www.healthcare.gov/using-insurance/employers/small-business/index.html

http://www.healthcare.gov/using-insurance/employers/small-business/index.html

Small businesses may qualify for tax credits that make it more affordable to provide health insurance to their employees. They also have some unique rights and responsibilities. Learn more here.

 

What is considered a small business?

In general, you are considered a small business if you have up to 50 employees. In some states, this will include you if you are self-employed with no employees. Contact your State Department of Insurance to find out whether this applies in your state.

Can I get tax credits for providing insurance to my employees? 

If you have up to 25 employees, pay average annual wages below $50,000, and provide health insurance, you may qualify for a small business tax credit of up to 35% (up to 25% for non-profits) to offset the cost of your insurance. This will bring down the cost of providing insurance.

Starting in 2014, the small business tax credit goes up to 50% (up to 35% for non-profits) for qualifying businesses. This makes the cost of providing insurance even lower.

Do I have to provide health insurance to my employees?

The Affordable Care Act does not require employers to provide health insurance for their employees.

The Employer Responsibility provision of the Affordable Care Act applies businesses with more than 50 full-time workers. To learn more read the Employer Bulletin on Automatic Enrollment, Employer Responsibility, and Waiting Periods.

What should the health insurance I offer to my employees cover?

It depends–states vary on what they require insurers to cover in small employer plans.Contact your State Department of Insurance for more information about small employer coverage requirements in your state.

What should I know when I am looking for health insurance for my employees?

If you are a small employer with 2-50 employees, health insurance companies cannot turn your business down based on the health status of your employees or their family members. This rule applies when you initially apply for small employer coverage and if you decide to change plans.

An insurer must also accept everyone in your group. Employees or family members (if you offer dependent coverage) with health conditions cannot be excluded from coverage.

Health insurance companies must sell you any small employer health plan they sell to other small employers in your state.

Contact your State Department of Insurance to learn more about your rights to getting and keeping small employer coverage.

What health insurance alternatives are available to my employees through the new law?

Starting in 2014, small businesses with generally fewer than 100 employees can shop in anAffordable Insurance Exchange—a new, transparent, competitive marketplace where individuals and small businesses can buy affordable, qualified health benefit plans. This gives small businesses power similar to what large businesses have to get better choices and lower prices for employee coverage.

Exchanges will offer more choices of high-quality coverage and lower prices.  Exchanges will offer a choice of plans that meet certain benefits and cost standards.

  • Small businesses will benefit from insurance with lower administrative costs compared to the choices available in the small business market today because they will be able to pool together.
  • Limits on insurance rating, such as no more rating based on employees’ health status or gender, will lower premiums for many small businesses.
  • The small business tax credits and the new competition promoted by Affordable Insurance Exchanges will help keep the cost of insurance down.

Do I have to pay more based on the health status of my group?

Most states, but not all, limit how much premiums can vary due to employees’ health status and other factors. Even within these limits, premiums can be significantly higher if someone in a small employer plan has a serious health condition.

Contact your State Department of Insurance for more information about small employer rating rules in your state.

Under the Affordable Care Act, this will change.  Starting in 2014, insurers won’t be allowed to charge more based on the health status of your group or the gender of your employees. There will also be limits on how much premiums can vary based on age.

Can an insurer cancel my small employer plan because one of my employees gets sick?

No, your insurance for the group (or for any member of the group) cannot be canceled because someone in your group becomes sick. This is called “guaranteed renewal.”

Do I have to report the cost of insurance in my employees’ W-2 forms?

Employers do not have to report the cost of insurance on employee W-2s in 2011. This reporting is optional in 2011.

The reporting requirement is intended to be informational and provide employees with greater transparency into health care costs. The amounts reported are not taxable.

Learn more about the W-2 reporting deferral from the IRS.

The Affordable Care Act and Small Business

Myth vs. Fact- Myth #1: All Businesses Will Be Required to Provide Health Insurance to All of Their Employees

http://www.sba.gov/community/blogs/community-blogs/health-care-business-pulse/myth-vs-fact-myth-1-all-businesses-will-b

by Meredith K. Olafson, Meredith K. Olafson is Senior Policy Advisor for the U.S. Small Business Administration

February 20, 2013, 4:00 pm

As a business owner, it’s important to understand how the Affordable Care Act can affect your business. However, with so many misconceptions about how the Affordable Care Act works, this can be difficult.  To clarify the myths versus facts, we’re launching a new blog series called “Myth vs. Fact: The Affordable Care Act and Small Business”.

This blog covers one of the most common myths we’ve seen out there:

Myth: All businesses will be required to provide health insurance to all of their employees.

Fact: Employers are not required to provide coverage to their employees under the Affordable Care Act.  However, starting in 2014, some businesses that do not offer health coverage to their full-time employees may be subject to a shared responsibility payment under the health care law.

How do I know if I may be subject to an Employer Shared Responsibility Payment?

Businesses with 50 or more full-time or full-time equivalent (FTE) employees that do not offer affordable health insurance that provides a minimum level of coverage to their full-time employees (and dependent children under the age of 26 starting in 2015) may be subject to a shared responsibility payment if at least one of their full-time employees receives a premium tax credit in an Affordable Insurance Exchange, or Marketplace.   For the purposes of these provisions, a full-time employee is one who is employed an average of at least 30 hours per week.

Businesses will not be affected by these provisions if they already offer affordable health coverage that provides a minimum level of coverage to their full-time employees, which is the vast majority of these businesses.

Businesses with fewer than 50 full-time or FTE employees are generally not affected by these provisions.  However, it’s important to know that if companies have a common owner or are otherwise related, their total combined number of employees is used to determine whether each separate company is subject to these provisions — even if none of the member companies individually employ 50 or more full-time or FTE employees.

How can I find out if I meet the threshold number of 50 or more full-time or FTE employees?

To assist employers, the IRS has developed a helpful set of Q&As on the Employer Shared Responsibility provisions. The IRS has also issued a set of proposed rules   relating to the Employer Shared Responsibility provisions, and is accepting written or electronic comments by or before March 18, 2013.

Understand the Affordable Care Act as a Small Business Owner

What does the health care law mean to you? Check out these resources that explain the key provisions of the law plus an overview of what is changing and when.

For a clear overview of how the law impacts small businesses, the Small Businesses and the Affordable Care Act guide breaks down the top things you need to know, including information about the following:

The Small Business Tax Credit and your eligibility to claim it.

Affordable Insurance Marketplaces, known as the Small Business Health Options Program (SHOP), will open on January 1, 2014 and give small employers buying power—similar to what large businesses have to get better choices and lower prices.  The SHOP Marketplaces will work with new insurance reforms and tax credits provided by the Affordable Care Act to help lower barriers to offering health insurance that small employers face.  Visit Healthcare.gov’s small business landing page for the latest information on SHOP, and review the get-ready checklist for small business owners.  Enrollment in SHOP begins on October 1, 2013.

This useful Small Business Q&A also helps you understand your rights and responsibilities as a small business owner.

Find Healthcare Insurance Options for Your Small Business

Looking for insurance for yourself or your employees? Healthcare.gov’s Insurance Finder organizes and presents information and pricing collected from insurers to help you better understand your options. Enter some basic data and the tool will filter your options accordingly.

http://www.sba.gov/community/blogs/online-tools-help-you-find-and-price-small-business-health-care-insurance-options

www.sba.gov/healthcare

Healthcare.gov

 

Strategies to Max Out Social Security Benefits

Which Social Security claiming strategy will pay the most over a lifetime:

Much of my mail these days seems to start with the same warm greeting: “What planet are you from?” That’s invariably the case when I suggest that readers consider ways to maximize Social Security benefits instead of grabbing a check at age 62, as about half of all retirees do.I know: Waiting to claim Social Security until your mid-60s or later isn’t easy. Many people need the cash, are fearful that the program might change (or collapse), or are trying to avoid tapping their savings for as long as possible. But two trends make this a good time to look at “claiming strategies” for Social Security and help illustrate just how much money is involved.

First, a recent report from the Census Bureau highlights a startling fact: The 90-plus population is projected to quadruple in size between now and 2050 — meaning that living into your tenth decade is something to factor into Social Security planning. Second, a growing number of Web-based tools now allow you to run dozens of possible claiming strategies — and can recommend how to maximize benefits.

For the examples below, I asked the folks at SocialSecuritySolutions.com in Leawood, Kan., for help; I like that the company’s lead researcher, Baylor University finance professor William Reichenstein, has written extensively about how best to tap nest eggs. (Using the site’s tool runs between $20 and $125, depending on how much personal attention you want interpreting your report.) Given the stakes, I suggest comparing results from a few different sites. You’ll find free tools at the Social Security Administration‘s site, Aarp.comand AnalyzeNow.com; another site, MaximizeMySocialSecurity.com, charges $40.Now some numbers. First, we need a way of measuring why one claiming strategy might be better than another. I’m going to use cumulative lifetime benefits as a yardstick. In other words, I want to see, given a specific starting age and life expectancy, which claiming strategy will pay me and a spouse the most money over a lifetime (or, considering there are two of us, lifetimes). You also could look at monthly income, but it can be misleading. More on that in a moment.

We’ll start with a simple example. Joe and John can begin collecting $1,500 monthly from Social Security at age 62, or $2,640 a month at age 70. Let’s say both live to 92. If Joe claims benefits at 62, his lifetime total will be $540,000. If John waits until 70, he’ll net $696,960 — almost $157,000 more.

If you look solely at monthly income, claiming benefits at 62 looks smart; Joe is getting $1,500 a month for eight years, and John is getting zilch. But again, “longevity risk should be part of your planning,” says William Meyer, founder and managing principal of Social Security Solutions. What are the odds that you will live to 85 or 90 — or longer? The answer for many: increasingly good.

Now let’s look at a husband and wife: Bob and Carol, ages 62 and 58. Bob is scheduled to receive $2,000 at his full retirement age of 66, while Carol is scheduled to receive $1,600 at her full retirement age, also 66. Each, of course, can claim Social Security at age 62. If they do so — and Bob lives until 83 and Carol lives until 90 — their cumulative benefits will be $840,600.

But Social Security Solutions offers a more lucrative — and slightly more complex — strategy. At his full retirement age, Bob claims a spousal benefit of $800. (Yes, Social Security allows this.) Carol, meanwhile, claims a benefit (based on her earnings) of $1,200 at age 62. Finally, Bob, at age 70, switches to a monthly benefit of $2,640, based on his earnings history, a move that falls under “delayed retirement credits.” In this case, the couple’s lifetime benefits will total $1,043,520, a gain of almost $203,000 over the let’s-jump-in-the-pool-as-quickly-as-possible approach.

The other interesting piece of these two strategies: survivor benefits. If both spouses claim benefits at age 62, Carol — when Bob dies — will be eligible for a survivor’s benefit (under Social Security’s rules) of $1,650 a month. But under the second claiming strategy, she would get a survivor’s benefit of $2,640, an extra $1,000 each month.

Now, consider the options for a woman, age 60, who loses her husband. Her benefit at full retirement age is $1,400; his would have been $2,000. She could begin collecting a widow’s benefit of $1,430 at age 60. But it might be better for her to pursue a different strategy — claiming a reduced benefit, based on her earnings history, of $1,050 at age 62 and switching to a widow’s benefit of $2,000 at age 66. The difference in total benefits if she lives until age 89: an extra $112,000.

Yes, the numbers can get a little head-spinning. But I hope these examples give you an idea about how much money might be forfeited if you claim benefits early — and how many claiming options are available. I recently heard this from Mark Ellingson, a retiree in Lake George, Colo.: “Take benefits [at age 62] while you still have good health and can enjoy life.” That’s tough to argue with. But please, do consider the alternatives.

http://www.smartmoney.com/retirement/planning/strategies-to-max-out-social-security-benefits-1329243329517/

Reporting Income Payments Using Form 1099-MISC

Form 1099-MISC is used to report payments made in a trade or business.

By , About.com Guide     http://taxes.about.com/od/businesstaxes/qt/1099-Misc-Reporting-for-Miscellaneous-Payments.htm

Form 1099-MISCis used to report certain types of payments made in the course of a trade or business. If you’re in business or self-employed, you may need to submit this report to both the Internal Revenue Service and the person or business whom you paid.

When is Form 1099-MISC Required?

Businesses will need to fill out a Form 1099-MISC for persons, vendors, subcontractors, independent contractors, and others in the following circumstances:

$600 or more per year is paid for

  • cash payments to fishermen
  • crop insurance proceeds,
  • medical and health care payments,
  • prizes and awards,
  • proceeds paid to attorneys,
  • rents,
  • services (including parts and materials), and
  • other types of payments not covered by another information reporting document.

$10 or more per year is paid for

  • broker payments in lieu of dividends or tax-exempt interest, and
  • royalties

Reporting such payments is required if the recipient of the payment is not a corporation — for example, when the recipient is an individual, partnership, a limited liability company treated as a partnership or sole proprietorship. Payments made to corporations are required in the case of medical and health care payments and in the case of legal fees paid to attorneys. Other types of payments made to corporations may be reported using Form 1099-MISC, but is not required. 

Report Payments Made by Cash or Check, but Not Payments Made by Credit Card

Starting with the 2011 tax year, the IRS is instructing businesses that payments made via credit card and other third party payment processing services need not be reported on Form 1099-MISC. Refer to the Instructions for Form 1099-MISC1, especially the What’s New2section. 

Expanded 1099-MISC Reporting Starting in 2011 for Rental Property Owners Has Been Repealed

Rental property would have needed to issue a 1099-MISC for payments relating to their rental properties beginning in the year 2011, but this requirement has been repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 20113

Expanded 1099-MISC Reporting Starting in 2012 Has Been Repealed

1099 reporting would have been expanded starting with the year 2012, but this provision has also been repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011. Prior to repeal, reporting would have been expanded to include payments made to corporations and as well as to include payments for goods and property. The 1099-MISC expansion was originally legislated as part of the health care reform package4

 

Steps to Take to Prepare for 1099-MISC Forms

You should request that your vendors, contractors and other payment recipients submit to you a Form W-95. The W-9 will provide you with the legal name, address and taxpayer identification number for the vendor, which is the information you will need when preparing any 1099-MISC forms.You should also keep track of your payments in your bookkeeping system. You will need to know whether the payment falls under any of the categories listed above for reportable payments, whether your payments to a particular recipient reaches the $10 or $600 threshold for reporting, and finally you’ll need to know the exact amount you paid the recipient for the year.

 

Penalties for Filing Form 1099-MISC Late

The following penalties will be in effect for the year 2011:

  • $30 penalty for filing a 1099 not more than 30 days late;
  • $60 penalty for filing a 1099 more than 30 days late and before August 1;
  • $100 penalty for filing a 1099 on or after August 1;
  • $250 penalty for intentional failure to file.

These Form 1099-MISC penalties were increased as part of the Small Business Jobs Act6, and have not been repealed.

Deadlines for 1099-MISC Forms

  • Provide the recipient with his or her copy of the Form 1099-MISC by January 31 reporting income for the previous calendar year.
  • Mail the Form 1099-MISC to the IRS by February 28.
  • Or electronically file 1099s with the IRS by March 31.

Businesses can request a 30-day extension to file 1099s with the IRS using Form 8809. An extension does not permit additional time for providing the 1099 to the recipient. 

Form 1099-MISC Tax Resources

Capital Gains Rates

Long Term Capital Gains Rates  0%, 5%, 15%, 25% or 28% depending on income level thru 12-31-2012

A look at the many CAPITAL GAINS RATES by Kay Bell • Bankrate.com • Bankrate’s Tax Guide

Money gurus are always preaching long-term investing. Not only will that give you a better shot at earning more, it’ll also get you a lower tax rate when you sell.

But exactly what capital gains tax rate you pay depends on several things, including when you bought the asset, when you sold it, your overall income level, and sometimes, what tax-code changes were made in the meantime.

Currently, capital gains are at historic lows. Some taxpayers in the two lowest tax brackets could end up without any capital gains tax bill. That’s right, zero capital gains for some filers.

Others will face tax rates of just 5 percent. Most investors will see their gains taxed at 15 percent. And 25 percent and 28 percent rates apply in special circumstances.

One thing all these tax levels do have in common is that they are known as long-term capital gains. This means they apply to assets that you hold for at least 366 days — more than one year.

The tax appeal of the long-term capital gains tax rate is that it is generally much lower than what you pay on your regular income. In fact, it is a taxpayer’s income level that generally determines which capital gains rate applies. And if your profit pushes you into a higher bracket, you could possibly be taxed at a combination of rates. And you could face yet another rate depending on the type of property you sell.

Zero capital gains taxes for some

On Jan. 1, 2008, the best of all possible tax rates — zero percent — took effect for investors in the 10 percent and 15 percent income tax brackets.

Previously these taxpayers had to pay Uncle Sam 5 percent of their long-term capital gains. Now any long-term assets they sell will be exempt from capital gains taxes.

Zero percent capital gains tax rate applies to

Filing status Maximum taxable income
Single or Married filing separately $34,000
Married filing jointly $68,000
Head of household $45,500

To qualify for the zero rate, you must own the asset for more than one year before you sell it.

While lower-income individuals aren’t typical investors, this tax benefit could help out folks such as retirees who have little or no taxable income. And the children of older individuals could combine the annual gift exclusion ($13,000 in 2010 and 2011) with this capital gains break and give appreciated long-term assets to their older parents.

15 percent tax rate for most

The zero percent rate is just the latest in a series of investor-friendly tax changes enacted during the George W. Bush administration. Prior to his taking office, investors whose overall income put them in the top four income tax brackets faced a long-term capital gains rate of 20 percent, while lower-income investors paid capital gains taxes of 10 percent.

Tax-law changes in May 2003, however, lowered the rates by 5 percent each, with the lower rate, as noted earlier, eventually being zeroed out in 2008. The lower rates were extended by the December 2010 tax bill through the 2012 tax year.

The changes have had the most effect on investors in the higher income ranges – 25 percent to 35 percent tax brackets. These individuals now find their capital gains taxed at 15 percent. This lower rate also applies to some dividends that stocks and mutual funds pay account holders. When you hear “lower capital gains rate,” it generally means this 15 percent level, because there are few investors with incomes low enough to qualify solely for the 5 percent, now zero percent, rate.

Remember, these rates are for long-term capital gains. In most cases, that means you have to hold an asset for more than a year before you sell it. If you cash it in sooner, you’ll be taxed at the short-term rate, which is the same as your ordinary income tax level and could be as high as 35 percent on 2010 returns.

25 percent capital gains rate

While the 5 percent (now zero percent) and 15 percent rates have received the most attention, at least on Capitol Hill, for the last few years there have been several other categories of capital gains taxes.

A rate of 25 percent applies to part of the gain from selling real estate you depreciated. Basically this keeps you from getting a double tax break. The Internal Revenue Service first wants to recapture some of the tax breaks you’ve been getting via depreciation throughout the years. You’ll have to complete the work sheet in the instructions for Schedule D to figure your gain (and tax rate) for this asset, known as Section 1250 property. More details on this type of holding and its taxation are available in IRS Publication 544, Sales and Other Dispositions of Assets.

28 percent capital gains rate

Two categories of capital gains are subject to this rate: small business stock and collectibles.

If you realized a gain from qualified small-business stock that you held more than five years, you generally can exclude one-half of your gain from income. The remainder is taxed at a 28 percent rate. If you’ve already hired a tax professional to help you sort out the 25 percent rate on depreciable property, she can help you figure this tax, too. Or you can get the specifics on gains on qualified small business stock in IRS Publication 550, Investment Income and Expenses.

If your gains came from collectibles rather than a business sale, you’ll still pay the 28 percent rate. This includes proceeds from the sale of a work of art, antiques, gems, stamps, coins, precious metals and even pricey wine or brandy collections.

More rate changes to come?

The capital gains tax rates are set through Dec. 31, 2012, but there continues to be a push by some in Washington, D.C., to return at least the top capital gains tax rate to the prior 20 percent level.

That decision will hinge in large part on the economy and future congressional and presidential elections.

With Congress continually tweaking investment tax laws, what’s an investor to do? Most financial experts say to take advantage of today’s lower rates while they are around and when they fit into your portfolio plans.

But don’t forget about the Dec. 31, 2012, deadline. And definitely keep an eye on federal tax-law writers in the interim.

http://www.bankrate.com/system/util/print.aspx?p=/finance/money-guides/capital-gains-tax-rates-1.aspx&s=br3&c=taxes&t=guide&e=1&v=1#ixzz1YbpRQfhz

The Social Security earnings test for people at full retirement age

Updated 06/03/2011    www.ssa.gov

What is the earnings test for people at full retirement age (FRA)?

Only earnings before the month of FRA count towards the earnings test.  Earnings in the month you reach FRA and after do not count towards the earnings test.

The Senior Citizens’ Freedom To Work Act of 2000 eliminated the Social Security annual earnings test and the foreign work test in and after the month a person attains FRA. The FRA was age 65 in 2000 through 2002, but began increasing beginning in 2003.

If you are under FRA when you start getting your Social Security payments, we will deduct $1 in benefits for each $2 you earn above the annual limit.  In 2011, the limit is $14,160; for 2010, the limit also was $14,160.  In the calendar year you attain FRA, we will deduct $1 in benefits for each $3 you earn above a higher annual limit up to the month of FRA attainment.

For 2011, the limit is $37,680; for 2010, the limit also was $37,680.

Examples: When you work and get Social Security at the same time Updated: January 04, 2011
You can continue to work and earn above the annual earnings limit and still get some of your benefits.Let’s look at a couple of examples: You are receiving Social Security retirement benefits every month in 2011 and you

You work and earn $23,760 ($9,600 over the $14,160 limit) during the year. Your Social Security benefits would be reduced by $4,800 ($1 for every $2 you earned over the limit), but you would still receive $4,800 of your $9,600 in benefits for the year. ($9,600 – $4,800 = $4,800)

  • Reach full retirement age in August 2011. You are entitled to $800 per month in benefits ($9,600 for the year).

You work and earn $62,000 during the year, with $39,690 ($2,010 over the 37,680 limit) of it in the 7 months from January through July.

  • Your Social Security benefits would be reduced through July by $670 ($1 for every $3 you earned over the limit). You would still receive $4,930 out of your $5,600 benefits for the first 7 months (January through July). ($5,600 – $670 = $4,930)
  • Beginning in August 2011, when you reach full retirement age, you would receive your full benefit ($800 per month), no matter how much you earn.

      When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you’re self-employed. We include bonuses, commissions and vacation pay. We don’t count pensions, annuities, investment income, interest, veterans or other government or military retirement benefits.

      Also, as long as you continue to work and receive benefits, we will check your record every year to see whether the additional earnings will increase your monthly benefit. If there is an increase, we will send you a letter telling you of your new benefit amount.

      In addition, after you reach full retirement age, we will recalculate your benefit amount to give you credit for any months in which you did not receive a benefit because of your earnings. We will send you a letter telling you about any increase in your benefit amount.

      If you are eligible for retirement benefits this year and are still working, you can use the SSA earnings test calculator to see how your earnings could affect your benefit payments.

      http://www.socialsecurity.gov/OACT/COLA/RTeffect.html

      Don’t default on Student Loans – Modify your payment plan if possible

      Repayment Plans and Calculators

      http://studentaid.ed.gov/PORTALSWebApp/students/english/repaying.jsp

      When it comes time to start repaying your student loan(s), you can select a repayment plan that’s right for your financial situation. Generally, you’ll have from 10 to 25 years to repay your loan, depending on which repayment plan you choose.

      • Standard Repayment

      With the standard plan, you’ll pay a fixed amount each month until your loans are paid in full. Your monthly payments will be at least $50, and you’ll have up to 10 years to repay your loans.

      Your monthly payment under the standard plan may be higher than it would be under the other plans because your loans will be repaid in the shortest time. For that reason, having a 10-year limit on repayment, you may pay the least interest.              To calculate your estimated loan payments, go to the Standard Repayment plan calculator.   http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry1.html

      • Extended Repayment

      Under the extended plan, youll pay a fixed annual or graduated repayment amount over a period not to exceed 25 years. If you’re a FFEL borrower, you must have more than $30,000 in outstanding FFEL Program loans. If you’re a Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans. This means, for example, that if you have $35,000 in outstanding FFEL Program loans and $10,000 in outstanding Direct Loans, you can choose the extended repayment plan for your FFEL Program loans, but not for your Direct Loans. Your fixed monthly payment is lower than it would be under the Standard Plan, but you’ll ultimately pay more for your loan because of the interest that accumulates during the longer repayment period.

      This is a good plan if you will need to make smaller monthly payments. Because the repayment period will be 25 years, your monthly payments will be less than with the standard plan. However, you may pay more in interest because you’re taking longer to repay the loans. Remember that the longer your loans are in repayment, the more interest you will pay.         To calculate your estimated loan payments, go to the Extended Repayment plan calculator http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry1.html

      • Graduated Repayment

      With this plan, your payments start out low and increase every two years. The length of your repayment period will be up to ten years. If you expect your income to increase steadily over time, this plan may be right for you. Your monthly payment will never be less than the amount of interest that accrues between payments. Although your monthly payment will gradually increase, no single payment under this plan will be more than three times greater than any other payment.               To calculate your estimated loan payments, go to the Graduated Repayment plan calculator http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry1.html

      • *Income Based Repayment (IBR) Effective July 1, 2009

      Income Based Repayment is a new repayment plan for the major types of federal loans made to students. Under IBR, the required monthly payment is capped at an amount that is intended to be affordable based on income and family size. You are eligible for IBR if the monthly repayment amount under IBR will be less than the monthly amount calculated under a 10-year standard repayment plan. If you repay under the IBR plan for 25 years and meet other requirements you may have any remaining balance of your loan(s) cancelled. Additionally, if you work in public service and have reduced loan payments through IBR, the remaining balance after ten years in a public service job could be cancelled.     http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp

      • Income Contingent Repayment (ICR) (Direct Loans Only)

      This plan gives you the flexibility to meet your Direct LoansSM obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income (AGI, plus your spouse’s income if you’re married), family size, and the total amount of your Direct Loans. Under the ICR plan you will pay each month the lesser of:

      1. The amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that varies with your annual income, or
      2. 20 percent of your monthly discretionary income.

      If your payments are not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized (added to the loan principal).

      The maximum repayment period is 25 years. If you haven’t fully repaid your loans after 25 years (time spent in deferment or forbearance does not count) under this plan, the unpaid portion will be discharged. You may, however, have to pay taxes on the amount that is discharged.

      As of July 1, 2009, graduate and professional student Direct PLUS Loan borrowers are eligible to use the ICR plan. Parent Direct PLUS Loan borrowers are not eligible for the ICR repayment plan.            To calculate your estimated loan payments, go to the ICR plan calculator http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry2.html

      • Income-Sensitive Repayment Plan (FFEL Federal Family Education Loans)  Loans only)

      With an income-sensitive plan, your monthly loan payment is based on your annual income. As your income increases or decreases, so do your payments. The maximum repayment period is 10 years. Ask your lender for more information on FFEL Income- Sensitive Repayment Plans.

      * Income-Based Repayment Plan

      The information below describes the Income-Based Repayment (IBR) Plan for federal student loans. It includes the IBR eligibility requirements, the benefits of IBR, an IBR payment calculator, and some examples of how a borrower’s monthly student loan payment amount can be reduced under IBR. For a PDF version of this information, see http://studentaid.ed.gov/students/publications/factsheets/factsheet_IncomeBasedRepayment.pdf

      What is Income-Based Repayment?

      Income-Based Repayment (IBR) is a repayment plan for the major types of federal student loans that caps your required monthly payment at an amount intended to be affordable based on your income and family size.

      What federal student loans are eligible to be repaid under an IBR plan?

      All Stafford, PLUS and Consolidation Loans made under either the Direct Loan or FFEL Program are eligible for repayment under IBR, EXCEPT loans that are currently in default, parent PLUS Loans (PLUS Loans that were made to parent borrowers), or Consolidation Loans that repaid parent PLUS Loans. The loans can be new or old, and for any type of education (undergraduate, graduate, professional, job training).

      Who is eligible for IBR?

      You may enter IBR if your federal student loan debt is high relative to your income and family size. While your loan servicer will perform the calculation to determine your eligibility, you can use the U.S. Department of Education’s IBR calculator to estimate whether you would likely qualify for the IBR plan. The calculator looks at your income, family size, and state of residence to calculate your IBR monthly payment amount. If that amount is lower than the monthly payment you would be required to pay on your eligible loans under a 10-year standard repayment plan, based on the greater of the amount you owed on your loans when they initially entered repayment or the amount you owe at the time you request IBR, then you are eligible to repay your loans under IBR.

      If you are married and you and your spouse file a joint federal tax return, and if your spouse also has IBR-eligible loans, your spouse’s eligible loan debt is taken into account when determining whether you are eligible for IBR. In this case, the required monthly payment amount under a 10-year standard repayment plan is determined based on the combined amount of your IBR-eligible loans and your spouse’s IBR-eligible loans, using the greater of the amount owed when the loans initially entered repayment or the amount owed at the time you or your spouse request IBR. If the combined monthly amount you and your spouse would be required to pay under IBR is lower than the combined monthly amount you and your spouse would pay under a 10-year standard repayment plan, you and your spouse are eligible for IBR.

      What are the benefits of IBR?

      • PAY AS YOU EARN — Under IBR, your monthly payment amount will be less than the amount you would be required to pay under a 10-year standard repayment plan, and may be less than under other repayment plans. Although lower monthly payments may be of great benefit to a borrower, these lower payments may result in a longer repayment period and additional accrued interest.
      • INTEREST PAYMENT BENEFIT — If your monthly IBR payment amount does not cover the interest that accrues on your loans each month, the government will pay your unpaid accrued interest on your Subsidized Stafford Loans (either Direct Loan or FFEL) for up to three consecutive years from the date you began repaying your loans under IBR.
      • 25-YEAR CANCELLATION — If you repay under the IBR plan for 25 years and meet certain other requirements, any remaining balance will be canceled.
      • 10-YEAR PUBLIC SERVICE LOAN FORGIVENESS — If you work in public service, on-time, full monthly payments you make under IBR (or certain other repayment plans) while employed full-time in a public service job will count toward the 120 monthly payments that are required to receive loan forgiveness through the Public Service Loan Forgiveness Program. Through this program, you may be eligible to have the remaining balance of your Direct Loans forgiven after you have made the 120 qualifying as described above. The Public Service Loan Forgiveness Program is available only for Direct Loans. If you have FFEL loans, you may be eligible to consolidate them into the Direct Loan Program to take advantage of the Public Service Loan Forgiveness Program. However, only the on-time, full monthly payments made under IBR or certain other repayment plans while you are a Direct Loan borrower will count toward the required 120 monthly payments. For more information about this program, review the Department’s Public Service Loan Forgiveness Program Fact Sheet.

      Are there any disadvantages to repaying under IBR?

      • YOU MAY PAY MORE INTEREST — The faster you repay your loans, the less interest you pay. Because a reduced monthly payment in IBR generally extends your repayment period, you may pay more total interest over the life of the loan than you would under other repayment plans.
      • YOU MUST SUBMIT ANNUAL DOCUMENTATION — To set your payment amount each year, your loan servicer needs updated information about your income and family size. If you do not provide the documentation, your monthly payment amount will be the amount you would be required to pay under a 10-year standard repayment plan, based on the amount you owed when you began repaying under IBR.

      How is the IBR amount determined?

      Under IBR, the amount you are required to repay each month is based on your Adjusted Gross Income (AGI) and family size. If you are married and file a joint federal tax return with your spouse, your AGI includes both your income and your spouse’s income. The annual IBR repayment amount is 15 percent of the difference between your AGI and 150 percent of the Department of Health and Human Services Poverty Guideline for your family size and state. This amount is then divided by 12 to get the monthly IBR payment amount.

      The following chart shows the maximum IBR monthly payment amounts for a sample range of incomes and family sizes using the Poverty Guidelines that were in effect as of January 20, 2011 for the 48 contiguous states and the District of Columbia.

      IBR Monthly Payment Amount
      Annual
      Income
      Family Size
      1 2 3 4 5 6 7
      $10,000 $0 $0 $0 $0 $0 $0 $0
      $15,000 $0 $0 $0 $0 $0 $0 $0
      $20,000 $46 $0 $0 $0 $0 $0 $0
      $25,000 $108 $37 $0 $0 $0 $0 $0
      $30,000 $171 $99 $28 $0 $0 $0 $0
      $35,000 $233 $162 $90 $18 $0 $0 $0
      $40,000 $296 $224 $153 $81 $9 $0 $0
      $45,000 $358 $287 $215 $143 $72 $0 $0
      $50,000 $421 $349 $278 $206 $134 $63 $0
      $55,000 $483 $412 $340 $268 $197 $125 $54
      $60,000 $546 $474 $403 $331 $259 $188 $116
      $65,000 $608 $537 $465 $393 $322 $250 $179
      $70,000 $671 $599 $528 $456 $384 $313 $241

      After the initial determination of your eligibility for IBR, your payment may be adjusted each year based on changes in your income and family size, but your required monthly payment amount will never be more than what you would be required to pay under a 10-year standard repayment plan, based on your outstanding loan balance on the date you began repaying the loans under IBR (unless you choose to exit the IBR program).

      Are there examples of borrowers who are eligible for IBR and borrowers who are not?

      Example 1 — Based upon the IBR repayment formula a borrower with a family size of one and an AGI of $30,000 would have an IBR calculated payment amount of $171 per month. If this borrower had total eligible student loan debt of $25,000 when the loans initially entered repayment, and the loan balance had increased to $30,000 when the borrower requested IBR, the calculated monthly repayment amount under a 10-year standard plan would be based on the higher of the two amounts. Using an interest rate of 6.8%, the 10-year standard payment amount for $30,000 would be $345. Since the $171 IBR calculated amount is less than the 10-year plan amount of $345, the borrower would be eligible to repay under IBR at a monthly amount of $171. However, if this borrower’s total eligible loan debt used to calculate the 10-year standard amount was only $10,000 the 10-year standard payment would be $115 per month, which is less than the IBR amount of $171. Therefore, the borrower would not be eligible for IBR.

      Example 2 — A borrower with a family size of four and income of $50,000 would have an IBR calculated monthly payment amount of $206. If this borrower had total eligible student loan debt of $20,000 when the loans initially entered repayment, and this amount had not changed when the borrower requested IBR, the calculated monthly repayment amount under a 10-year standard plan would be based on $20,000. Using an interest rate of 6.8%, the 10-year standard payment amount for $20,000 would be $230. Since the $206 IBR calculated amount is less than the 10-year plan amount of $230, the borrower would be eligible to repay under IBR at a monthly amount of $206. However, if the borrower’s total eligible loan debt used to calculate the 10-year standard amount was only $15,000, the 10-year calculated amount would be $173 per month, which is less than the IBR amount of $206. This borrower would not be eligible for IBR.

      Income-Based Repayment Questions and Answers (Q&As)

      http://studentaid.ed.gov/students/attachments/siteresources/IBR_QA_Final2-2011.pdf
      For additional information on IBR, check out the Income-Based Repayment Q&As. The Q&As are grouped into six categories: General Information, Eligible Loans, Determination of IBR Monthly Payment Amount, Married Borrowers, Application Process, and Other Information. The answers are dated and, as new questions are added or a previous response is updated, we will include a new date.

      Health Care Tax Credit for Small Employers

      Tuesday May 11, 2010             http://taxes.about.com/od/businesstaxes/qt/Small-Business-Health-Care-Tax-Credit.htm

      Small businesses may qualify for a new tax credit worth up to 35 percent of the cost of employer-paid health insurance premiums. This health care tax credit1 was enacted as part of the massive health care reform bill2 passed, and the credit is available starting in the year 2010.

      As with all tax credits, there are limitations as to which small businesses qualify, as well as rules for calculating the actual amount of the tax credit. In general, eligible small employers can claim a federal tax credit based on health insurance premiums paid by the employer on behalf of their employees, up to a maximum credit of 35% of premiums paid. Eligible small businesses are those with fewer than full-time 25 employees (or full-time equivalents), average annual wages under $50,000 per employee, and paying 50% or more of the health benefit.

      Health Care Tax Credit Amounts
      • 35% of eligible premiums — for 2010 through 2013
      • 50% of eligible premiums — beginning in 2014
      Qualifying for the Health Care Tax Credit

      There’s a three-part test for see if a small business qualifies for the health care tax credit:

      • The business must have less than 25 full-time equivalent employees
      • The average wage of employees must be less than $50,000 per full-time equivalent employee
      • Health insurance premiums must be paid through a “qualifying arrangement”
      No Tax Credit for Owners of the Business

      Small businesses cannot take a tax credit for insurance premiums paid for owners of the business. This means that owners of corporations, partners in a partnership, and sole proprietors. For small businesses structured as a C-corporation, no tax credit is available for employees who own 5% or more of the corporation. For S-corporations, no tax credit is available for employees who own 2% or more of the S-corporation. Partners, members of LLC treated as a partnership, owners of a single-member LLC, S-corporation shareholders owning 2% or more of an S-corporation, and sole proprietors are all treated as self-employed persons for health insurance purposes, and are eligible for the self-employed health insurance deduction instead of the tax credit.

      Employer Must Pay at Least Half of the Insurance Premiums

      So far the IRS is applying the term “qualifying arrangement” to any scenario in which the small business pays at least half of the health insurance premiums for its employees. In a set of frequently asked questions, the IRS clarified that this 50% test applies only to employee-only health coverage. So a scenario is which the employers pays half of the employee-only coverage, and the employee pays all the premiums for covering spouse and children would still qualify for the tax credit.

      3 Limitations That Reduce the Health Care Tax Credit

      Small employers may not qualify for the full amount of the credit. The 35% credit amount represents a maximum amount for the tax credit. The credit must be reduced (or phased out) in the following circumstances:

      • The number of full-time equivalent employees exceeds ten,
      • Average annual wages exceeds $25,000 per full-time equivalent, or
      • Actual health insurance premiums exceed average premiums paid for health coverage in the employer’s area.

      In Revenue Ruling 2010-13 (pdf, 4 pages), the IRS has set forth average health insurance premiums by state that can be used for 2010. Average health insurance premiums will be determined by the Department of Health and Human Services and published by the IRS.

      Claiming the Health Care Tax Credit

      The IRS has not yet released any forms or instructions for claiming the credit. It’s clear, however, that the tax credit will be reported on the business’s income tax return. The health care credit will reduce any income tax. The credit is non-refundable (meaning it can reduce income tax to at most zero). The credit cannot offset payroll tax or self-employment tax liabilities for small business owners.

      Can Businesses Take a Deduction for Health Insurance Premiums?

      Small businesses can take both a deduction for health insurance premiums as well as the health care tax credit. However, the amount of the deduction must be reduced by the amount of the tax credit.

      Planning Tips for the Health Care Tax Credit

      Small businesses should review their accounting systems to make sure they are keeping track of employer-paid and employee-paid health insurance premiums. This will become vitally important as employers will need to report the value of health insurance benefits on employees’ W-2 Forms starting in 2011.

      Additionally, business owners will want to review how they structure their health benefits. For example, owners may want to revise what percentage of health insurance premiums they want to pay so as to be eligible for the tax credit.

      Business may also want to calculate different scenarios such as paying 50% of the insurance premiums, or 60%, or 100%, or taking only the deduction instead of the tax credit. This could help reveal the most cost-efficient way to structure health benefits for employees.

      More information:

      1. http://taxes.about.com/od/businesstaxes/qt/Small-Business-Health-Care-Tax-Credit.htm
      2. http://taxes.about.com/b/2010/03/30/tax-provisions-in-the-health-care-reform-law.htm
      3. http://taxes.about.com/od/businesstaxes/qt/Small-Business-Health-Care-Tax-Credit.htm
      4. http://biztaxlaw.about.com/od/healthcarebusinesstax/f/smallbiztaxcredit.htm
      5. http://biztaxlaw.about.com/od/healthcarebusinesstax/tp/healthcareplanlist.htm

      When Do the Health Care Reform Provisions Go Into Effect for Businesses?

      By Jean Murray,     http://biztaxlaw.about.com/od/healthcarebusinesstax/f/hclawtimeline.htm?nl=1

      President Obama signed into law HR 3590, the Patient Protection and Affordable Care Act (commonly called “Health Care Reform”) in March 2010 This law was modified by a reconciliation bill. The provisions of this combined legislation go into effect at various times, starting in 2009 forward through 2018. Here is a brief timeline of provisions which affect your business taxes, adapted from the Tax Foundation1.

      Retroactive provisions

      Small Business Tax Credit for certain small businesses (those meeting certain criteria) providing health insurance to employees (retroactive to January 1, 2010). In 2013, restricted only to insurance purchased through an exchange and only available for two consecutive years.

      Provisions going into effect before the end of 2010
      July 1, 2010: Impose 10% excise tax on indoor tanning services

      Provisions going into effect in 2011

      • Employers must report the value of health benefits on employee W-2 forms2.
      • Conform the definition of medical expenses for health savings accounts, Archer MSAs, health flexible spending arrangements, and health reimbursement arrangements to the definition of the itemized deduction for medical expenses (excluding over-the-counter medicines prescribed by a physician)
      • Increase in additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses to 20%

      Provisions going into effect in 2012

      • Simple cafeteria plan nondiscrimination safe harbor for certain small employers
      • Require information reporting on payments to corporations (on Form 1099-MISC3)

      Provisions going into effect in 2013

      • Limit health flexible spending arrangements in cafeteria plans to $2,500; indexed to CPI-U after 2013
      • Eliminate business tax deduction for expenses allocable to Medicare Part D subsidy
      • Impose Fee on Insured and Self-Insured Health Plans; Patient-Centered Outcomes Research Trust Fund (expires after 2019)

      Provisions going into effect in 2014

      • Increase by 15.75 percentage points the required corporate estimated tax payments factor for corporations with assets of at least $1 billion for payments due in July, August, and September 2014
      • Excise Tax (i.e., penalty) on Employers Not Providing Health Insurance Coverage to Employees (Shared Responsibility for Employers)
      • Requirement that employers report health insurance coverage
      • Provisions specifying cafeteria treatment of employers who purchase insurance through exchange

      Small Business Health Care Tax Credit: Frequently Asked Questions

      http://www.irs.gov/newsroom/article/0,,id=220839,00.html

      The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.

      Employers Eligible for the Credit

      1. Which employers are eligible for the small employer health care tax credit?

      A. Small employers that provide health care coverage to their employees and that meet certain requirements (“qualified employers”) generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement” described in Q/A-3.  See Q/A-9 through 15 for further information on calculating FTEs and average annual wages and see Q/A-22 for information on anticipated transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.

      2. Can a tax-exempt organization be a qualified employer?

      A. Yes. The same definition of qualified employer applies to an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). However, special rules apply in calculating the credit for a tax-exempt qualified employer. A governmental employer is not a qualified employer unless it is an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). See Q/A-6.

      Calculation of the Credit

      3. What expenses are counted in calculating the credit?

      A.  Only premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. See Q/A-22 for information on transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.

      If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer.  For example, if an employer pays 80 percent of the premiums for employees’ coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit. For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.

      In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the state (or an area within the state) in which the employer offers coverage were substituted for the actual premium. If the employer pays only a portion of the premium for the coverage provided to employees (for example, under the terms of the plan the employer pays 80 percent of the premiums and the employees pay the other 20 percent), the premium amount that counts for purposes of the credit is the same portion (80 percent in the example) of the premiums that would have been paid for the coverage if the average premium for the small group market in the state were substituted for the actual premium.

      4.  What is the average premium for the small group market in a state (or an area within the state)?

      A. The average premium for the small group market in a state (or an area within the state) is determined by the Department of Health and Human Services (HHS). Revenue Ruling 2010-13 sets forth the average premium for the small group market in each state for the 2010 taxable year. For the 2010 taxable year, HHS may provide additional average premium rates for the small group market for areas within some states (sub-state rates). These additional sub-state rates will be published by the IRS and will not be lower than the applicable rate for each state that is set forth in RR-2010-13.

      5. What is the maximum credit for a qualified employer (other than a tax-exempt employer)?

      A. For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3.

      Example: For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit.  The credit for 2010 equals $25,200 (35% x $72,000).

      6. What is the maximum credit for a tax-exempt qualified employer?

      A.  For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3. However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., hospital insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages.

      Example: For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit. The total amount of the employer’s income tax and Medicare tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2010.

      The credit is calculated as follows:

      (1)  Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000
      (2)  Employer’s withholding and Medicare taxes: $30,000
      (3)  Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).

      7. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?

      A.  If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero). If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15. If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.

      Example: For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit.

      The credit is calculated as follows:

      (1) Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600
      (2)  Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
      (3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
      (4) Total credit reduction: ($4,480 + $6,720) = $11,200
      (5) Total 2010 tax credit: ($33,600 – $11,200) = $22,400.

      8. Can premiums paid by the employer in 2010, but before the new health reform legislation was enacted, be counted in calculating the credit?

      A. Yes. In computing the credit for a tax year beginning in 2010, employers may count all premiums described in Q/A-3 for that tax year.

      Determining FTEs and Average Annual Wages

      9.  How is the number of FTEs determined for purposes of the credit?

      A. The number of an employer’s FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. See Q/A-12 through 14 for information on which employees are not counted for purposes of determining FTEs.

      Example: For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.

      The employer’s FTEs would be calculated as follows:

      (1) Total hours not exceeding 2,080 per employee is the sum of:

      a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)
      b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)
      c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)

      These add up to 15,600 hours

      (2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number)

      10. How is the amount of average annual wages determined?

      A. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer’s tax year by (2) the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).  See Q/A-12 through 14 for information on which employees are not counted as employees for purposes of determining the amount of average annual wages.

      Example: For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.

      The employer’s average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000)

      11. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?

      A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.

      12. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?

      A. Generally, no. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year.

      13. If an owner of a business also provides services to it, does the owner count as an employee?

      A. Generally, no. A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

      14. Do family members of a business owner who work for the business count as employees?

      A. Generally, no. A family member of any of the business owners or partners listed in Q/A-13, or a member of such a business owner’s or partner’s household, is not considered an employee for purposes of the credit. Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.

      15.  How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?

      A. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit. Thus, for example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under Code section 414(b), (c), (m), and (o).

      How to Claim the Credit

      16. How does an employer claim the credit?

      A. The credit is claimed on the employer’s annual income tax return. For a tax-exempt employer, the IRS will provide further information on how to claim the credit.

      17. Can an employer (other than a tax-exempt employer) claim the credit if it has no taxable income for the year?

      A. Generally, no. Except in the case of a tax-exempt employer, the credit for a year offsets only an employer’s actual income tax liability (or alternative minimum tax liability) for the year. However, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. Because an unused credit amount cannot be carried back to a year before the effective date of the credit, though, an unused credit amount for 2010 can only be carried forward.

      18.  Can a tax-exempt employer claim the credit if it has no taxable income for the year?

      A. Yes. For a tax-exempt employer, the credit is a refundable credit, so that even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the income tax withholding and Medicare tax liability, as discussed in Q/A-6).

      19. Can the credit be reflected in determining estimated tax payments for a year?

      A. Yes. The credit can be reflected in determining estimated tax payments for the year to which the credit applies in accordance with regular estimated tax rules.

      20. Does taking the credit affect an employer’s deduction for health insurance premiums?

      A. Yes. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.

      21. May an employer reduce employment tax payments (i.e., withheld income tax, social security tax, and Medicare tax) during the year in anticipation of the credit?

      A. No. The credit applies against income tax, not employment taxes.

      Anticipated Transition Relief for Tax Years Beginning in 2010

      22. Is it expected that any transition relief will be provided for tax years beginning in 2010 to make it easier for taxpayers to meet the requirements for a qualifying arrangement?

      A. Yes. The IRS and Treasury intend to issue guidance that will provide that, for tax years beginning in 2010, the following transition relief applies with respect to the requirements for a qualifying arrangement described in Q/A-3:

      (a) An employer that pays at least 50% of the premium for each employee enrolled in coverage offered to employees by the employer will not fail to maintain a qualifying arrangement merely because the employer does not pay a uniform percentage of the premium for each such employee. Accordingly, if the employer otherwise satisfies the requirements for the credit described above, it will qualify for the credit even though the percentage of the premium it pays is not uniform for all such employees.

      (b) The requirement that the employer pay at least 50% of the premium for an employee applies to the premium for single (employee-only) coverage for the employee. Therefore, if the employee is receiving single coverage, the employer satisfies the 50% requirement with respect to the employee if it pays at least 50% of the premium for that coverage. If the employee is receiving coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer satisfies the 50% requirement with respect to the employee if the employer pays an amount of the premium for such coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the coverage the employee is actually receiving).

      EDUCATION Credits, Deductions and Non-taxable benefits

      Credits

      American Opportunity Credit

      Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American opportunity credit, to pay for college expenses.

      The American opportunity credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

      The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

      Special rules apply to a student attending college in a Midwestern disaster area. For tax-year 2009, only, taxpayers can choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.

      If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.

      Hope Credit

      The Hope credit generally applies to 2008 and earlier tax years. It helps parents and students pay for post-secondary education. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. The Hope credit you are allowed may be limited by the amount of your income and the amount of your tax.

      The Hope credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. Normally, you can claim tuition and required enrollment fees paid for your own, as well as your dependents’ college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time.

      Generally, you can claim the Hope credit if all three of the following requirements are met:

      • You pay qualified education expenses of higher education.
      • You pay the education expenses for an eligible student.
      • The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

      You cannot take both an education credit and a deduction for tuition and fees (see Deductions, below) for the same student in the same year. In some cases, you may do better by claiming the tuition and fees deduction instead of the Hope credit.

      Education credits are claimed on Form 8863, Education Credits (Hope and Lifetime Learning Credits). For details on these and other education-related tax breaks, see IRS Publication 970, Tax Benefits of Education.

      Lifetime Learning Credit

      The lifetime learning credit helps parents and students pay for post-secondary education.

      For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 ($4,000 for students in Midwestern disaster areas) for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the Hope or American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.

      Generally, you can claim the lifetime learning credit if all three of the following requirements are met:

      • You pay qualified education expenses of higher education.
      • You pay the education expenses for an eligible student.
      • The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

      If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.

      If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope or American opportunity credit for one student and the lifetime learning credit for another student in the same year.


      Deductions

      Tuition and Fees Deduction

      You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

      The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.

      You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.

      Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

      • You pay qualified education expenses of higher education.
      • You pay the education expenses for an eligible student.
      • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

      You cannot claim the tuition and fees deduction if any of the following apply:

      • Your filing status is married filing separately.
      • Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.
      • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).
      • You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
      • You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.

      Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

      Student Loan Interest Deduction

      Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $70,000 ($145,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

      For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2008.

      The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040).

      Qualified Student Loan

      This is a loan you took out solely to pay qualified education expenses (defined later) that were:

      • For you, your spouse, or a person who was your dependent when you took out the loan.
      • Paid or incurred within a reasonable period of time before or after you took out the loan.
      • For education provided during an academic period for an eligible student.

      Loans from the following sources are not qualified student loans:

      • A related person.
      • A qualified employer plan.

      Qualified Education Expenses

      For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:

      • Tuition and fees.
      • Room and board.
      • Books, supplies and equipment.
      • Other necessary expenses (such as transportation).

      The cost of room and board qualifies only to the extent that it is not more than the greater of:

      • The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
      • The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

      Business Deduction for Work-Related Education

      If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.

      If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.

      Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the Hope and lifetime learning credits. You may qualify for these other benefits even if you do not meet the requirements listed above.

      To claim a business deduction for work-related education, you must:

      • Be working.
      • Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
      • File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
      • Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.

      Qualifying Work-Related Education

      You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:

      • The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
      • The education maintains or improves skills needed in your present work.

      However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:

      • Is needed to meet the minimum educational requirements of your present trade or business or
      • Is part of a program of study that will qualify you for a new trade or business.

      You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

      Education Required by Employer or by Law

      Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.

      • It is required for you to keep your present salary, status or job.
      • The requirement serves a business purpose of your employer.
      • The education is not part of a program that will qualify you for a new trade or business.

      When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.

      Education to Maintain or Improve Skills

      If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.


      Savings Plans

      529 Plans Expanded

      Tax-free college savings plans and prepaid tuition programs can be used to buy computer equipment and services for an eligible student during 2009 and 2010. These 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

      529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books, supplies, equipment and special needs services. For someone who is at least a half-time student, room and board also qualify.

      For 2009 and 2010, the ARRA change adds to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit or tuition and fees deduction.

      States sponsor 529 plans that allow taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student’s qualified education expenses.

      Coverdell Education Savings Account

      This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and  the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

      Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

      Here are some things to remember about distributions from Coverdell accounts:

      • Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
      • There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible.
      • Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
      • If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

      For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.


      Scholarships and Fellowships

      A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.

      A scholarship or fellowship is tax free only if you meet the following conditions:

      • You are a candidate for a degree at an eligible educational institution.
      • You use the scholarship or fellowship to pay qualified education expenses.

      Qualified Education Expenses

      For purposes of tax-free scholarships and fellowships, these are expenses for:

      • Tuition and fees required to enroll at or attend an eligible educational institution.
      • Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

      However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.

      Expenses that Don’t Qualify

      Qualified education expenses do not include the cost of:

      • Room and board.
      • Travel.
      • Research.
      • Clerical help.
      • Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

      This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

      For more information, see Pub. 970.


      Exclusions from Income

      You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the Hope credit and the lifetime learning credit.

      Employer-Provided Educational Assistance

      If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.

      Educational Assistance Program

      To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.

      Educational Assistance Benefits

      Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items.

      • Meals, lodging, or transportation.
      • Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
      • Courses involving sports, games, or hobbies unless they:
        • Have a reasonable relationship to the business of your employer, or
        • Are required as part of a degree program.

      Benefits over $5,250

      If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.

      Working Condition Fringe Benefit

      However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

      http://www.irs.gov/newsroom/article/0,,id=213044,00.html?portlet=6

      Independent Contractor or Employee?

      Independent Contractor (Self-Employed) or Employee?

      It is critical that you, the business owner, correctly determine whether the individuals providing services for your company are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

      If you are an independent contractor and hire or subcontract work to others, you will want to review the information in this section to determine whether individuals you hire are independent contractors (subcontractors) or employees.

      Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be –

      People such as lawyers, contractors, subcontractors and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case.

      The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

      Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
      If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.

      • A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
      • A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
      • An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
      • A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.

      Refer to the Salesperson section located in Publication 15-A, Employer’s Supplemental Tax Guide (PDF) for additional information.

      Social Security and Medicare Taxes

      Withhold Social Security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply.

      • The service contract states or implies that substantially all the services are to be performed personally by them.
      • They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).
      • The services are performed on a continuing basis for the same payer.
      There are generally two categories of statutory nonemployees: direct sellers and licensed real estate agents. They are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:

      • Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked, and
      • Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

      Refer to information on Direct Sellers located in Publication 15-A, Employer’s Supplemental Tax Guide (PDF) for additional information.

      In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

      Common Law Rules

      Facts that provide evidence of the degree of control and independence fall into three categories:

      1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

      Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

      The behavioral control factors fall into the categories of:

      • Type of instructions given
      • Degree of instruction
      • Evaluation systems
      • Training

      Types of Instructions Given

      An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

      • When and where to do the work.
      • What tools or equipment to use.
      • What workers to hire or to assist with the work.
      • Where to purchase supplies and services.
      • What work must be performed by a specified individual.
      • What order or sequence to follow when performing the work.

      Degree of Instruction

      Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

      Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

      Evaluation System

      If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.

      If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.

      Training

      If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way.  This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.

      2.  Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

      Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.

      The financial control factors fall into the categories of:

      • Significant investment
      • Unreimbursed expenses
      • Opportunity for profit or loss
      • Services available to the market
      • Method of payment

      Significant investment

      An independent contractor often has a significant investment in the equipment he or she uses in working for someone else.  However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment.  Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.

      Unreimbursed expenses

      Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

      Opportunity for profit or loss

      The opportunity to make a profit or loss is another important factor.  If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work).  Having the possibility of incurring a loss indicates that the worker is an independent contractor.

      Services available to the market

      An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

      Method of payment

      An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

      3.  Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

      Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.

      The factors, for the type of relationship between two parties, generally fall into the categories of:

      • Written contracts
      • Employee benefits
      • Permanency of the relationship
      • Services provided as key activity of the business

      Written Contracts

      Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status.  The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax.  How the parties work together determines whether the worker is an employee or an independent contractor.

      Employee Benefits

      Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance.  Businesses generally do not grant these benefits to independent contractors.  However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.

      Permanency of the Relationship

      If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.

      Services Provided as Key Activity of the Business

      If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities.  For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work.  This would indicate an employer-employee relationship.

      Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

      The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

      You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link.

      Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).