Key Takeaways
• Form W-2 reports wages, tips, taxes withheld; provided by employers annually by January.
• Form 1099-NEC is for independent contractors; no taxes withheld, taxpayers pay self-employment taxes.
• Immigrants must report all worldwide income unless law exempts; tips, bonuses, foreign earnings included.
Understanding Wages, Salaries, and Other Earnings for U.S. Tax Purposes
When living or working in the United States 🇺🇸, it’s important to know what counts as income for tax purposes. This is especially true for immigrants, non-citizens, and anyone new to the U.S. tax system. The Internal Revenue Service (IRS) requires people to report many types of earnings, not just regular paychecks. This guide explains what counts as income, how it’s reported, and what forms you might receive, such as Form W-2 and Form 1099-NEC. It also covers special situations like tips, bonuses, foreign income, and more.
What Is Gross Income?
Gross income is the total amount of money you earn before any taxes or deductions are taken out. This includes wages, salaries, tips, bonuses, and other types of compensation. The IRS uses gross income to figure out how much tax you owe. If you’re an immigrant or non-citizen working in the United States 🇺🇸, you must report all income you earn, even if it comes from outside the country, unless a special rule says otherwise.
Wages and Salaries: The Basics
Most people earn money through wages or salaries. These are payments you get for working as an employee. Your employer will usually report your annual pay on Form W-2 (Wage and Tax Statement). Employers must give you this form by the end of January each year. If you file your tax return by mail, you should attach copy B of your Form W-2 to your return. If you file electronically, you don’t need to mail the form.
Key points about Form W-2:
– Shows your total wages, tips, and other compensation for the year
– Lists taxes withheld for federal, state, and sometimes local governments
– Needed to file your federal income tax return
If you do not receive a Form W-2 from your employer, you should contact them right away. If you still don’t get it, you can contact the IRS for help.
Nonemployee Compensation: Form 1099-NEC
Sometimes, people work as independent contractors or freelancers instead of regular employees. If this is your situation, your client or company will give you a Form 1099-NEC (Nonemployee Compensation) instead of a Form W-2. This form reports how much you were paid for your work, but it does not show any taxes withheld. You are responsible for reporting this income and paying any taxes owed.
Key points about Form 1099-NEC:
– Used for independent contractors, freelancers, and self-employed people
– Shows total payments received for services
– No taxes are taken out, so you must pay your own income and self-employment taxes
If you receive a Form 1099-NEC but believe you should be treated as an employee, you may need to discuss this with the company or seek advice from a tax professional.
Reporting Uncollected Social Security and Medicare Taxes
If you receive a Form 1099-NEC instead of a Form W-2 because your employer did not consider you an employee, you may need to report uncollected Social Security and Medicare taxes. This is done using Form 8919 (Uncollected Social Security and Medicare Tax on Wages). This form helps you pay the correct amount of taxes that would have been withheld if you were treated as an employee.
Childcare Providers and Babysitters
If you provide childcare, whether in your home or someone else’s, the money you earn must be included in your gross income. If you are not an employee (for example, you run your own childcare business or babysit for different families), you should report your earnings on Schedule C (Profit or Loss from Business) and complete Schedule 1 (Additional Income and Adjustments to Income) with your tax return.
Important points:
– All payments for childcare or babysitting, even for relatives, must be reported as income
– If you are self-employed, you may also need to pay self-employment tax
Foreign Income: What Immigrants Need to Know
U.S. citizens and resident aliens must report income from all sources, including money earned outside the United States 🇺🇸. This includes both earned income (like wages and tips) and unearned income (like interest, dividends, and rental income). However, some foreign income may be excluded under special rules, such as the foreign earned income exclusion.
Key points for immigrants:
– Report all worldwide income unless a specific U.S. law says it’s exempt
– You may be able to exclude some foreign earned income if you qualify
– For more details, see the IRS page on foreign earned income exclusion
Advance Commissions
If you receive advance commissions or payments for services you will provide in the future, you must include these amounts as income in the year you receive them, not when you actually do the work. This rule applies if you use the cash method of accounting, which most individuals do.
Cost of Living Allowances and Reimbursements
Some jobs offer cost of living allowances to help with higher expenses in certain locations. In most cases, these allowances are included in your income and are taxable. However, if you are a federal civilian or court employee stationed in Alaska, Hawaii, or outside the United States 🇺🇸, these allowances may not be taxable.
Allowances that increase your basic pay as an incentive for taking a less desirable assignment are always included in your income.
Back Pay, Bonuses, and Awards
If you receive back pay as part of a settlement or court judgment, you must include it in your income. This also applies to payments for damages, unpaid life insurance, or health insurance premiums. Employers should report these amounts on your Form W-2.
Bonuses and awards from your employer are also taxable and should appear on your Form W-2. If you receive goods or services as an award, you must include the fair market value (what it would cost to buy them) in your income.
Severance Pay
If you lose your job and receive severance pay or a payment for canceling your employment contract, you must include the full amount in your income. This includes any money for unused vacation days or payments withheld for outplacement services (like job training). If you accept less severance pay in exchange for job training, you must still report the full, unreduced amount as income.
Sick Pay and Disability Income
If you receive pay from your employer while you are sick or injured, this is considered part of your salary or wages and must be included in your income. This also applies to sick pay benefits from:
– A welfare fund
– A state sickness or disability fund
– An association of employers or employees
– An insurance company, if your employer paid for the plan
If you paid the premiums for your own accident or health insurance policy, the benefits you receive are not taxable.
For disability income, if your employer pays for the accident or health plan, you must report any payments you receive as income. If both you and your employer pay for the plan, you only report the part that comes from your employer’s payments. Some reimbursements for medical expenses may not be taxable, but if you already deducted those expenses on a previous tax return, you may need to include the reimbursement as income in the current year.
Accident or Health Plan Coverage
The value of accident or health plan coverage provided by your employer is usually not included in your income. However, benefits you receive from the plan may be taxable, depending on who paid for the coverage and what the benefits are for.
Fringe Benefits
Fringe benefits are extra benefits you get from your employer, such as a company car, free meals, or gym memberships. Most fringe benefits are included in your income unless a law says otherwise or you pay the fair market value for them. Even if you agree not to work for a competitor (a “covenant not to compete”), the IRS treats this as a service for tax purposes.
Group Term Life Insurance
If your employer provides group term life insurance, the cost of up to $50,000 in coverage is not included in your income. If the coverage is more than $50,000, the extra cost is included in your income and reported in Box 1 of your Form W-2. If your employer pays for whole life or permanent insurance, the premiums are included in your income.
Restricted Property and the 83(b) Election
Sometimes, employers give employees property (like stock) as part of their compensation. Usually, you don’t include the value of this property in your income until it is no longer restricted (for example, when you have worked enough years to keep it). However, you can choose to include the value in your income right away by making an 83(b) election. This is done by sending a letter to the IRS within 30 days of receiving the property.
Example:
Your employer gives you $50,000 in stock, but you must work five more years to keep it. You don’t report the stock as income until you finish the five years. If you make an 83(b) election, you report the $50,000 as income in the first year, and any increase in value after that is taxed at lower capital gains rates when you sell the stock.
Stock Options
If you receive a non-statutory stock option (also called a non-qualified stock option or NSO), the tax treatment depends on the fair market value of the option when you get it or when you use it. If the option has a clear value when granted, you include it as income right away. If not, you include it as income when you exercise the option or sell it.
If you receive a statutory stock option (also called an incentive stock option or ISO), you don’t have to report any income until you sell the stock. If you hold the stock for more than one year after exercising the option and more than two years after the option was granted, you get a lower tax rate on any gain.
Example:
Doug receives options to buy 1,000 shares of stock at $25 each when the stock is worth $5. He waits until the stock is worth $95, then buys the shares. He gets $70,000 in compensation (the difference between what he paid and the value of the stock), which is reported on his Form W-2.
Tip Income
All tips you receive are taxable and must be included in your gross income. This includes:
– Cash tips
– Charged tips paid by your employer
– Tips received through tip-splitting or tip-pooling
– Non-cash tips (like tickets or passes), based on their value
How to report tip income:
– Keep a daily record of your tips
– Report cash and charge tips to your employer by the 10th of the next month if you receive $20 or more in tips
– Report all tips on your tax return, even if you don’t report them to your employer
If you receive less than $20 in tips in a month, you don’t have to report them to your employer, but you still must include them on your tax return.
Example:
Ben works at a restaurant and earns $10,000 in wages and $7,000 in reported tips. He also earns $18 in tips in June, which he doesn’t report to his employer because it’s less than $20. On his tax return, Ben reports $17,018 as wages ($10,000 wages + $7,000 reported tips + $18 unreported tips).
Tip income is subject to Social Security and Medicare taxes. If you don’t report all your tips to your employer, you must use Form 4137 to figure out the taxes you owe on unreported tips.
If you don’t report your tips, you may face a penalty equal to 50% of the unpaid Social Security and Medicare taxes. You can avoid this penalty if you have a good reason for not reporting the tips and explain it to the IRS.
Real-World Implications for Immigrants and Non-Citizens
For immigrants and non-citizens, understanding these rules is important for staying in compliance with U.S. tax laws. Not reporting all your income can lead to penalties, interest, or even problems with your immigration status. Many immigration forms and processes ask about your tax history, so it’s important to keep accurate records and report all your earnings.
Key steps for compliance:
– Keep all pay stubs, forms, and records of income
– Report all income, including foreign income, unless excluded by law
– Use the correct forms (Form W-2, Form 1099-NEC, Schedule C, etc.)
– Pay any taxes owed on time
Where to Find More Information
For more details on what counts as income and how to report it, visit the IRS official page on taxable and nontaxable income.
As reported by VisaVerge.com, understanding the difference between employee and nonemployee compensation, and knowing which forms to use, can help immigrants and non-citizens avoid costly mistakes and stay on the right side of U.S. tax law.
Practical Takeaways
- Form W-2 is for employees; Form 1099-NEC is for independent contractors.
- All types of earnings, including tips, bonuses, and foreign income, must be included in your gross income unless a law says otherwise.
- Keep careful records and report all income to avoid penalties and protect your immigration status.
- Use the correct IRS forms and seek help if you’re unsure about your tax situation.
By following these guidelines, you can meet your tax obligations and avoid problems that could affect your future in the United States 🇺🇸.
Learn Today
Gross Income → Total money earned before taxes or deductions, including wages, tips, bonuses, and other compensation.
Form W-2 → Employer-issued form reporting annual wages, tips, and taxes withheld for employees.
Form 1099-NEC → Form reporting payments to independent contractors without tax withholding; contractors pay own taxes.
Self-Employment Tax → Tax paid by self-employed individuals covering Social Security and Medicare contributions.
83(b) Election → IRS election to include restricted property value in income immediately rather than upon restriction removal.
This Article in a Nutshell
Understanding U.S. wages and earnings is vital for immigrants. Correct reporting with Forms W-2 or 1099-NEC avoids penalties and ensures tax compliance under IRS rules.
— By VisaVerge.com
