How to Report Different Types of Employee Compensation on Your Tax Return

There are specific guidelines provided by IRS on which items are to be included in the employee's gross income. It is better to know them well.

Advance commissions - If you are receiving some money by way of commission for services to be performed in the future and if you'll maintain your records on cash basis, you have to include these amounts in the year in which you receive them. If you repay on core and commission in the year of their receipt, you can reduce the amount from your income. Back pay awards - If you are awarded money in a settlement or judgment for back pay, you need to include this in your income. This includes money received for damages and unpaid Life Insurance & health premiums. The amount should also be reported by your employer on your form W2. Bonuses and awards - If you receive these for outstanding work, they need to be included in your income. These include prizes and vacation trips for meeting goals. If you receive such awards in the form of goods or services, the fair market value of such goods or services has to be included in your income. However if the employer just promises you to pay a bonus, it is not included unless you receive it actually. Employee achievement award - If you receive personal property other than cash or a gift certificate, towards an award for length of service or safety achievement, you can exclude that amount from your income.  However if the amount exceeds $1600, you need to include it in your income. If a length of service award is given for less than five years of your service or if you receive it within five years of receiving the previous award, you need to include it in your income. Cost of living allowances - These are generally included in your income. Non-qualified deferred compensation plans - Your employer will report to you these amounts, which are not included in your income. However, if any time during the year the plan fails to meet the specified requirements, or it is non operational under those requirements, the amounts under that plan for the present tax year as well as the amounts received in all proceeding tax year is are included in your income of present tax year. Note received for services - If you receive a secured note towards the payment for your services, you have to include the fair market value of such note in the year in which you receive such note. However when you receive payments on that note at a later date, you need not include that in your income. Severance pay - This money and the money you receive for cancellation of your employment contract has to be included in your income. Accrued payment for leave - If you receive this type of payment when you resign or retire, it will be included as your income and will be shown on your form W2. Outplacement services - If you opt to accept less amount of severance pay in order to receive outplacement services, you have to include the unreduced amount of severance pay in your income. However in this situation you can deduct the value of such outplacement services as a miscellaneous deduction. This deduction is subject to normal two per cent of the AGI limit. Sick pay - If you receive pay when you are sick or receive any money from an insurance company where your employer pays for the plan, all this money needs to be included in your income. However if you have paid the premiums on such insurance policies, money received under such policies is not taxable. Social security and Medicare taxes paid by the employer - If your employer pays these amounts under an agreement with you, you have to report this money as your taxable income on your tax return. Stock appreciation rights - These rights granted by the employer are not included in your income until you actually exercise such right. When you exercise such right, you may receive a cash payment which is equal to be fair market value of the stock of the corporation on that date, less the fair market value on the date of the right. You have to include such cash payment in your income. Remember, these are normally the types of compensation employees receive. If you receive any other compensation than above, you need to talk to a tax consultant to find out its tax treatment.