for $20 a share at a time when the stock had a value of $22 a share. Eighteen months later, when the value of the stock was $23 a share, you exercised the option, and 14 months after that you sold your stock for $30 a share. In the year of sale, you must report as wages the difference between the option price ($20) and the value at the time the option was granted ($22). The rest of your gain ($8 per share) is capital gain, figured as follows: Selling price ($30 × 100 shares)  $ 3,000 Purchase price (option price) ($20 × 100 shares)  -2,000 Gain  $ 1,000 Amount reported as wages [($22 × 100 shares) - $2,000]  – 200 Amount reported as capital gain $ 800 Holding period requirement not met.   If you do not meet the holding period requirement, your ordinary income is the amount by which the stock’s fair market value when you exercised the option exceeded the option price. This ordinary income is not limited to your gain from the sale of the stock. Increase your basis in the stock by the amount of this ordinary income. The difference between your increased basis and the selling price of the stock is a capital gain or loss. Example. The facts are the same as in the previous example, except that you sold the stock only 6 months after you exercised the option. You did not hold the stock long enough, so you must report $300 as wages and $700 as capital gain, figured as follows: Selling price ($30 × 100 shares)  $3,000 Purchase price (option price) ($20 × 100 shares)  -2,000 Gain  $1,000 Amount reported as wages [($23 × 100 shares) - $2,000]  – 300 Amount reported as capital gain [$3,000 – ($2,000 + $300)]  $700 Restricted Property Generally, if you receive property for your services, you must include its fair market value in your income in the year you receive the property. However, if you receive stock or other property that has certain restrictions that affect its value, you do not include the value of the property in your income until it has been substantially vested. (You can choose to include the value of the property in your income in the year it is transferred to you, as discussed later, rather than the year it is substantially vested.) Until the property becomes substantially vested, it is owned by the person who makes the transfer to you, usually your employer. However, any income from the property, or the right to use the property, is included in your income as additional compensation in the year you receive the income or have the right to use the property. When the property becomes substantially vested, you must include its fair market value, minus any amount you paid for it, in your income for that year. Example. Your employer, the RST Corporation, sells you 100 shares of its stock at $10 a share. At the time of the sale the fair market value of the stock is $100 a share. Under the terms of the sale, the stock is under a substantial risk of forfeiture (you have a good chance of losing it) for a 5-year period. Your stock is not substantially vested when it is transferred, so you do not include any amount in your income in the year you buy it. At the end of the 5-year period, the fair market value of the stock is $200 a share. You must include $19,000 in your income [100 shares × ($200 fair market value - $10 you paid)]. Dividends paid by the RST Corporation on your 100 shares of stock are taxable to you as additional compensation during the period the stock can be forfeited. Substantially vested.   Property is substantially vested when: It is transferable, or It is not subject to a substantial risk of forfeiture. (You do not have a good chance of losing it.) Transferable property.   Property is transferable if you can sell, assign, or pledge your interest in the property to any person (other than the transferor), and if the person receiving your interest in the property is not required to give up the property, or its value, if the substantial risk of forfeiture occurs. Substantial risk of forfeiture.   A substantial risk of forfeiture exists if the rights in the property transferred depend on performing (or not performing) substantial services, or on a condition related to the transfer, and the possibility of forfeiture is substantial if the condition is not satisfied. Example. The Spin Corporation transfers to you as compensation for services 100 shares of its corporate stock for $100 a share. Under the terms of the transfer, you must resell the stock to the corporation at $100 a share if you leave your job for any reason within 3 years from the date of transfer. You must perform substantial services over a period of time and you must resell the stock to the corporation at $100 a share (regardless of its value) if you do not perform the services, so your rights to the stock are subject to a substantial risk of forfeiture. Choosing to include in income for year of transfer.   You can choose to include the value of restricted property at the time of transfer (minus any amount you paid for the property) in your income for the year it is transferred. If you make this choice, the substantial vesting rules do not apply and, generally, any later appreciation in value is not included in your compensation when the property becomes substantially vested. Your basis for figuring gain or loss when you sell the property is the amount you paid for it plus the amount you included in income as compensation. If you make this choice, you cannot revoke it without the consent of the Internal Revenue Service. Consent will be given only if you were under a mistake of fact as to the underlying transaction. If you forfeit the property after you have included its value in income, your loss is the amount you paid for the property minus any amount you realized on the forfeiture. You cannot make this choice for a non-statutory stock option. How to make the choice.   You make the choice by filing a written statement with the Internal Revenue Service center where you file your return. You must file this statement no later than 30 days after the date the property was transferred. A copy of the statement must be attached to your tax return for the year the property was transferred. You also must give a copy of this statement to the person for whom you performed the services and, if someone other than you received the property, to that person. You must sign the statement and indicate on it that you are making the choice under section 83(b) of the Internal Revenue Code. The statement must contain all of the following information. Your name, address, and taxpayer identification number. A description of each property for which you are making the choice. The date or dates on which the property was transferred and the tax year for which you are making the choice. The nature of any restrictions on the property. The fair market value at the time of transfer (ignoring restrictions except those that will never lapse) of each property for which you are making the choice. Any amount that you paid for the property. A statement that you have provided copies to the appropriate persons. Dividends received on restricted stock.   Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these payments on your Form W–2. If they are also reported on a Form 1099–DIV, Dividends and Distributions, you should list them on Schedule B (Form 1040) or Schedule 1 (Form 1040A), Interest and Ordinary Dividends for Form 1040A Filers, with a statement that you have included them as wages. Do not include them in the total dividends received. Stock you chose to include in your income.   Dividends you receive on restricted stock you chose to include in your income in the year transferred are treated the same as any other dividends. You should receive a Form 1099–DIV showing these dividends. Do not include the dividends in your wages on your return. Report them as dividends. Sale of property not substantially vested.   These rules apply to the sale or other disposition of property that you did not choose to include in your income in the year transferred and that is not substantially vested. If you sell or otherwise dispose of the property in an arm’s-length transaction, include in your income as compensation for the year of sale the amount realized minus the amount you paid for the property. If you exchange the property in an arm’s-length transaction for other property that is not substantially vested, treat the new property as if it were substituted for the exchanged property. The sale or other disposition of a non-statutory stock option to a related person after July 1, 2003, is not considered an arm’s-length transaction. See Temporary Regulations section 1.83–7T for the definition of a related person. If you sell the property in a transaction that is not at arm’s length, include in your income as compensation for the year of sale the total of any money you received and the fair market value of any substantially vested property you received on the sale. In addition, you will have to report income when the original property becomes substantially vested, as if you still held it. Report as compensation its fair market value minus the total of the amount you paid for the property and the amount included in your income from the earlier sale. Example. In 2000, you paid your employer $50 for a share of stock that had a fair market value of $100 and was subject to forfeiture until 2003. In 2002, you sold the stock to your spouse for $10 in a transaction not at arm’s length. You had compensation of $10 from this transaction. In 2003, when the stock had a fair market value of $120, it became substantially vested. For 2003, you must report additional compensation of $60, figured as follows: Fair market value of stock at time of substantial vesting    $120 Minus: Amount paid for stock  $50 Minus: Compensation previously included in income from sale to spouse  10  -60 Additional income   $60 Inherited property not substantially vested.   If you inherit property not substantially vested at the time of the decedent’s death, any income you receive from the property is considered income in respect of a decedent and is taxed according to the rules for restricted property received for services. For information about income in respect of a decedent, get Publication 559. Special Rules for Certain Employees This part of the publication deals with special rules for people in certain types of employment: members of the clergy, members of religious orders, people working for foreign employers, military personnel, and volunteers. Clergy If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it is not taxable to you. If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Get Publication 526, Charitable Contributions. Also, see Members of Religious Orders, later. Pension.   A pension or retirement pay for a member of the clergy usually is treated as any other pension or annuity. It must be reported on lines 16a and 16b of Form 1040, or on lines 12a and 12b of Form 1040A. Housing Special rules for housing apply to members of the clergy. Under these rules, you do not include in your income the rental value of a home (including utilities) or a designated housing allowance provided to you as part of your pay. However, the exclusion cannot be more than the reasonable pay for your service. If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost. The home or allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. However, you must include the rental value of the home or the housing allowance as earnings from self-employment on Schedule SE (Form 1040), Self-Employment Tax, if you are subject to the self-employment tax. For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Members of Religious Orders If you are a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order depends on whether your services are performed for the order. Services performed for the order.   If you are performing the services as an agent of the order in the exercise of duties required by the order, do not include in your income the amounts turned over to the order. If your order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to be performing the services as an agent of the order. Any wages you earn as an agent of an order that you turn over to the order are not included in your income. Example. You are a member of a church order and have taken a vow of poverty. You renounce any claims to your earnings and turn over to the order any salaries or wages you earn. You are a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the church. However, you remain under the general direction and control of the order. You are considered to be an agent of the order and any wages you earn at the hospital that you turn over to your order are not included in your income. Services performed outside the order.   If you are directed to work outside the order, your services are not an exercise of duties required by the order unless they meet both of the following requirements. They are the kind of services that are ordinarily the duties of members of the order. They are part of the duties that you must exercise for, or on behalf of, the religious order as its agent. If you are an employee of a third party, the services you perform for the third party will not be considered directed or required of you by the order. Amounts you receive for these services are included in your income, even if you have taken a vow of poverty. Example 1. Mark Brown is a member of a religious order and has taken a vow of poverty. He renounces all claims to his earnings and turns over his earnings to the order. Mark is a schoolteacher. He was instructed by the superiors of the order to get a job with a private tax-exempt school. Mark became an employee of the school, and, at his request, the school made the salary payments directly to the order. Because Mark is an employee of the school, he is performing services for the school rather than as an agent of the order. The wages Mark earns working for the school are included in his income. Example 2. Gene Dennis is a member of a religious order who, as a condition of membership, has taken vows of poverty and obedience. All claims to his earnings are renounced. Gene received permission from the order to establish a private practice as a psychologist and counsels members of religious orders as well as nonmembers. Although the order reviews Gene’s budget annually, Gene controls not only the details of his practice but also the means by which his work as a psychologist is accomplished. Gene’s private practice as a psychologist does not make him an agent of the religious order. The psychological services provided by Gene are not the type of services that are provided by the order. The income Gene earns as a psychologist is earned in his individual capacity. Gene must include in his income the earnings from his private practice. Foreign Employer Special rules apply if you work for a foreign employer. U.S. citizen.   If you are a U.S. citizen who works in the United States for a foreign government, an international organization, a foreign embassy, or any foreign employer, you must include your salary in your income. Social security and Medicare taxes.   You are exempt from social security and Medicare employee taxes if you are employed in the United States by an international organization or a foreign government. However, you must pay self-employment tax on your earnings from services performed in the United States, even though you are not self-employed. This rule also applies if you are an employee of a qualifying wholly-owned instrumentality of a foreign government. Employees of international organizations or foreign governments.   Your compensation for official services to an international organization is exempt from federal income tax if you are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States). Your compensation for official services to a foreign government is exempt from federal income tax if all of the following are true. You are not a citizen of the United States or you are a citizen of the Philippines (whether or not you are a citizen of the United States). Your work is like the work done by employees of the United States in foreign countries. The foreign government gives an equal exemption to employees of the United States in its country. Waiver of alien status.   If you are an alien who works for a foreign government or international organization and you file a waiver under section 247(b) of the Immigration and Nationality Act to keep your immigrant status, any salary you receive after the date you file the waiver is not exempt under this rule. However, it may be exempt under a treaty or agreement. See Publication 519, U.S. Tax Guide for Aliens, for more information about treaties. Non-wage income.   This exemption applies only to employees’ wages, salaries, and fees. Pensions and other income do not qualify for this exemption. Employment abroad.    For information on the tax treatment of income earned abroad, get Publication 54. Military Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. Allowances generally are not taxed. For more information on the tax treatment of military allowances and benefits, get Publication 3, Armed Forces’ Tax Guide. Military retirement pay.    If your retirement pay is based on age or length of service, it is taxable and must be included in your income as a pension on lines 16a and 16b of Form 1040, or on lines 12a and 12b of Form 1040A. Do not include in your income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for your spouse or children under the Retired Serviceman’s Family Protection Plan or the Survivor Benefit Plan. For a more detailed discussion of survivor annuities, get Publication 575. Disability.   If you are retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits, later. Veterans’ benefits.    Do not include in your income any veterans’ benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). The following amounts paid to veterans or their families are not taxable. Education, training, and subsistence allowances. Disability compensation and pension payments for disabilities paid either to veterans or their families. Grants for homes designed for wheelchair living. Grants for motor vehicles for veterans who lost their sight or the use of their limbs. Veterans’ insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran’s endowment policy paid before death. Interest on insurance dividends left on deposit with the VA. Rehabilitative program payments.   VA payments to hospital patients and resident veterans for their services under the VA’s therapeutic or rehabilitative programs are not treated as nontaxable veterans’ benefits. Report these payments as income on line 21 of Form 1040. Volunteers The tax treatment of amounts you receive as a volunteer worker for the Peace Corps or similar agency is covered in the following discussions. Peace Corps.   Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are exempt from tax. Taxable allowances.   The following allowances must be included in your income and reported as wages. Allowances paid to your spouse and minor children while you are a volunteer leader training in the United States. Living allowances designated by the Director of the Peace Corps as basic compensation. These are allowances for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses. Leave allowances. Readjustment allowances or termination payments. These are considered received by you when credited to your account. Example. Gary Carpenter, a Peace Corps volunteer, gets $175 a month as a readjustment allowance during his period of service, to be paid to him in a lump sum at the end of his tour of duty. Although the allowance is not available to him until the end of his service, Gary must include it in his income on a monthly basis as it is credited to his account. Volunteers in Service to America (VISTA).   If you are a VISTA volunteer, you must include meal and lodging allowances paid to you in your income as wages. National Senior Service Corps programs.   Do not include in your income amounts you receive for supportive services or reimbursements for out-of-pocket expenses from the following progr