Anatomy of a Tax Return: 1040 Series Part 3
The time has come! We made it to the numbers part of the tax return. I know you are excited, but you need to calm down. We have lots to do.
Today we need to discuss Line 1 of your tax return: Wages, salaries, tips, etc.
For most returns, this is the easiest number. You just grab your W2 and copy the amount in Box 1
Easy, right? Box 1 goes to Line 1.
If you have more than one job in the year, add those guys up and throw the total on Line 1 of your 1040. If your spouse is employed, add those W2s in there as well.
Great news! If all you have is a regular 9 to 5 job, your return is almost done! Just a little math and one more number to put in.
Have a great week everybody! Come back for Line 2 next week!
No, its never that simple. There are some other things that might also go on Line 1 that are less common, but I still see them.
Let's look a little closer at that Box 1 on the W2:
See how it says wages, tips and other compensation?
Tips are taxable income. They are taxable income EVEN IF YOU GET CASH!! I know...its hard to hear.
In the past, there have been some unscrupulous characters who took cash tips as part of their every-day hard work and didn't report it as income. Since they were cash, they reasoned, the IRS couldn't track them and had no way of knowing how much they got in tips. And, they monologue as they twirl their long thin mustaches, if the IRS can't track it, they must not need to pay tax on it.
Unfortunately for tipped employees, this conniving villain has already been caught and defeated in courts by the IRS. These days, tipped employees are required to report their tips on a daily tip log to their employers so the business can properly withhold and pay in the social security and medicare taxes, as well as federal income tax on that tip income.
Restaurants have fought against this and lost and had to fork up the missing social security and medicare taxes on the tips that were not reported. The IRS used average tip rates based on credit card receipts to estimate the underreported tips. So don't expect to get away with not reporting your tips to your employers or secret away those wet dollar bills left on the table.
If you do get away with some tips not reported on your W2, just know that the law says those are taxable income, and you should include them on Line 1 of your 1040, along with your other wages.
But how, you ask, will the IRS know? ...well...they have ways, but they may not know. But you will know. And those tips will be thump thump thumping under your floorboards until you report them
You've added up your tips and your wages and you are excited to jot that number onto your form.
But wait, there's more!
There are a few other items that might get reported on Line 1 of your return.
These include statutory employee wages and disability payments received before retirement age.
Statutory employees are a topic for another day, but the general idea is that there are some employers who would prefer to pretend their employees are independent contractors in order to shift the burden of social security and medicare taxes to their employees. There are various factors that can be used to determine whether that 1099 independent contractor income should really be wage income. If it turns out you are that kind of employee, there are some issues to consider, but those wages would go on Line 1 of the 1040.
Disability payments reported to you on Form 1099 would also go on Line 1 of the 1040 if they are received before you reach retirement age. The theory is that those are payments intended to substitute for or supplement wages that you might have earned if you were not disabled, and so they are reported on Line 1 as if you had received wages.
So get out your calculator, or even better, your excel file, and add up those wages. Throw that nice sum on Line 1 and get ready to move on to more exciting things next week.
Like...Line 2. Line 2 has a and b. (Teaser!)