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Summary of Chapter 3 of Free Tax Course

Below is a summary of what you have learned in Chapter 3 of the Free Tax Course.

  • The total of all taxable compensation earned as an employee is entered on line 7 of the form 1040. Taxable employee compensation includes payment given in the form of:

     

    • bonuses,

       

    • awards,

       

    • strike benefits, and

       

    • severance pay in addition to salary and wages.

     

  • In general, the amount entered on line 7 is the amount from box 1 of form W-2 that your employer provides to you. If more than one form W-2 is received, add the amounts from box 1 of each Form W-2 and enter the total on line 7.

     

     

  • Tip income that was not reported to your employer or allocated tips from Form W-2, box 8, must be added to the amounts reported in box 1 and report the total on line 7 of 1040 form.

     

  • Other income that must be reported on line 7 includes:

     

    • scholarships and fellowships

       

    • household employee income not reported on form W-2

       

    • nonexcludable portion of certain fringe benefits such as dependent care benefits.

     

  • Deferred compensation is the part of pay received by an employee that is contributed to a qualified retirement arrangement set up by an employer. While this income is not subject to tax when contributions are made, it is subject to tax when plan contributions are withdrawn.

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