You can receive income in the form of money, property, or
services. This section discusses many kinds of income that are taxable or
nontaxable. It includes discussions on employee wages and fringe benefits, and
income from bartering, partnerships, S corporations, and royalties. The
information on this page should not be construed as all-inclusive. Other steps
may be appropriate for your specific type of business.
Generally, an amount included in your income is taxable
unless it is specifically exempted by law. Income that is taxable must be
reported on your return and is subject to tax. Income that is nontaxable may
have to be shown on your tax return but is not taxable. A list is available in Publication
525, Taxable and Nontaxable Income.
Constructively-received income. You are generally
taxed on income that is available to you, regardless of whether it is actually
in your possession.
A valid check that you received or that was made
available to you before the end of the tax year is considered income constructively
received in that year, even if you do not cash the check or deposit it to
your account until the next year. For example, if the postal service
tries to deliver a check to you on the last day of the tax year but you are not
at home to receive it, you must include the amount in your income for that tax
year. If the check was mailed so that it could not possibly reach you
until after the end of the tax year, and you could not otherwise get the funds
before the end of the year, you include the amount in your income for the next
year.
Assignment of income. Income received by an
agent for you is income you constructively received in the year the agent
received it. If you agree by contract that a third party is to receive
income for you, you must include the amount in your income when the party
receives it.
Example. You and your
employer agree that part of your salary is to be paid directly to your former
spouse. You must include that amount in your income when your former
spouse receives it.
Prepaid income. Prepaid income, such as
compensation for future services, is generally included in your income in the
year you receive it. However, if you use an accrual method of accounting,
you can defer prepaid income you receive for services to be performed before
the end of the next tax year. In this case, you include the payment in
your income as you earn it by performing the services.
Employee Compensation
Generally, you must include in gross income everything
you receive in payment for personal services. In addition to wages,
salaries, commissions, fees, and tips, this includes other forms of
compensation such as fringe benefits and stock options.
You should receive a Form W-2, Wage and Tax Statement,
from your employer showing the pay you received for your services.
Childcare providers. If you provide child
care, either in the child's home or in your home or other place of business,
the pay you receive must be included in your income. If you are not an
employee, you are probably self-employed and must include payments for your
services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule
C-EZ (Form 1040), Net Profit From Business. You generally are not an
employee unless you are subject to the will and control of the person who employs
you as to what you are to do and how you are to do it.
Babysitting. If you babysit for relatives or
neighborhood children, whether on a regular basis or only periodically, the
rules for childcare providers apply to you.
Fringe Benefits
Fringe benefits you receive in connection with the
performance of your services are included in your income as compensation unless
you pay fair market value for them or they are specifically excluded by
law. Abstaining from the performance of services (for example, under a covenant
not to compete) is treated as the performance of services for purposes of these
rules.
Recipient of fringe benefit. You are the
recipient of a fringe benefit if you perform the services for which the fringe
benefit is provided. You are considered to be the recipient even if it is
given to another person, such as a member of your family. An example is a
car your employer gives to your spouse for services you perform. The car
is considered to have been provided to you and not your spouse.
You do not have to be an employee of the provider to be a
recipient of a fringe benefit. If you are a partner, director, or
independent contractor, you can also be the recipient of a fringe
benefit.
Business and Investment Income
Rents from personal property. If you rent out
personal property, such as equipment or vehicles, how you report your income
and expenses is generally determined by:
Whether or not the rental activity is a business, and
Whether or not the rental activity is conducted for
profit.
Generally, if your primary purpose is income or profit
and you are involved in the rental activity with continuity and regularity,
your rental activity is a business. See Publication
535, Business Expenses, for details on deducting expenses for both
business and not-for-profit activities.
Partnership Income
A partnership generally is not a taxable entity. The
income, gains, losses, deductions, and credits of a partnership are passed
through to the partners based on each partner's distributive share of these
items. For more information, refer to Publication
541.
Partner's distributive share. Your
distributive share of partnership income, gains, losses, deductions, or credits
generally is based on the partnership agreement. You must report your
distributive share of these items on your return whether or not they actually
are distributed to you. However, your distributive share of the partnership
losses is limited to the adjusted basis of your partnership interest at the end
of the partnership year in which the losses took place.
Partnership return. Although a partnership
generally pays no tax, it must file an information return on Form 1065, U.S.
Return of Partnership Income. This shows the result of the partnership's
operations for its tax year and the items that must be passed through to the
partners.
S Corporation Income
In general, an S corporation does not pay tax on its
income. Instead, the income, losses, deductions, and credits of the corporation
are passed through to the shareholders based on each shareholder's pro rata
share. You must report your share of these items on your return. Generally, the
items passed through to you will increase or decrease the basis of your S
corporation stock as appropriate.
S corporation return. An S corporation must
file a return on Form 1120S, U.S. Income Tax Return for an S Corporation. This
shows the results of the corporation's operations for its tax year and the
items of income, losses, deductions, or credits that affect the shareholders'
individual income tax returns. For additional information, see the Instructions
for Form 1120S.
Royalties
Royalties from copyrights, patents, and oil, gas and
mineral properties are taxable as ordinary income.
You generally report royalties in Part I of Schedule E
(Form 1040), Supplemental Income and Loss. However, if you hold an
operating oil, gas, or mineral interest or are in business as a self-employed
writer, inventor, artist, etc., report your income and expenses on Schedule C
or Schedule C-EZ.
For additional information, refer to Publication
525, Taxable and Nontaxable Income.
Bartering
Bartering is an exchange of property or services. You
must include in your income, at the time received, the fair market value of
property or services you receive in bartering. For additional information,
Refer to Tax Topic 420 - Bartering Income and Barter Exchanges.
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.
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.
