The answer is almost always “yes” when someone asks a Registered Tax Return Preparer if money received is taxable. Payments to a person are usually income, which rarely escapes tax. The only amounts that are safely relied upon as nontaxable are gifts, loans, and returns of capital.
Gifts are a complicated matter in tax preparer jobs because they must embody a particular nature in order to qualify. That is, a gift is freely given out of generosity alone. Just because a payment is an unexpected surprise doesn’t mean that it represents a gift.
This is especially true of payments from an employer. For example, a bonus that is not anticipated and seems generous of the company is still a consequence of employment. Therefore, bonuses are taxable income. A loan from an employer is not taxable when granted, but it does add to income if the business later forgives repayment.
Awards from an employer are sometimes nontaxable if they are part of a program that follows specific rules learned during tax preparer training. Income tax is not assessed on awards for length of service or safety if all awards during the year average less than $400. Awards of less than $50 are omitted from calculating the average. Nontaxable employer awards must comply with an established written plan and not discriminate in favor of highly compensated employees.
Taxed bonuses and awards are added to an employee W-2. However, workers who operate as independent contractors face a different situation. These self-employed individuals should receive a Form 1099 for payment of bonuses and awards. A worker receiving an amount he considers a gift should receive a warning from someone with tax preparer certification. This precaution explains the fact that payments of money connected to a working relationship are always taxable income. Only a small gift of property is non-taxable. The normal IRS rule is that a small gifts must have less than $100 of value.
Refusing to complete a W-9 – with which an independent contractor provides a tax ID number to a payer – does not avert a requirement of the contractor to report income received. The payer of funds to the contractor may still issue a 1099 and mark “REFUSED” in the tax ID box. The paying company is supposed to obtain the W-9 in advance of payment. But the IRS penalty assessed on the business is of no concern to the tax preparer or the payment recipient. Instead, the tax preparer must simply assure that the tax return of the worker reports all income from working.
The key element from tax preparation courses about these cases is that payments received from a job are counted as taxable income. Consulting with a tax adviser is recommended before accepting any remuneration – even potential gifts.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.