Other Taxes
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Other Taxes
Introduction
This lesson covers the Other Taxes reported on the return. You will determine if taxpayers owe additional
taxes, which can decrease a refund or increase a balance due.
Objectives
At the end of this lesson, using your resource materials, you will be able to:
• Identify the dierent types of other taxes on a return
• Determine if a taxpayer is liable for other taxes that are within scope of
the VITA/TCE programs
• Determine how to report these additional taxes on the tax return and
complete the applicable forms or schedules
What do I need?
□ Form 13614-C
□ Publication 4012
□ Publication 17
Optional:
□ Publication 1244
□ Form 1040 Instructions
□ Form 4137
□ Form 5329 and Instructions
□ Form 5405 and Instructions
□ Form W-2
□ Schedule SE
What are other taxes?
“Other taxes” are dierent from the income tax from the tax tables or
gured using the Tax Computation Worksheet. They include, but are not limited to:
• Self-employment tax
• Social Security and Medicare taxes on tip income
• Additional taxes on IRAs and other qualied retirement plans
• Repayment of rst-time homebuyer credit
These amounts are usually calculated on their own form or schedule and entered on Form 1040, Schedule 2.
The taxes are added after the nonrefundable credits are calculated; the nonrefundable credits do not
reduce the other taxes.
Household employment taxes are also included in Other Taxes. However, this topic is beyond the scope
of the VITA/TCE programs. Taxpayers who must le household employment taxes should be referred to a
professional tax preparer.
Two additional taxes may apply to taxpayers with higher income. These are the additional Medicare tax
on wages (Form 8959, Additional Medicare Tax) and the net investment income tax (Form 8960, Net
Investment Income Tax Individuals, Estates, and Trusts). Taxpayers with income levels large enough to
incur these taxes should be referred to a paid professional preparer.
Social Security and Medicare taxes on tip income is covered under the Advanced course. Self-employment
tax, additional tax on IRAs and other qualied retirement plans, and repayment of rst-time homebuyer credit are
Advanced-level topics. If an issue related to an Advanced-level topic arises at a volunteer site, be sure that a volun-
teer with required certication provides assistance.
Refer to the Premium Tax Credit lesson contained in this publication for information on the repayment of the
advanced premium tax credit.
Other Taxes
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What is self-employment tax?
Self-employment (SE) tax is Social Security and Medicare taxes collected primarily from individuals who
work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most
wage earners except a self-employed individual pays both the employee part and what would be the
employer part. Payments of SE tax contribute to the taxpayer’s coverage under the Social Security system.
Social Security coverage provides the taxpayer with retirement, disability, survivor, and hospital insurance
(Medicare) benets.
Who must pay self-employment tax?
SE tax must be paid if either of the following applies:
• The taxpayer had income as a church employee of $108.28 or more.
• The taxpayer receives net earnings from self-employment income in the amount of $400 or more
(excluding church employee income).
The VITA/TCE programs’ scope includes Schedule C, with limits.
Generally, taxpayers who are independent contractors or sole proprietors must le Schedule C and
Schedule SE. Since taxes are not withheld from independent contractors’ pay, it is the taxpayer’s
responsibility to pay income and SE tax. Taxpayers should make quarterly estimated tax payments during
the year to pay these taxes.
The Social Security Administration uses the information from Schedule SE to gure a person’s benets under
the social security program. Not reporting all of a taxpayer’s self-employment income could cause their social security
benets to be lower when they retire.
This tax applies no matter how old the taxpayer is and even if they are already getting social security or Medicare
benets.
Self-employed taxpayers who receive tips should include the tips in gross receipts on Schedule C.
How do I gure and report this tax?
Net Prot from Business was covered in an earlier lesson. When assisting a taxpayer with self-employment
income, rst complete Schedule C. Schedule SE is used to calculate the self-employment tax. The
deductible part of the self-employment tax is reected as an adjustment to income on Form 1040, Schedule
1. The adjustment to income is similar to the benet that employers receive when they deduct their share of
the Social Security and Medicare taxes as payroll taxes.
Self-employment tax is Social Security and Medicare taxes collected primarily from individuals who work for
themselves, similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.
The self-employment tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).
Tax Software Hint: The software automatically transfers the appropriate information from Schedule
C to Schedule SE and calculates the self-employment tax and the adjustment for the deductible part of the
self-employment tax.
Other Taxes
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Partial tax deferral for certain Schedule SE lers
Self-employed individuals may have deferred the employer portion of the Social Security tax on self-
employment income earned from March 27, 2020 through December 31, 2020. Half of the deferred
Social Security tax is due by December 31, 2021, and the remainder is due by December 31, 2022. Refer
taxpayers who have questions regarding payment of deferred tax to https://www.irs.gov/newsroom/
how-self-employed-individuals-and-household-employers-repay-deferred-social-security-tax
Who does not pay self-employment tax?
Some professions do not have a requirement to pay the self-employment tax:
• Notaries public are not subject to the self-employment tax by law. Be sure to identify notaries on the
input forms.
• Statutory employees have Social Security and Medicare tax withheld and do not have to pay the self-
employment tax even though they report their income and expenses on Schedule C.
Tax Software Hint: Enter the net prot from a notary’s business on the SE Tax input screen so that
SE tax is not computed.
What about taxes on unreported tip income?
All tip income is subject to federal income tax. However, tips of less than $20 per month that are not
reported to the employer are not subject to Social Security and Medicare taxes.
Individuals who receive $20 or more per month in tips from any one job must report their tip income to
their employer. The employer reports these tips as part of the wages on Form W-2, Box 1. The employer
withholds Social Security and Medicare taxes and federal income tax on that income.
What about allocated tips?
An employer may “allocate” tips to an employee if the employee worked in a restaurant, cocktail lounge, or
similar business and reported tips that were less than the employee’s share of 8% of food and drink sales.
If the employer allocates tips to employees, the amount is reported on Form W-2, Box 8, and included in
income on Form 1040. Social Security and Medicare taxes are not withheld on allocated tips. The employee
pays the Social Security and Medicare taxes by completing Form 4137, Social Security and Medicare Tax
on Unreported Tip Income.
If the employee can show, using Publication 1244, Employee’s Daily Record of Tips and Report to
Employer, or some similar daily tip record, that the actual tips received are dierent from the allocated
amount, then the actual amount is reported on Form 1040. The actual tips received are also reported on
Form 4137 to calculate Social Security and Medicare taxes.
What about tips that the employee did not report to the employer?
If the employee received $20 or more in unreported cash and charge tips in any month from any job, the
employee must report that income on Form 1040 and pay the Social Security and Medicare taxes on that
income. But, if the employee received less than $20 in tips in any month from any job, they are not required
to report them to the employer. However, these amounts do need to be included on Form 1040. They will
not be subject to Social Security or Medicare taxes and you will need to indicate that on Form 4137.
Other Taxes
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EXERCISES
Answers follow the lesson summary.
Question 1: Nancy had a summer job at a coee hut. She made $18 in tips in May, $755 in June, $600
in July, and $45 in August. Until a co-worker told her, she didn’t realize she had to report her tips to their
employer. She then reported $1,000 in tips to her boss.
What amount of tips will Nancy have to add to her Form 1040 as wages?
A. $1,418
B. $1,000
C. $418
D. $18
Question 2: What amount of unreported tips does Nancy have to pay Social Security and Medicare
taxes on when she les her tax return?
A. $1,418
B. $400
C. $45
D. $18
example
Carla waits tables at a café. Her employer reports all tips that customers add to their credit card tabs,
but she leaves it up to Carla to keep track of her cash tips. Carla receives more than $20 per month in
cash tips. Carla keeps a record but, because she doesn’t report her cash tips to her employer, they are
not included on her Form W-2. Carla includes the unreported tips as income on Form 1040. Carla also
uses Form 4137 to calculate and pay the Social Security and Medicare taxes on those tips.
Tax Software Hint: See Volunteer Resource Guide, Tab D, Income, for instructions on reporting tip
income. The software calculates Social Security and Medicare taxes on the tips based on your entries on
the W-2 input and Form 4137 input. The software will also add unreported tips to Form 1040 as wages.
How do I gure and report these taxes?
As part of your interview, explain to taxpayers that sometimes people do not realize they owe taxes on tips they
do not report to their employer. Also explain the taxes paid on those tips actually boost the taxpayer’s future Social
Security benets.
To gure the tax, determine if during any month the taxpayer received $20 or more in tips that were not
reported to the employer. Unreported tips are entered on the W-2 screen.
Other Taxes
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What about taxes on IRAs and other qualied retirement plans?
Traditional IRAs and other qualied plans allow individuals to defer paying taxes on contributions and
earnings until the funds are distributed.
If the rules for contributions and distributions are not followed, additional taxes may be due. For example,
the taxpayer must pay income tax plus an additional tax if any of the following apply:
• A distribution is taken before the individual reaches the age of 59½, is not rolled over into another quali-
ed plan or IRA, and no exception applies
• Minimum distributions are not withdrawn when required (out of scope)
• Excess contributions are not withdrawn by the due date of the return including extensions (out of scope)
If the taxpayer is under the age of 59½, earnings on excess contributions withdrawn by the due date of the
return are early distributions and subject to the 10% additional tax. Refer to the Adjustments to Income lesson for
more information.
The additional tax for each situation is outlined on Form 5329, Additional Taxes on Qualied Plans
(Including IRAs) and Other Tax-Favored Accounts.
Only Part I of Form 5329 is in scope. This part provides for the exceptions to the additional tax on part or
all of the early distributions from IRAs or qualied pension plans. The other parts of Form 5329 are out of
scope; refer taxpayers with these issues to a professional tax preparer.
Some exceptions apply only to IRA distributions, some apply only to distributions from a qualied retirement
plan, and some exceptions apply to both IRA and retirement plan distributions. Refer to the Volunteer Resource
Guide, Tab H for the list of exceptions.
Refer to the intake and interview sheet, Part III – Income, for the question regarding retirement income or
payments from pensions, annuities, and/or IRA. If yes is checked, review any Form 1099-R that reports
these payments to determine if the taxpayer is subject to the additional tax or qualies for an exception.
If Form 1099-R correctly shows code 1 in Box 7 indicating an early distribution, the additional tax applies
unless the taxpayer qualies for an exception. In some circumstances, Form 5329 is not required. Tax
software does this automatically based on entries on Form 1099-R.
Early distribution in case of birth or adoption of child
An IRA owner or a participant in a workplace-dened contribution plan, such as a 401(k) or 403(b) plan, can
withdraw up to $5,000 for the birth or adoption of a child without incurring the usual 10% additional tax on
early distributions. The distribution must be made within one year after the child is born or the adoption is
nalized and cannot be from a dened benet plan. Any time after receiving the distribution, the IRA owner
or plan participant may generally recontribute any portion of the distribution as a rollover contribution to an
eligible retirement plan, including an IRA.
Early distribution exception for public safety employees
Qualied public safety employees who receive distributions from a governmental dened benet pension
plan aren’t subject to the additional tax on early distributions. Qualied public safety employees include
those who provide police protection, reghting services, or emergency medical services for a state or
municipality, and who separated from service in or after the year they attained age 50.
Other Taxes
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The denition of qualied public safety employees also includes federal law enforcement ocers, federal
customs and border protection ocers, federal reghters, air trac controllers, nuclear materials couriers,
members of the United States Capitol Police or Supreme Court Police, and diplomatic security special
agents of the Department of State.
How do you complete Form 5329, Part I?
If an exception to the additional tax on early distributions applies, Form 5329, Part I, must be completed.
Refer to the Volunteer Resource Guide, Tab H for the software entries and exception codes.
When the early distribution is from a SEP IRA and it is made within two years from when participation in the
plan began, the addition to tax is computed using a rate of 25% instead of 10%. Such a distribution is designated by
Code S in Box 7 of Form 1099-R.
Do not reduce medical expenses or education expenses eligible for a deduction or credit for the amounts used
to reduce the addition to tax on an early distribution. This is not a double dip situation and is allowable.
What about repayment of the rst-time homebuyer credit?
Certain situations may require the rst-time homebuyer credit to be repaid and reported on Form 1040,
Schedule 2. Review the Life Events section of the intake and interview sheet to determine if the taxpayer
claimed the 2008 homebuyer credit and must pay back a portion of the credit each year.
If the taxpayer received the rst-time homebuyer credit for a home purchased in 2008, generally they must
repay the credit over a 15-year period in 15 equal installments. The repayment period began in 2010.
However, if the home ceases to be the taxpayer’s main home before the 15-year period is up, the taxpayer
must repay all remaining annual installments.
The home ceases to be the main home if the taxpayer sells the home; converts the entire home to business
or rental property; the home is destroyed, condemned, or disposed of under threat of condemnation; or the
lender forecloses on the mortgage. There are certain exceptions to the repayment rule. See the general
instructions for Form 5405 for details.
example
Laura is 41 years old and received an early distribution from her 401(k) account. The volunteer
determines that Laura paid for unreimbursed qualied medical expenses in excess of 7.5% of her AGI,
which is more than the amount of her distribution. In this case Form 5329, Part I, would be completed.
Laura would not have to pay the additional tax on this distribution. If Laura is itemizing deductions, she
can claim the whole amount of her medical expenses even though she used the expenses to reduce
the additional tax.
example
John is 39 years old and received Form 1099-R with code 1 in Box 7. John has qualied education
expenses that he paid during the year, which are on the list of exceptions. He can reduce the amount
of the early distribution that is subject to the additional tax by the amount of qualied education
expenses. Note that John can also use the qualied education expenses for another education
benet if he meets those requirements. See the Education Credits lesson.
Other Taxes
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If the taxpayer dies, they do not have to repay the balance of the credit.
Special rules apply for taxpayers who led a joint return for 2008 and claimed the rst-time homebuyer credit. If the
home is transferred to a spouse (or ex-spouse as part of a divorce), the spouse receiving the home is responsible
for repaying the credit, unless an exception applies. Or if one of the spouses dies, their half of the remaining credit is
forgiven and does not need to be paid back.
The credit is repaid by including it as additional tax on the return for the year the home ceases to be the
taxpayer’s main home. If the taxpayer is required to repay the credit, it is calculated on Form 5405 and
reported on Form 1040, Schedule 2. Certain taxpayers who are repaying an installment of the credit
claimed for homes purchased in 2008 are not required to le Form 5405. See Form 5405 Instructions for
more information.
Summary
This lesson explained how to report Other Taxes on the return. Other taxes are not calculated using the
income tax tables or the Tax Computation Worksheet. They include:
• Self-employment tax
• Social Security and Medicare taxes on unreported tip income
• Additional taxes on IRAs and other qualied retirement plans
• Repayment of rst-time homebuyer credit
What situations are out of scope for the VITA/TCE programs?
The following are out of scope for this lesson. While this list may not be all inclusive, it is provided for your
awareness only.
• Employment taxes for household employees
• IRA minimum distributions not withdrawn when required
• Excess contributions to an IRA that are not withdrawn by the due date of the return including extensions
• Distributions or excess contributions shown on parts II through IX of Form 5329 (only Part I is in scope)
• Distribution from an ABLE account that exceeds the qualied disability expenses
• Individuals subject to the additional Medicare tax on Form 8959
• Individuals subject to the net investment income tax on Form 8960
EXERCISE ANSWERS
Answer 1: C. Nancy’s combined tips for May, June, July, and August were $1,418, and she reported
only $1,000 to her employer. She needs to add $418 as wages on her tax return.
Answer 2: B. Nancy does not have to pay Social Security and Medicare taxes on the tips she received
in May, because they amounted to less than $20 for the month.
TAX LAW APPLICATION
To gain a better understanding of the tax law, complete the practice return(s) for your course of study
using the Practice Lab on L<.
Other Taxes
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Notes
