liberty tax service online basic income tax course. lesson 4

Liberty Tax Service Liberty Tax Service Online Basic Income Tax Online Basic Income Tax

Course.Course.

Lesson 4Lesson 4

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HOMEWORK CHAPTER 3HOMEWORK CHAPTER 3

Homework 1 - 1Homework 1 - 1

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Wilke (Parent would qualify her for H/H if Wilke (Parent would qualify her for H/H if she was not married. Parent she was not married. Parent does notdoes not make her eligible to be considered make her eligible to be considered unmarried.) unmarried.)

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Jones (Filing Status 2, Married Filing Joint Jones (Filing Status 2, Married Filing Joint is also acceptable)is also acceptable)

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LizoLizo

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Homework 2 - 4Homework 2 - 4DeMarcoDeMarco

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KingKing

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Chapter 4: Wages, Salaries, Tips, Etc. Chapter 4: Wages, Salaries, Tips, Etc. and Withheld Taxesand Withheld Taxes

Chapter ContentChapter Content Form W-2Form W-2 Wages and Other CompensationWages and Other Compensation Tip IncomeTip Income Other Line 7 IncomeOther Line 7 Income Nontaxable CompensationNontaxable Compensation Withheld taxesWithheld taxes Key IdeasKey Ideas

ObjectivesObjectives Know the Difference Between Taxable and Nontaxable Know the Difference Between Taxable and Nontaxable

IncomeIncome Understand the Types of Employee CompensationUnderstand the Types of Employee Compensation Use Form W-2 to Report Employee Compensation Use Form W-2 to Report Employee Compensation UnderstandUnderstand the Ways Tip Income is Reported the Ways Tip Income is Reported Recognize How Your tax is Paid by WithholdingRecognize How Your tax is Paid by Withholding

1414

Taxable IncomeTaxable Income

Taxable income.Taxable income.

1. All income in the form of money, goods, 1. All income in the form of money, goods, services, and property you receive during services, and property you receive during the tax year that is subject to income taxthe tax year that is subject to income tax

2. Includes earned income and unearned income2. Includes earned income and unearned income Earned income is income from personal Earned income is income from personal

services such as wages and other services such as wages and other employee compensationemployee compensation

Unearned income is non-personal service Unearned income is non-personal service income such as interest and dividendsincome such as interest and dividends

3. Reported on lines 7 through 21 of Form 1040.3. Reported on lines 7 through 21 of Form 1040.

1515

Nontaxable IncomeNontaxable Income

Nontaxable or exempt income (not subject Nontaxable or exempt income (not subject to income tax).to income tax).

Child supportChild support Federal tax refundsFederal tax refunds Interest on municipal bondsInterest on municipal bonds Public assistance paymentsPublic assistance payments Workers’ compensationWorkers’ compensation Most life insurance proceeds received upon Most life insurance proceeds received upon

deathdeath Part or all of social security benefitsPart or all of social security benefits Veteran’s disability benefitsVeteran’s disability benefits Gifts, bequests, and inheritances (may be Gifts, bequests, and inheritances (may be

subject to other taxes)subject to other taxes) SomeSome nontaxable income, such as exempt nontaxable income, such as exempt

interest, must be shown on Form 1040 but is interest, must be shown on Form 1040 but is not added to gross income.not added to gross income.

1616

Wages, Salaries and TipsWages, Salaries and Tips

Wages, salaries, and tips that are earned as an employee Wages, salaries, and tips that are earned as an employee are probably the most familiar types of income.are probably the most familiar types of income.

The most common types of income:The most common types of income: Wages and salaries are compensation paid by your Wages and salaries are compensation paid by your

employer for work or services you provideemployer for work or services you provide

Tips are received from customersTips are received from customers

Compensation also includes awards, bonuses, sick pay, Compensation also includes awards, bonuses, sick pay, and other taxable employee benefitsand other taxable employee benefits

Wage and tip income and other compensation can be Wage and tip income and other compensation can be in the form of cash or goods, services, and propertyin the form of cash or goods, services, and property

All such income that is not specifically excluded by law All such income that is not specifically excluded by law from taxation is taxable and must be reported.from taxation is taxable and must be reported.

1717

Form W-2Form W-2

Form 1040, Page 1

1818

Form W-2Form W-2

Reports wage and tip income, tax withholding and Reports wage and tip income, tax withholding and other related information to you and to the IRS.other related information to you and to the IRS.

1.1. Employer must provide by January 31Employer must provide by January 312.2. Box 1 of Form W-2 reports total wages, tips, Box 1 of Form W-2 reports total wages, tips,

and other compensation which is entered on and other compensation which is entered on line 7 of Form 1040line 7 of Form 1040

3.3. Some of Form W-2 boxes provide information Some of Form W-2 boxes provide information about the box 1 amount; this information is about the box 1 amount; this information is not entered on Form 1040not entered on Form 1040

4.4. If box 1 information is incorrect, employer If box 1 information is incorrect, employer must issue Form W-2cmust issue Form W-2c

5.5. If you have more than one W-2, add the If you have more than one W-2, add the amounts in each box 1 and enter the total on amounts in each box 1 and enter the total on line 7line 7

6.6. Even if you do not receive Form W-2 from Even if you do not receive Form W-2 from your employer, you must still report the your employer, you must still report the income.income.

1919

Statutory EmployeesStatutory Employees

Statutory employees include full time life Statutory employees include full time life insurance agents, certain home insurance agents, certain home workers, and traveling salespeople.workers, and traveling salespeople.

Income is reported on Form W-2Income is reported on Form W-2 Statutory employee in box 13 of Form W-2 is Statutory employee in box 13 of Form W-2 is

checkedchecked If there are no expenses related to income, If there are no expenses related to income,

enter box 1 amount on line 7 of Form 1040enter box 1 amount on line 7 of Form 1040 If there are expenses, complete Schedule C If there are expenses, complete Schedule C

and enter net income on line 12 of Form and enter net income on line 12 of Form 1040.1040.

2020

Wages And Other CompensationWages And Other Compensation

Compensation reported in box 1 that must be Compensation reported in box 1 that must be entered on line 7 of Form 1040 includes: regular entered on line 7 of Form 1040 includes: regular pay; advance commissions; back pay awards; pay; advance commissions; back pay awards; bonuses and awards; sick pay; holiday gifts; bonuses and awards; sick pay; holiday gifts; severance pay; travel and other business severance pay; travel and other business expense reimbursements; employer provided expense reimbursements; employer provided vehicles; supplemental unemployment benefits; vehicles; supplemental unemployment benefits; disability income from an employer-paid plan disability income from an employer-paid plan received before you reach minimum retirement received before you reach minimum retirement age, whether reported on Form W-2 or Form age, whether reported on Form W-2 or Form 1099-R (covered in Chapter 9).1099-R (covered in Chapter 9).

The amount shown in box 1 of Form W-2 is gross The amount shown in box 1 of Form W-2 is gross pay before federal and state income taxes, pay before federal and state income taxes, social security and Medicare taxes and other social security and Medicare taxes and other withholdings are taken out.withholdings are taken out.

2121

Wages and Income – Problem 1Wages and Income – Problem 1

Lorenzo P. Lake’s salary for 2008 was Lorenzo P. Lake’s salary for 2008 was $35,000. Lorenzo’s take home pay was $35,000. Lorenzo’s take home pay was $28,129.50 because his employer withheld $28,129.50 because his employer withheld social security, Medicare and federal social security, Medicare and federal income taxes of $6,870.50. Which amount income taxes of $6,870.50. Which amount will be reported in box 1 of his Form W-2?will be reported in box 1 of his Form W-2?

a. $28,129.50a. $28,129.50

b. $35,000.00b. $35,000.00

c. None of the abovec. None of the above

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Lorenzo P. Lake’s salary for 2008 was $35,000. Lorenzo’s take home Lorenzo P. Lake’s salary for 2008 was $35,000. Lorenzo’s take home pay was $28,129.50 because his employer withheld social pay was $28,129.50 because his employer withheld social security, Medicare and federal income taxes of $6,870.50. security, Medicare and federal income taxes of $6,870.50. Which amount will be reported in Box 1 of his Form W-2?Which amount will be reported in Box 1 of his Form W-2?

b. $35,000.00b. $35,000.00

2323


Corey was employed by the Ace Insurance Company, Corey was employed by the Ace Insurance Company, her salary in 2008 was $29,000. She was given a her salary in 2008 was $29,000. She was given a Christmas bonus of $500. Corey won a sales contest Christmas bonus of $500. Corey won a sales contest in November 2008 and the prize was a 4 day in November 2008 and the prize was a 4 day vacation to Florida. The value of the vacation prize vacation to Florida. The value of the vacation prize (cost of the airline tickets and hotel) was $1,200. (cost of the airline tickets and hotel) was $1,200. She did not actually take the vacation until February She did not actually take the vacation until February 2009. What is the total compensation that her 2009. What is the total compensation that her employer should report in box 1 of Form W-2?employer should report in box 1 of Form W-2?

a. $29,500a. $29,500b. $29,000b. $29,000c. $30,700c. $30,700d. $30,200d. $30,200

2424


Corey was employed by the Ace Insurance Company, Corey was employed by the Ace Insurance Company, her salary in 2008 was $29,000. She was given a her salary in 2008 was $29,000. She was given a Christmas bonus of $500. Corey won a sales contest Christmas bonus of $500. Corey won a sales contest in November 2008 and the prize was a 4 day in November 2008 and the prize was a 4 day vacation to Florida. The value of the vacation prize vacation to Florida. The value of the vacation prize (cost of the airline tickets and hotel) was $1,200. (cost of the airline tickets and hotel) was $1,200. She did not actually take the vacation until February She did not actually take the vacation until February 2009. What is the total compensation that her 2009. What is the total compensation that her employer should report in box 1 of Form W-2?employer should report in box 1 of Form W-2?

c. $30,700c. $30,700

$29,000 salary + $500 bonus + $1,200 prize awarded in 2007 = $29,000 salary + $500 bonus + $1,200 prize awarded in 2007 = $30,700. The amounts of the bonus and prize included in box 1 $30,700. The amounts of the bonus and prize included in box 1 may be broken out and shown in box 14 of Form W-2.may be broken out and shown in box 14 of Form W-2.

2525

Tip IncomeTip Income

All cash and non-cash tips received from customers All cash and non-cash tips received from customers are taxable income and must be reported on line 7 of are taxable income and must be reported on line 7 of Form 1040.Form 1040.

You must keep a daily tip record so you can:You must keep a daily tip record so you can: Report tips to your employerReport tips to your employer Report tips accurately on your tax returnReport tips accurately on your tax return Prove tip income if your return is Prove tip income if your return is

questioned questioned

2626

Tip IncomeTip Income

Include the value of all noncash tips such as tickets or passes.

2727

Reporting Tips To Your EmployerReporting Tips To Your Employer

Report to your employer cash, check, or Report to your employer cash, check, or credit card tips of $20 or more for any credit card tips of $20 or more for any one month for any one job.one month for any one job.

1. These tips are included in the amount shown 1. These tips are included in the amount shown in box 1 of Form W-2in box 1 of Form W-2

2. Your employer withholds social security and 2. Your employer withholds social security and Medicare taxes for these tips from your Medicare taxes for these tips from your wageswages

3. Any social security and Medicare taxes not 3. Any social security and Medicare taxes not collected by your employer must be reported collected by your employer must be reported as additional tax on your returnas additional tax on your return

4. Do not report the value of noncash tips to 4. Do not report the value of noncash tips to your employeryour employer

5. If you do not report tips of $20 or more as 5. If you do not report tips of $20 or more as required, you may berequired, you may be subject to a penaltysubject to a penalty..

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Reporting Tips To Your Employer – Problem 3Reporting Tips To Your Employer – Problem 3

Zachary works at Uncle Sam’s Restaurant as a Zachary works at Uncle Sam’s Restaurant as a waiter. He keeps a daily tip record. He waiter. He keeps a daily tip record. He received only cash tips in 2008. His tips in received only cash tips in 2008. His tips in June were $17. Every other month his tips June were $17. Every other month his tips were $20 or more. Is Zachary required to were $20 or more. Is Zachary required to report his June tips to his employer?report his June tips to his employer?

Yes or No?Yes or No?

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Reporting Tips To Your Employer – Problem 3Reporting Tips To Your Employer – Problem 3

Zachary works at Uncle Sam’s Restaurant as a Zachary works at Uncle Sam’s Restaurant as a waiter. He keeps a daily tip record. He waiter. He keeps a daily tip record. He received only cash tips in 2008. His tips in received only cash tips in 2008. His tips in June were $17. Every other month his tips June were $17. Every other month his tips were $20 or more. Is James required to were $20 or more. Is James required to report his June tips to his employer?report his June tips to his employer?

No.No.

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Tips Not Reported To Your EmployerTips Not Reported To Your Employer

Do not report tips under $20 a month or to your Do not report tips under $20 a month or to your employer.employer.

These tips are subject to income tax but not social These tips are subject to income tax but not social security or Medicare taxsecurity or Medicare tax

Add these tips and the value of noncash tips to your Add these tips and the value of noncash tips to your box 1 wages and enter the total on line 7 of Form box 1 wages and enter the total on line 7 of Form 10401040

If you did not report tips of $20 or more per month If you did not report tips of $20 or more per month to your employer as required, also add these tips to to your employer as required, also add these tips to the amount entered on line 7the amount entered on line 7

Use Form 4137 to figure and report social security Use Form 4137 to figure and report social security and Medicare tax on these tips.and Medicare tax on these tips.

3131

Tips Not Reported – Problem 4Tips Not Reported – Problem 4

Bob works for Tanya’s beauty shop. His salary is $18,000. Bob Bob works for Tanya’s beauty shop. His salary is $18,000. Bob keeps a daily tip diary. One month he made $32 in tips and keeps a daily tip diary. One month he made $32 in tips and another month he made $26. He reported these tips to his another month he made $26. He reported these tips to his employer as required and his employer included them in box 1 employer as required and his employer included them in box 1 of Bob’s 2008 Form W-2 that showed total compensation of of Bob’s 2008 Form W-2 that showed total compensation of $18,058. The other 10 months Bob did not make more than $18,058. The other 10 months Bob did not make more than $19 in cash tips in any month, so he was not required to $19 in cash tips in any month, so he was not required to report these tips to his employer. He received total cash tips report these tips to his employer. He received total cash tips for the year of $175 that he did not report to his employer. for the year of $175 that he did not report to his employer. One of his customers also tipped Bob with passes to the One of his customers also tipped Bob with passes to the County Fair. The value of the passes was $12. What is the County Fair. The value of the passes was $12. What is the total income that Bob must report in box 1 of his Form W-2 total income that Bob must report in box 1 of his Form W-2 and on line 7 of Form 1040?and on line 7 of Form 1040?

a. $18,058a. $18,058b. $18,245b. $18,245c. $18,233c. $18,233

3232

Tips Not Reported – Problem 4Tips Not Reported – Problem 4

Bob works for Tanya’s beauty shop. His salary is $18,000. Bob Bob works for Tanya’s beauty shop. His salary is $18,000. Bob keeps a daily tip diary. One month he made $32 in tips and keeps a daily tip diary. One month he made $32 in tips and another month he made $26. He reported these tips to his another month he made $26. He reported these tips to his employer as required and his employer included them in box 1 employer as required and his employer included them in box 1 of Bob’s 2008 Form W-2 that showed total compensation of of Bob’s 2008 Form W-2 that showed total compensation of $18,058. The other 10 months Bob did not make more than $18,058. The other 10 months Bob did not make more than $19 in cash tips in any month, so he was not required to $19 in cash tips in any month, so he was not required to report these tips to his employer. He received total cash tips report these tips to his employer. He received total cash tips for the year of $175 that he did not report to his employer. for the year of $175 that he did not report to his employer. One of his customers also tipped Bob with passes to the One of his customers also tipped Bob with passes to the County Fair. The value of the passes was $12. What is the County Fair. The value of the passes was $12. What is the total income that Bob must report in box 1 of his Form W-2 total income that Bob must report in box 1 of his Form W-2 and on line 7 of Form 1040?and on line 7 of Form 1040?

b. $18,245b. $18,245

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Tips Not Reported To Your EmployerTips Not Reported To Your Employer

BOB’S WAGES, PLUS THE TIPS HE REPORTED TO HIS EMPLOYER

+ Unreported cash tips ($175)+ Value of non-cash tip ($12)

= $18,245

Form 1040

BOB’S WAGES, PLUS THE TIPS HE REPORTED TO HIS EMPLOYER

3434

Allocated TipsAllocated Tips

Allocated tips are tips that are assigned to you by your Allocated tips are tips that are assigned to you by your employer in addition to the tips you report to the employer in addition to the tips you report to the employer.employer.

1.1. Tip allocation is only required if you work for certain food Tip allocation is only required if you work for certain food and drink establishments and your reported tips are less and drink establishments and your reported tips are less than your share of a required percentage of food and than your share of a required percentage of food and drink salesdrink sales

2.2. Allocated tips are shown in box 8 of Form W-2 and must Allocated tips are shown in box 8 of Form W-2 and must be included in your gross income unless you have proof be included in your gross income unless you have proof of actual tipsof actual tips

3.3. If you have to include allocated tips in your income, add If you have to include allocated tips in your income, add the amount in box 8 to the box 1 amount, enter on line 7 the amount in box 8 to the box 1 amount, enter on line 7 of Form 1040 and complete Form 4137 to figure the social of Form 1040 and complete Form 4137 to figure the social security and Medicare tax you owesecurity and Medicare tax you owe

4.4. You must use Form 1040 if reporting allocated tip You must use Form 1040 if reporting allocated tip income.income.

3535

Allocated Tips – Problem 5Allocated Tips – Problem 5

In 2008, Hope reported $400 in total tips to In 2008, Hope reported $400 in total tips to her employer. Her employer reported wages her employer. Her employer reported wages of $16,580, which included those tips. Box 8 of $16,580, which included those tips. Box 8 of her Form W-2 showed allocated tips of of her Form W-2 showed allocated tips of $484. How much income would Hope report $484. How much income would Hope report Form 1040, line 7?Form 1040, line 7?

a. $16,980a. $16,980

b. $16,580b. $16,580

c. $17,064c. $17,064

3636


In 2008, Hope reported $400 in total tips to In 2008, Hope reported $400 in total tips to her employer. Her employer reported wages her employer. Her employer reported wages of $16,580, which included those tips. Box 8 of $16,580, which included those tips. Box 8 of her Form W-2 showed allocated tips of of her Form W-2 showed allocated tips of $484. How much income would Hope report $484. How much income would Hope report Form 1040, line 7?Form 1040, line 7?

c. $17,064c. $17,064

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+ = $17,064

Form 1040, Page 1

3838

OTHER FORM 1040 LINE 7 INCOMEOTHER FORM 1040 LINE 7 INCOMEThe following are some of the types of income that are either The following are some of the types of income that are either

not reported on a Form W-2 or not included in box 1 that not reported on a Form W-2 or not included in box 1 that must be reported on line 7 of Form 1040:must be reported on line 7 of Form 1040:

1.1. The taxable portion of scholarships and fellowships not The taxable portion of scholarships and fellowships not reported on Form W-2. Write “SCH” and the amount not reported on Form W-2. Write “SCH” and the amount not reported on Form W-2 in the space to the left of line 7. If reported on Form W-2 in the space to the left of line 7. If you are a degree candidate, only those amounts not used you are a degree candidate, only those amounts not used for tuition and other course related expenses are taxable.for tuition and other course related expenses are taxable.

2. Wages received as a household employee that were not 2. Wages received as a household employee that were not reported on a Form W-2 because an employer paid less reported on a Form W-2 because an employer paid less than $1,500. Write “HSH” and the amount not reported than $1,500. Write “HSH” and the amount not reported on a Form W-2 in the space to the left of line 7.on a Form W-2 in the space to the left of line 7.

3939

OTHER FORM 1040 LINE 7 INCOMEOTHER FORM 1040 LINE 7 INCOME

3. The amount of dependent care benefits shown 3. The amount of dependent care benefits shown in box 10 of Form W-2 that you cannot exclude in box 10 of Form W-2 that you cannot exclude from your income. Dependent care benefits from your income. Dependent care benefits are amounts an employer paid to an employee are amounts an employer paid to an employee or paid out on behalf of an employee for child or paid out on behalf of an employee for child and dependent care services. and dependent care services.

4. Any amount of employer provided adoption 4. Any amount of employer provided adoption benefits or moving expense reimbursements benefits or moving expense reimbursements that are not excludable. If these benefits were that are not excludable. If these benefits were received, the amounts are shown on Form W-2 received, the amounts are shown on Form W-2 in box 12. in box 12.

4040

Form 1099-MISC IncomeForm 1099-MISC Income

If income is reported by the payer in box 7 If income is reported by the payer in box 7 of Form 1099-MISC, you are being of Form 1099-MISC, you are being reported as self-employed.reported as self-employed.

Report your income on Schedule C and line 12 Report your income on Schedule C and line 12 of Form 1040of Form 1040

You may also owe self-employment tax on You may also owe self-employment tax on income reported on Form 1099-MISCincome reported on Form 1099-MISC

Use the SS-8 questionnaire to help you Use the SS-8 questionnaire to help you determine if you are an employee or an determine if you are an employee or an independent contractorindependent contractor

4141

Nontaxable Employee CompensationNontaxable Employee Compensation

Many fringe benefits you receive from your Many fringe benefits you receive from your employer are tax free or tax deferred employer are tax free or tax deferred because you pay fair market value for them because you pay fair market value for them or they are specifically excluded by law from or they are specifically excluded by law from taxable income.taxable income.

A tax-free fringe benefit is never included in A tax-free fringe benefit is never included in your gross income and you will never pay tax your gross income and you will never pay tax on it. Examples of tax-free benefits are:on it. Examples of tax-free benefits are: Health care benefitsHealth care benefits Group term life insurance up to $50,000 of Group term life insurance up to $50,000 of

coveragecoverage

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A tax-deferred benefit is not included in gross income A tax-deferred benefit is not included in gross income in the year you receive it and so is not taxed in the in the year you receive it and so is not taxed in the year received.year received.

Your employer’s contributions to a qualified Your employer’s contributions to a qualified retirement planretirement plan

Your contributions for retirement under a Your contributions for retirement under a qualified deferred compensation plan set up qualified deferred compensation plan set up by your employer, such as a 401 (k) planby your employer, such as a 401 (k) plan

Contribution limited to $15,500 in 2008 Contribution limited to $15,500 in 2008 ($20,500 if age 50 or over)($20,500 if age 50 or over)

Any amount over that is subject to income tax Any amount over that is subject to income tax in the year you receive itin the year you receive it

Contributions to a deferred compensation is Contributions to a deferred compensation is shown in box 12 of Form W-2 with the code shown in box 12 of Form W-2 with the code letter Dletter D

4343


Social security and Medicare taxes are Social security and Medicare taxes are collected on this deferred compensation in the collected on this deferred compensation in the year you receive ityear you receive it

Social security and Medicare wages shown in Social security and Medicare wages shown in boxes 3 and 5 of Form W-2 will include this boxes 3 and 5 of Form W-2 will include this deferred compensation and be different from deferred compensation and be different from the amount shown in box 1.the amount shown in box 1.

Retirement plan distributions are taxed in the Retirement plan distributions are taxed in the year you withdraw them from your retirement year you withdraw them from your retirement plan.plan.

4444


Jack D. Sprat’s salary is $28,640. He participates in Jack D. Sprat’s salary is $28,640. He participates in his employer’s 401(k) plan. In 2008, Jack his employer’s 401(k) plan. In 2008, Jack contributed $1,400 of his salary to the plan. Jack’s contributed $1,400 of his salary to the plan. Jack’s Form W-2 is shown below.Form W-2 is shown below.

4545

Withheld TaxesWithheld Taxes

Federal income tax is a pay-as-you-earn tax. You owe tax on income as you earn or

receive it Must pay the tax you owe as you

receive the income.

Paid in one of two ways: Withheld from your wages , or Make estimated tax payments.

If you do not pay enough tax during the year, you may owe a penalty in addition to the tax that is still due.

4646


WITHHELD TAXES are tax payments withheld from your income and made to the IRS in your name during the year by the payer of the income.

If you are an employee, your employer will withhold income tax payments from your pay based on the amount you earn and the information you give your employer on Form W-4.

4747


Other types of income from which taxes mustbe or may be withheld: Unemployment compensation Gambling winnings Pensions Social security benefits Interest and dividend payments

The taxes withheld during the year from your income determine whether you owe money or whether you will receive a refund.

4848

Mandatory WithholdingMandatory Withholding

Taxes must generally be withheld from Taxes must generally be withheld from wages, from some gambling winnings and in wages, from some gambling winnings and in certain cases from interest and dividend certain cases from interest and dividend payments. For some types of required payments. For some types of required withholding the withholding rate is also set withholding the withholding rate is also set by law. by law.

4949

Salaries and WagesSalaries and Wages

Your employer withholds the tax you owe on your Your employer withholds the tax you owe on your wages or other employee compensation. Federal wages or other employee compensation. Federal income tax your employer is required to withhold income tax your employer is required to withhold from your pay is based on the amount you earn and from your pay is based on the amount you earn and the information you provide on Form W-4. You must the information you provide on Form W-4. You must complete a Form W-4 when starting a new job.complete a Form W-4 when starting a new job.

5050

Salaries and WagesSalaries and Wages

The W-4 includes three types of information your The W-4 includes three types of information your employer will use to figure your withholding:employer will use to figure your withholding:

Whether to withhold at the single or the lower Whether to withhold at the single or the lower married rate (the higher the rate, the more tax is married rate (the higher the rate, the more tax is withheld)withheld)

How many withholding allowance you claim (each How many withholding allowance you claim (each allowance reduces the amount withheld)allowance reduces the amount withheld)

Whether you want an additional amount withheld (so Whether you want an additional amount withheld (so that you are paying more of your tax liability during that you are paying more of your tax liability during the year)the year)

5151

Form 1040, Page 2Form 1040, Page 2

Enter the withholding on line 62 of Form 1040.Enter the withholding on line 62 of Form 1040. If you worked for more than one employer during the If you worked for more than one employer during the

year, add the amounts in box 2 from all your W-2 year, add the amounts in box 2 from all your W-2 forms and enter the total on line 62.forms and enter the total on line 62.

If you are married filing jointly, add the box 2 If you are married filing jointly, add the box 2 amounts from all the W-2 forms for each spouse and amounts from all the W-2 forms for each spouse and enter the total on line 62 of Form 1040.enter the total on line 62 of Form 1040.

Form 1040, Page 2Form 1040, Page 2

5252

Wages, Salaries, Tips, Etc. and Wages, Salaries, Tips, Etc. and Withheld TaxesWithheld Taxes

Key IdeasKey Ideas

The total of all taxable compensation earned as an The total of all taxable compensation earned as an employee is entered on line 7 of Form 1040. Taxable employee is entered on line 7 of Form 1040. Taxable employee compensation includes payment given in the employee compensation includes payment given in the form of bonuses, awards, strike benefits, and severance form of bonuses, awards, strike benefits, and severance pay in addition to salary or wages.pay in addition to salary or wages.

In general, the amount entered on line 7 is the amount In general, the amount entered on line 7 is the amount from box 1 of Form W-2 that your employer provides to from box 1 of Form W-2 that your employer provides to you. If more than one Form W-2 is received, add the you. If more than one Form W-2 is received, add the amounts from box 1 of each Form W-2 and enter the total amounts from box 1 of each Form W-2 and enter the total on line 7.on line 7.

Tip income that was not reported to your employer or Tip income that was not reported to your employer or allocated tips from Form W-2, box 8, must be added to the allocated tips from Form W-2, box 8, must be added to the amounts reported in box 1 and report the total on line 7.amounts reported in box 1 and report the total on line 7.

5353


Key IdeasKey Ideas

Other income that must be reported on line 7 Other income that must be reported on line 7 includes scholarships and fellowships, household includes scholarships and fellowships, household employee income not reported on a Form W-2, and employee income not reported on a Form W-2, and the nonexcludable portion of certain fringe benefits the nonexcludable portion of certain fringe benefits such as dependent care benefits.such as dependent care benefits.

Deferred compensation is the part of pay received Deferred compensation is the part of pay received by an employee that is contributed to a qualified by an employee that is contributed to a qualified retirement arrangement set up by an employer. retirement arrangement set up by an employer. While this income is not subject to tax when While this income is not subject to tax when contributions are made, it is subject to tax when contributions are made, it is subject to tax when plan contributions are withdrawn.plan contributions are withdrawn.

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Key Ideas

You are expected to pay at least 90% of your income tax liability as you receive income during the year.

Withholding is one way income tax is paid as it comes due. The payer withholds tax payments from your income and sends these to the IRS. The most common type of withholding is from your pay by your employer.

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KEY IDEAS

The amount of your pay and the information provided on Form W-4 determine the amount of tax your employer withholds.

Withholding from your pay is mandatory. You generally do not have the option of having no tax withheld from your pay. You can choose to have income tax withheld from other types of income such as unemployment compensation or social security benefits.

If you do not have enough tax withheld to pay your tax liability, you have to pay the difference with your tax return. If the tax withheld is more than your tax liability, you are due a refund of the overpayment.

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Wages, Salaries, Tips, Etc. and Wages, Salaries, Tips, Etc. and Withheld Taxes Withheld Taxes

Classwork 1. Classwork 1. True or False.True or False.

1)1) Employee bonuses are not included in gross income. Employee bonuses are not included in gross income.

2)2) Most taxable compensation you receive as an employee is Most taxable compensation you receive as an employee is shown in box 1 of Form W-2. shown in box 1 of Form W-2.

3)3) Tips are not taxable income. Tips are not taxable income.

4)4) The amounts shown in each box on Form W-2 are entered The amounts shown in each box on Form W-2 are entered on your tax return. on your tax return.

5)5) Taxable employee compensation is reported on line 7 of Taxable employee compensation is reported on line 7 of Form 1040. Form 1040.

6)6) If the amount shown in box 1 of Form W-2 is incorrect, you If the amount shown in box 1 of Form W-2 is incorrect, you should cross it out and write in the correct amount. should cross it out and write in the correct amount.

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Wages, Salaries, Tips, Etc.Wages, Salaries, Tips, Etc.Classwork 1. Classwork 1. True or False.True or False.

7)7) Box 8 of Jackie’s Form W-2 shows allocated tips of $340. If Box 8 of Jackie’s Form W-2 shows allocated tips of $340. If Jackie cannot prove she received a smaller amount of tips, she Jackie cannot prove she received a smaller amount of tips, she must include $340 in the amount she enters on line 7 of Form must include $340 in the amount she enters on line 7 of Form 1040 and she must complete Form 4137. 1040 and she must complete Form 4137.

8)8) Joe contributes part of his salary to the 401(k) retirement plan Joe contributes part of his salary to the 401(k) retirement plan set up by his employer. Joe will never have to pay tax on these set up by his employer. Joe will never have to pay tax on these contributions. contributions.

9)9) Generally, withholding of federal taxes is required on all Generally, withholding of federal taxes is required on all employee compensation. employee compensation.

10)10) In 2001, Carol (born 2/2/1949) retired on disability from her job In 2001, Carol (born 2/2/1949) retired on disability from her job at Starr Industries. The minimum retirement age at Starr is 62 at Starr Industries. The minimum retirement age at Starr is 62 years of age. For the 2008 tax year, Carol reports the disability years of age. For the 2008 tax year, Carol reports the disability pensionpension payments she received from Starr on line 7 of her Form 1040. payments she received from Starr on line 7 of her Form 1040.

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Wages, Salaries, Tips, Etc. and Wages, Salaries, Tips, Etc. and Withheld Taxes Withheld Taxes


1)1) Employee bonuses are not included in gross income. Employee bonuses are not included in gross income. FF

2)2) Most taxable compensation you receive as an employee is Most taxable compensation you receive as an employee is shown in box 1 of Form W-2. shown in box 1 of Form W-2. TT

3)3) Tips are not taxable income. Tips are not taxable income. FF

4)4) The amounts shown in each box on Form W-2 are entered The amounts shown in each box on Form W-2 are entered on your tax return. on your tax return. FF

5)5) Taxable employee compensation is reported on line 7 of Taxable employee compensation is reported on line 7 of Form 1040. Form 1040. TT

6)6) If the amount shown in box 1 of Form W-2 is incorrect, you If the amount shown in box 1 of Form W-2 is incorrect, you should cross it out and write in the correct amount. should cross it out and write in the correct amount. FF

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7)7) Box 8 of Jackie’s Form W-2 shows allocated tips of $340. If Box 8 of Jackie’s Form W-2 shows allocated tips of $340. If Jackie cannot prove she received a smaller amount of tips, she Jackie cannot prove she received a smaller amount of tips, she must include $340 in the amount she enters on line 7 of Form must include $340 in the amount she enters on line 7 of Form 1040 and she must complete Form 4137. 1040 and she must complete Form 4137. TT

8)8) Joe contributes part of his salary to the 401(k) retirement plan Joe contributes part of his salary to the 401(k) retirement plan set up by his employer. Joe will never have to pay tax on these set up by his employer. Joe will never have to pay tax on these contributions. contributions. FF

9)9) Generally, withholding of federal taxes is required on all Generally, withholding of federal taxes is required on all employee compensation. employee compensation. TT

10)10) In 2001, Carol (born 2/2/1949) retired on disability from her job In 2001, Carol (born 2/2/1949) retired on disability from her job at Starr Industries. The minimum retirement age at Starr is 62 at Starr Industries. The minimum retirement age at Starr is 62 years of age. For the 2008 tax year, Carol reports the disability years of age. For the 2008 tax year, Carol reports the disability pensionpension payments she received from Starr on line 7 of her Form 1040. payments she received from Starr on line 7 of her Form 1040. TT

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CLASSWORK 2CLASSWORK 2: Should the following types of compensation be included in : Should the following types of compensation be included in box 1 of Form W-2? Yes or No.box 1 of Form W-2? Yes or No.

1)1) A vacation trip you were awarded as a prize for meeting A vacation trip you were awarded as a prize for meeting sales goals. sales goals.

2)2) Your employer’s contribution to a qualified retirement Your employer’s contribution to a qualified retirement plan. plan.

3)3) The ham your employer gave you for Christmas. The ham your employer gave you for Christmas.

4)4) Employer provided vehicles used for personal driving, Employer provided vehicles used for personal driving, including commuting to and from work. including commuting to and from work.

5)5) Payments received from your employer while you were Payments received from your employer while you were out with a broken leg. out with a broken leg.

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CLASSWORK 2CLASSWORK 2: Should the following types of compensation be included in : Should the following types of compensation be included in box 1 of Form W-2? Yes or No.box 1 of Form W-2? Yes or No.

1)1) A vacation trip you were awarded as a prize for meeting A vacation trip you were awarded as a prize for meeting sales goals. sales goals. YY

2)2) Your employer’s contribution to a qualified retirement Your employer’s contribution to a qualified retirement plan. plan. NN

3)3) The ham your employer gave you for Christmas. The ham your employer gave you for Christmas. NN

4)4) Employer provided vehicles used for personal driving, Employer provided vehicles used for personal driving, including commuting to and from work. including commuting to and from work. YY

5)5) Payments received from your employer while you were Payments received from your employer while you were out with a broken leg. out with a broken leg. YY

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CLASSWORK 3CLASSWORK 3: Multiple choice. : Multiple choice.

1)1) Shea is a waitress. The amount in box 1 of her Form W-2 is $17,540. She Shea is a waitress. The amount in box 1 of her Form W-2 is $17,540. She reported tips as required to her employer. Her reported tips totaled reported tips as required to her employer. Her reported tips totaled $2,489. Her unreported tips totaled $37. $2,489. Her unreported tips totaled $37. What is the amount of her tips the amount of her tips included in the box 1 of her Form W-2? included in the box 1 of her Form W-2?

a.a. $2,489$2,489b.b. $2,526$2,526c.c. $0$0

1)1) How much does Shea have to include on Form 1040, line 7? How much does Shea have to include on Form 1040, line 7?

a.a. $17,540$17,540b.b. $17,577$17,577c.c. $20,029$20,029d.d. $20,066.$20,066.

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3)3) James is a waiter. The amount in box 1 of James’s Form W-2 is $14,722. James is a waiter. The amount in box 1 of James’s Form W-2 is $14,722. He reported tips of $1,554 to his employer. Box 8 of his Form W-2 shows He reported tips of $1,554 to his employer. Box 8 of his Form W-2 shows the amount of $412 and James does not have records to dispute this the amount of $412 and James does not have records to dispute this amount. What amount will James enter on line 7 of Form 1040? amount. What amount will James enter on line 7 of Form 1040?

a.a. $16,688$16,688b.b. $15,134 $15,134 c.c. $14,722$14,722d.d. $16,276$16,276

4)4) Which of the following is an example of unearned income? Which of the following is an example of unearned income? a.a. WagesWagesb.b. A bonus from your employerA bonus from your employerc.c. Sick paySick payd.d. Unemployment compensationUnemployment compensation

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1)1) Shea is a waitress. The amount in box 1 of her Form W-2 is $17,540. She Shea is a waitress. The amount in box 1 of her Form W-2 is $17,540. She reported tips as required to her employer. Her reported tips totaled reported tips as required to her employer. Her reported tips totaled $2,489. Her unreported tips totaled $37. What is the amount of her tips $2,489. Her unreported tips totaled $37. What is the amount of her tips included in the box 1 of her Form W-2? included in the box 1 of her Form W-2? a. $2,489a. $2,489

2)2) How much does Shea have to include on Form 1040, line 7? How much does Shea have to include on Form 1040, line 7? 3)3) b. $17,577 ($17,540 from box 1 plus $37)b. $17,577 ($17,540 from box 1 plus $37)

4)4) James is a waiter. The amount in box 1 of James’s Form W-2 is $14,722. James is a waiter. The amount in box 1 of James’s Form W-2 is $14,722. He reported tips of $1,554 to his employer. Box 8 of his FormW-2 shows He reported tips of $1,554 to his employer. Box 8 of his FormW-2 shows the amount of $412 and James does not have records to dispute this the amount of $412 and James does not have records to dispute this amount. What amount will James enter on line 7 of Form 1040? amount. What amount will James enter on line 7 of Form 1040? b. b. $15,134 ($14,722 from box 1 plus $412)$15,134 ($14,722 from box 1 plus $412)

5)5) Which of the following is an example of unearned income? Which of the following is an example of unearned income? 6)6) d., unemployment compensationd., unemployment compensation

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Questions and AnswersQuestions and Answers

liberty tax service online basic income tax course. lesson 4

Documents

exempt income

income tax2

gross income

taxessome nontaxable

ways tip income

common types of income

familiar types of income

form of money