Tax Consequences for Self-Employment and Employees

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Questions and Answers

Which of the following is NOT a requirement for an accountable reimbursement plan?

The plan must reimburse all employee expenses regardless of documentation. (correct)

Reimbursed expenses must be submitted within a reasonable period of time.

There must be a business connection to the employee's expenses.

Excess reimbursements must be returned to the employer in a timely manner.

When is an employee's excess reimbursement includable in gross income under an accountable plan?

When they provide proof of all appropriate expenses.

When they fail to return excess reimbursement. (correct)

When the reimbursement exceeds the federal mileage rate of 67 cents per mile.

When the employer pays for personal expenses.

Which of the following transportation expenses is NOT deductible for self-employed individuals?

Cost of driving to a work conference within the same city.

Cost of traveling to a temporary worksite.

Cost of going from one job to a second job.

Cost of commuting from home to a permanent work location. (correct)

For travel expenses to be deductible, which condition must be met?

The travel must be away from home and involve an overnight stay. Signup and view all the answers

Which educational expense qualifies for deduction?

Courses required to maintain and improve skills in the employee's current job. Signup and view all the answers

What form does an employee file to report income and taxes?

1040 Signup and view all the answers

Which of the following is a deductible business expense for self-employed individuals?

Any business expenses deducted FOR AGI Signup and view all the answers

Which condition allows an employee's meal to be considered excludable?

The meal is provided for a noncompensatory reason and on business premises Signup and view all the answers

If Joe receives a $500 insurance reimbursement, which statement is true?

He must include it as gross income in the current year if deducted in the previous year. Signup and view all the answers

Which of the following can be excluded from an employee's gross income?

Employer-paid health insurance premiums Signup and view all the answers

Under what condition can lodging be excluded from gross income?

If it is for the convenience of the employer and on business premises Signup and view all the answers

What is the status of unreimbursed business expenses for employees?

They are not deductible at all. Signup and view all the answers

What type of meal expenditure is NOT excludable?

A meal chosen and paid for by the employee Signup and view all the answers

Study Notes

Self-Employment Tax Consequences

Self-employed individuals file Schedule C and pay self-employment taxes.
Business expenses can be deducted for Adjusted Gross Income (AGI).

Employee Tax Consequences

Employees file IRS Form 1040.
Unreimbursed business expenses are non-deductible for employees.
Employers are responsible for withholding and paying Social Security and income tax.

Employee Exclusions

Workers' compensation is an exclusion.
Employer-paid health insurance premiums and relevant reimbursements are excluded.

Insurance Reimbursments

If Joe receives $500 in insurance reimbursement, it is fully deductible.
If Joe deducts a reimbursement in the prior year, it counts as gross income in the current year.
Other exclusions include reimbursements for serious injuries (e.g., loss of a limb) and premiums for sick pay paid by the employee.

Meal Exclusions

Meals provided for non-compensatory reasons, for the employer's convenience, and on business premises can be excluded.
Free meals are not excludable unless the employee meets specific criteria, such as being on standby duty or having limited time to eat.
Meals an employee chooses to buy are not excludable.

Lodging Exclusions

Lodging is excludable if on business premises, for employer convenience, and required for employment.
"No additional cost" lodging where the employer incurs no expense is also excludable.
Example: Ira stayed in a company apartment during his job search, which was not used during the buying season.

Additional Exclusions

Health Savings Accounts (HSAs) and benefits under cafeteria plans are excludable.
Group term life insurance coverage provided by the employer is also excluded unless specified otherwise.

Employee Business Expenses

Reimbursements for business expenses are excluded under an accountable plan meeting three criteria:
- Business connection to expenses.
- Submission of expenses within a reasonable time.
- Return of excess reimbursements promptly.
Noncompliance with these requirements makes reimbursement includable in gross income.

Special Rules for Accountable Plans

If an employee fails to show proof of expenses or return excess reimbursement, only the excess over actual costs is included in gross income.

Per Diem and Fixed Rate Reimbursement

Reimbursements up to the federal rate of 67 cents per mile are excludable, even if actual expenses are lower.

"Employee Business Expenses" for Self-Employed Individuals

Transportation expenses can be deducted if they meet the 67 cents per mile rate rule and relate to specific travel scenarios (e.g., between jobs, temporary worksites).
Deductible transport costs include tolls and parking fees.
Travel expenses are deductible if incurred while away from home and overnight, covering meals, lodging, and laundry.

Educational Expenses

Deductible only if they maintain or improve current skills or are required for job retention in the same field.

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Description

This quiz explores the tax implications for self-employed individuals and employees, including filing requirements and deductible expenses. Understand how different business and insurance reimbursements are treated in tax filings. Test your knowledge on meal exclusions and employee benefits regarding taxes.