This publication explains your tax responsibilities as an employer. It explains the requirements for withholding, depositing, reporting, and paying
employment taxes. It explains the forms you must give your employees, those your employees must give you, and those you must send to the IRS and SSA.
This guide also has tax tables you need to figure the taxes to withhold for each employee for 2002.
Additional employment tax information is available in Pub. 15-A, Employer's Supplemental Tax Guide. Pub. 15-A includes specialized
information supplementing the basic employment tax information provided in this publication. Pub. 15-B, Employer's Tax Guide to Fringe
Benefits, contains information about the employment tax treatment and valuation of various types of noncash compensation.
Most employers must withhold (except FUTA), deposit, report, and pay the following employment taxes -
- Income tax.
- Social security and Medicare taxes.
- Federal unemployment tax (FUTA).
There are exceptions to these requirements. See section 15, Special Rules for Various Types of Services and Payments. Railroad
retirement taxes are explained in the Instructions for Form CT-1.
Federal Government employers.
The information in this guide applies to Federal agencies except for the rules requiring deposit of Federal taxes only at Federal Reserve banks or
through the FedTax option of the Government On-Line Accounting Link Systems (GOALS). See the Treasury Financial Manual (I TFM 3-4000) for
State and local government employers.
Employee wages are generally subject to Federal income tax withholding, but not Federal unemployment (FUTA) tax. In addition, wages, with certain
exceptions, are subject to social security and Medicare taxes. See section 15 for more information on the exceptions.
You can get information on reporting and social security coverage from your local IRS office. If you have any questions about coverage under a
section 218 (Social Security Act) agreement, contact the appropriate state official. To find out the State Social Security Administrator, contact the
National Conference of State Social Security Administrators Web Site at www.ncsssa.org.
1. Employer Identification Number (EIN)
If you are required to report employment taxes or give tax statements to employees or annuitants, you need an EIN.
The EIN is a nine-digit number the IRS issues. The digits are arranged as follows: 00-0000000. It is used to identify the tax accounts of employers
and certain others that have no employees. Use your EIN on all the items you send to the IRS and SSA. For more information, get Pub.
1635, Understanding Your EIN.
If you have not asked for an EIN, request one on Form SS-4, Application for Employer Identification Number. Form SS-4 has information on
how to apply for an EIN by mail or by telephone.
You should have only one EIN. If you have more than one and are not sure which one to use, please check with the Internal Revenue Service office
where you file your return. Give the numbers you have, the name and address to which each was assigned, and the address of your main place of
business. The IRS will tell you which number to use.
If you took over another employer's business, do not use that employer's EIN. If you do not have your own EIN by the time a return is due, write
Applied for and the date you applied in the space shown for the number.
See Depositing without an EIN on page 21 if you must make a deposit and you do not have an EIN.
2. Who Are Employees?
Generally, employees are defined either under common law or under special statutes for certain situations.
Employee status under common law.
Generally, a worker 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. See
Pub. 15-A, Employer's Supplemental Tax Guide, for more information on how to determine whether an individual providing services is an
independent contractor or an employee.
Generally, people in business for themselves are not employees. For example, doctors, lawyers, veterinarians, construction contractors, and others
in an independent trade in which they offer their services to the public are usually not employees. However, if the business is incorporated,
corporate officers who work in the business are employees.
If an employer-employee relationship exists, it does not matter what it is called. The employee may be called an agent or independent contractor.
It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time.
If someone who works for you is not an employee under the common law rules discussed above, do not withhold Federal income tax from his or her pay.
Although the following persons may not be common law employees, they may be considered employees by statute for social security, Medicare, and FUTA
tax purposes under certain conditions.
- An agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else.
- A full-time life insurance salesperson.
- A homeworker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to
someone that person designates.
- A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities)
for one firm or person getting orders from customers. The orders must be for items for resale or use as supplies in the customer's business. The
customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or
See Pub. 15-A for details on statutory employees.
Direct sellers and qualified real estate agents are by law considered nonemployees. They are instead treated as self-employed for all Federal tax
purposes, including income and employment taxes. See Pub. 15-A for details.
Treating employees as nonemployees.
You will be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold them because you treat an
employee as a nonemployee. See Internal Revenue Code section 3509 for details.
If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker.
To get this relief, you must file all required information returns (Form 1099-MISC) on a basis consistent with your treatment of the worker. You (or
your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977.
If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal
Employment Taxes and Income Tax Withholding.
3. Family Employees
Child employed by parents.
Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and
Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. If these services
are for work other than in a trade or business, such as domestic work in the parent's private home, they are not subject to social security and
Medicare taxes until the child reaches age 21. However, see Covered services of a child or spouse below. Payments for the services of a
child under age 21 who works for his or her parent whether or not in a trade or business are not subject to Federal unemployment (FUTA) tax. Although
not subject to FUTA tax, the wages of a child may be subject to income tax withholding.
One spouse employed by another.
The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social
security and Medicare taxes, but not to FUTA tax. However, the services of one spouse employed by another in other than a trade or business, such as
domestic service in a private home, are not subject to social security, Medicare, and FUTA taxes.
Covered services of a child or spouse.
The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or
she works for:
- A corporation, even if it is controlled by the child's parent or the individual's spouse,
- A partnership, even if the child's parent is a partner, unless each partner is a parent of the child,
- A partnership, even if the individual's spouse is a partner, or
- An estate, even if it is the estate of a deceased parent.
Parent employed by child.
The wages for the services of a parent employed by his or her child in a trade or business are subject to income tax withholding and social
security and Medicare taxes. Social security and Medicare taxes do not apply to wages paid to a parent for services not in a trade or business, but
they do apply to domestic services if:
- The parent cares for a child who lives with a son or daughter and who is under age 18 or requires adult supervision for at least 4
continuous weeks in a calendar quarter due to a mental or physical condition, and
- The son or daughter is a widow or widower, divorced, or married to a person who, because of a physical or mental condition, cannot care for
the child during such period.
Wages paid to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided.
4. Employee's Social Security Number (SSN)
You are required to get each employee's name and SSN and to enter them on Form W-2. (This requirement also applies to resident and nonresident
alien employees.) You should ask your employee to show you his or her social security card. The employee is required to show the card if it is
available. You may, but are not required to, photocopy the social security card if the employee provides it. If you do not provide the correct
employee name and SSN on Form W-2, you may owe a penalty.
Any employee without a social security card can get one by completing Form SS-5, Application for a Social Security Card. You can get
this form at Social Security Administration (SSA) offices or by calling 1-800-772-1213. Form SS-5 can also be obtained from the SSA Web Site at
www.ssa.gov. The employee must complete and sign Form SS-5; it cannot be filed by the employer. If your employee applied for an SSN but
does not have it when you must file Form W-2, enter Applied for on the form. When the employee receives the SSN, file Form W-2c,
Corrected Wage and Tax Statement, to show the employee's SSN and furnish a copy to the employee.
Record the name and number of each employee exactly as they are shown on the employee's social security card. If the employee's name is not
correct as shown on the card (for example, because of marriage or divorce), the employee should request a new card from the SSA. Continue to use the
old name until the employee shows you the new social security card with the new name.
If your employee was given a new social security card to show his or her correct name and number after an adjustment to his or her alien residence
status, correct your records and show the new information on Form W-2. If you filed Form W-2 for the same employee in prior years under the old name
and SSN, file Form W-2c to correct the name and number. Use a separate Form W-2c to correct each prior year and furnish a copy of each Form W-2c to
the employee. Advise the employee to contact the local SSA office no earlier than 9 months after the Form W-2c is filed to ensure that the records
IRS individual taxpayer identification numbers (ITINs) for aliens.
A resident or nonresident alien may request an ITIN for tax purposes if he or she does not have and is not eligible to get an SSN. Possession of an
ITIN does not change an individual's employment or immigration status under U.S. law. Do not accept an ITIN in place of an SSN for employee
identification or for work.
An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN.
Verification of social security numbers.
The Social Security Administration (SSA) offers employers and authorized reporting agents two methods for verifying employee SSNs. Both methods
match employee names and SSNs.
- Telephone verification. To verify up to five names and numbers, call 1-800-772-6270. To verify up to 50 names and numbers,
contact your local social security office.
- Large volume verification. The Enumeration Verification Service (EVS) may be used to verify more than 50 employee
names and SSNs. Preregistration is required for EVS or for requests made on magnetic media. For more information, call the EVS information line at
410-965-7140 or visit SSA's Web Site for Employers at www.ssa.gov/employer.
5. Wages and Other Compensation
Wages subject to Federal employment taxes include all pay you give an employee for services performed. The pay may be in cash or in other forms. It
includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. It does not matter how you measure or make the payments. Also,
compensation paid to a former employee for services performed while still employed is wages subject to employment taxes. See section 6 for a
discussion of tips and section 7 for a discussion of supplemental wages. Also, see section 15 for exceptions to the general rules for wages. Pub.
15-A, Employer's Supplemental Tax Guide, provides additional information on wages and other compensation. Pub. 15-B, Employer's Tax
Guide to Fringe Benefits, provides information on other forms of compensation, including:
- Accident and health benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- De minimis (minimal) benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Group-term life insurance coverage
- Lodging on your business premises
- Moving expense reimbursements
- No-additional-cost services
- Retirement planning services
- Transportation (commuting) benefits
- Tuition reduction
- Working condition benefits
Employee business expense reimbursements.
A reimbursement or allowance arrangement is a system by which you substantiate and pay the advances, reimbursements, and charges for your
employees' business expenses. How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan.
If a single payment includes both wages and an expense reimbursement, you must specify the amount of the reimbursement.
These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee.
To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules.
- They must have paid or incurred deductible expenses while performing services as your employees.
- They must adequately account to you for these expenses within a reasonable period of time.
- They must return any amounts in excess of expenses within a reasonable period of time.
Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and payment of social security, Medicare, and
Federal unemployment (FUTA) taxes.
If the expenses covered by this arrangement are not substantiated or amounts in excess of expenses are not returned within a reasonable period of
time, the amount is treated as paid under a nonaccountable plan. This amount is subject to income tax withholding and payment of social security,
Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period.
A reasonable period of time depends on the facts and circumstances. Generally, it is considered reasonable if your employees receive the advance
within 30 days of the time they incur the expense, adequately account for the expenses within 60 days after the expenses were paid or incurred, and
they return any amounts in excess of expenses within 120 days after the expense was paid or incurred. Also, it is considered reasonable if you give
your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so
within 120 days.
Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as
supplemental wages and subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Your payments are treated as paid
under a nonaccountable plan if:
- Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation or
- You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or
she does not use for business expenses.
See section 7 for more information on supplemental wages.
Per diem or other fixed allowance.
You may reimburse your employees by travel days, or miles, or some other fixed allowance. In these cases, your employee is considered to have
accounted to you if the payments do not exceed rates established by the Federal Government. The 2001 standard mileage rate for auto expenses was 34.5
cents per mile. The rate for 2002 is 36.5 cents per mile.
The government per diem rates for meals and lodging in the continental United States are listed in
Pub. 1542, Per Diem Rates. Other than the amount of these expenses, your employees' business expenses must be substantiated (for example,
the business purpose of the travel or the number of business miles driven).
If the per diem or allowance paid exceeds the amounts specified, you must report the excess amount as wages. This excess amount is subject to
income tax withholding and payment of social security, Medicare, and FUTA taxes. Show the amount equal to the specified amount (i.e., the nontaxable
portion) in box 12 of Form W-2 using code L.
Wages not paid in money.
If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument, such as a
check, you are said to pay them in kind. Payments in kind may be in the form of goods, lodging, food, clothing, or services. Generally, the
fair market value of such payments at the time they are provided is subject to income tax withholding and social security, Medicare, and FUTA taxes.
However, noncash payments for household work, agricultural labor, and service not in the employer's trade or business are exempt from social
security, Medicare, and FUTA taxes. Withhold income tax on these payments only if you and the employee agree to do so. However, noncash payments for
agricultural labor, such as commodity wages, are treated as cash payments subject to employment taxes if the substance of the transaction is a cash
Reimbursed and employer-paid qualified moving expenses (those that would otherwise be deductible by the employee) are not includible in an
employee's income unless you have knowledge that the employee deducted the expenses in a prior year. Reimbursed and employer-paid nonqualified moving
expenses are includible in income and are subject to employment taxes and income tax withholding. For more information on moving expenses, see
Pub. 521, Moving Expenses.
Meals and lodging.
The value of meals is not taxable income and is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the meals
are furnished for the employer's convenience and on the employer's premises. The value of lodging is not subject to income tax withholding and social
security, Medicare, and FUTA taxes if the lodging is furnished for the employer's convenience, on the employer's premises, and as a condition of
For the convenience of the employer means that you have a substantial business reason for providing the meals and lodging other than to
provide additional compensation to the employee. For example, meals you provide at the place of work so an employee is available for emergencies
during his or her lunch period are generally considered to be for your convenience.
However, whether meals or lodging are provided for the convenience of the employer depends on all the facts and circumstances. A written statement
that the meals or lodging are for your convenience is not sufficient.
If over 50% of the employees who are provided meals on an employer's business premises receive these meals for the convenience of the employer, all
meals provided on the premises are treated as furnished for the convenience of the employer. If this 50% test is met, the value of the meals is
excludable for all employees and is not subject to income tax withholding or employment taxes.
For more information, see Pub. 15-B, Employer's Tax Guide to Fringe Benefits.
Health insurance plans.
If you pay the cost of an accident or health insurance plan for your employees, which may include an employee's spouse and dependents, your
payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. Generally, this exclusion applies
to qualified long-term care insurance contracts. However, the cost of health insurance benefits must be included in the wages of S corporation
employees who own more than 2% of the S corporation (2% shareholders).
Archer medical savings accounts.
Your contributions to an employee's medical savings account (Archer MSA) are not subject to social security, Medicare, or FUTA taxes, or income tax
withholding if it is reasonable to believe at the time of payment of the contributions that they will be excludable from the income of the employee.
To the extent that it is not reasonable to believe they will be excludable, your contributions are subject to these taxes. Employee
contributions to their Archer MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA
taxes, and income tax withholding.
Medical care reimbursements.
Generally, medical care reimbursements paid for an employee under an employer's self-insured medical reimbursement plan are not wages and are not
subject to social security, Medicare, and FUTA taxes, or income tax withholding. See Pub. 15-B for an exception for highly compensated employees.
You generally must include fringe benefits in an employee's gross income (but see Nontaxable fringe benefits next). The benefits are
subject to income tax withholding and employment taxes. Fringe benefits include cars you provide, flights on aircraft you provide, free or discounted
commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or
sporting events. In general, the amount you must include is the amount by which the fair market value of the benefits is more than the sum of what the
employee paid for it plus any amount the law excludes. There are other special rules you and your employees may use to value certain fringe benefits.
See Pub. 15-B for more information.
Nontaxable fringe benefits.
Some fringe benefits are not taxable if certain conditions are met. See Pub. 15-B for details. Examples are:
- Services provided to your employees at no additional cost to you.
- Qualified employee discounts.
- Working condition fringes that are property or services the employee could deduct as a business expense if he or she had paid for it.
Examples include a company car for business use and subscriptions to business magazines.
- Minimal value fringes (including an occasional cab ride when an employee must work overtime, local transportation benefits provided because
of unsafe conditions and unusual circumstances, and meals you provide at eating places you run for your employees if the meals are not furnished at
- Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway
vehicle, any transit pass, and qualified parking).
- Qualified moving expense reimbursement. See page 9 for details.
- The use of on-premises athletic facilities if substantially all the use is by employees, their spouses, and their dependent
- Qualified tuition reduction, which an educational organization provides its employees for education. For more information, see Pub.
520, Scholarships and Fellowships.
However, do not exclude the following fringe benefits from the income of highly compensated employees unless the benefit is available to employees
on a nondiscriminatory basis.
- No-additional-cost services (item 1 above).
- Qualified employee discounts (item 2 above).
- Meals provided at an employer operated eating facility (included in item 4 above).
- Reduced tuition for education (item 8 above).
For more information, including the definition of a highly compensated employee, see Pub. 15-B.
When fringe benefits are treated as paid.
You may choose to treat certain noncash fringe benefits as paid by the pay period, or by the quarter, or on any other basis you choose as long as
you treat the benefits as paid at least once a year. You do not have to make a formal choice of payment dates or notify the IRS of the dates you
choose. You do not have to make this choice for all employees. You may change methods as often as you like, as long as you treat all benefits provided
in a calendar year as paid by December 31 of the calendar year. See Pub.15-A for more information, including a discussion of the special accounting
rule for fringe benefits provided during November and December.
Valuation of fringe benefits.
Generally, you must determine the value of fringe benefits no later than January 31 of the next year. Prior to January 31, you may reasonably
estimate the value of the fringe benefits for purposes of withholding and depositing on time.
Withholding on fringe benefits.
You may add the value of fringe benefits to regular wages for a payroll period and figure withholding taxes on the total, or you may withhold
Federal income tax on the value of the fringe benefits at the flat 27% supplemental wage rate.
You may choose not to withhold income tax on the value of an employee's personal use of a vehicle you provide. You must, however, withhold social
security and Medicare taxes on the use of the vehicle. See Pub. 15-A for more information on this election.
Depositing taxes on fringe benefits.
Once you choose payment dates for fringe benefits (discussed above), you must deposit taxes in the same deposit period you treat the fringe
benefits as paid. To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period.
If you determine by January 31 that you overestimated the value of a fringe benefit at the time you withheld and deposited for it, you may claim a
refund for the overpayment or have it applied to your next employment tax return (see Valuation of fringe benefits above). If you
underestimated the value and deposited too little, you may be subject to the failure to deposit penalty. See section 11 for information on deposit
If you deposited the required amount of taxes but withheld a lesser amount from the employee, you can recover from the employee the social
security, Medicare, or income taxes you deposited on his or her behalf, and included in the employee's Form W-2. However, you must recover the income
taxes before April 1 of the following year.
In general, sick pay is any amount you pay, under a plan you take part in, to an employee who is unable to work because of sickness or injury.
These amounts are sometimes paid by a third party, such as an insurance company or employees' trust. In either case, these payments are subject to
social security, Medicare, and FUTA taxes. Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the
employee last worked for the employer. The payments are also subject to income tax. See Pub. 15-A for more information.
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