Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 4

Wages, Salaries, and Other Earnings

Payments to employees for services rendered, such as wages, salaries, and commissions, are fully taxable. Fringe benefits, such as payments for vacation days and sick days, personal use of a company car, or gym memberships, are also taxable. However, many benefits are not taxable, such as employer-provided health insurance, qualified retirement plan contributions (although qualified retirement plan contributions may be taxable when withdrawn), and dependent care benefits.

Taxpayers who work in certain industries or receive non-regular wages, such as workers who earn tips, members of the clergy and the military, and U.S. citizens who live overseas and earn foreign income, are subject to specific rules.

Although an employer may pay a worker for services rendered, the worker may not be an employee but an independent contractor. Whether an employer–employee relationship exists depends on the facts and circumstances and the relationship between the two parties. Various factors are taken into account in determining this relationship.

Employee Compensation

“Employee compensation” generally refers to payments made by an employer to an employee for services rendered. The payments may be in the form of cash, property, or employer-paid benefits. Examples of different forms of employee compensation are described next.

TIP: The employee's Form ...