 Hello and welcome to this session in which we will discuss W2 wages, which is part of the gross income for individual taxpayers. The taxpayer might have many sources of income. Compensation for services provided in the US is one of the most common source of income. Simply put, that compensation is shown on W2 or what we call them W2 wages. Simply put, when you work for a company, you earn wages, the wages are shown on your W2. The compensation received by an employee for services provided are not limited to the amount of cash collected. The first thing we need to understand is, you might have an amount greater than the cash that you received in your bank account. Why? Because that could include bonuses, other economic benefit received in the course of employment. What could be those benefits? Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Well, yes, most employers pay you in cash. But some employers might give you a piece of property. For example, they might give you the vehicle of the, one of the vehicles of the company. Well, if they gave you this vehicle as a compensation, the fair value of that vehicle becomes part of your income. Also, rather than giving you the vehicle, they may sell it to you for less than its fair value. For example, if the vehicle is worth $15,000, that's the fair market value, they sold it to you for $10,000, you received a discount of $5,000. Well guess what? That discount is treated as compensation, therefore it's included as part of your compensation. Also services provided by the employer, if the services provide any service to you, free of charge, that's included in your W-2 wages. Also some taxable fringe benefits, we'll talk about fringe benefits later on, usually, usually most fringe benefits are tax-free, but some of them are. For example, one notable exception is the portion of life insurance premium for coverage and access of $50,000, and don't worry, we'll explain this later on. Also, any liabilities or expenses paid on your behalf, paid on your behalf by the employer. In other words, the employer paid for it, it becomes W wages for you. I'm not sure if you watch in the news these days, but one of the companies FDX is filing for a bankruptcy, they're in big trouble, and what they find out is the company was paying for homes for their employees. Well, if they paid for your home or help you put a down payment on your home, well that becomes W-2 wages, because companies don't give gifts. When you work for a company, the relationship between you and a company is not a friendly relationship. In other words, I'm not your friend, I am not going to give you a gift. There's no such thing as a gift between employee and employer. Usually, when you compensate an employee, you compensate that employee for their services. Therefore, it should be considered wages. Now, most wages are paid in cash, but again, that's not the only thing that you could pay employee. For example, I know some employers, what they do is they pay your rent. So they don't give you the money in W-2 wages, they help you with your rent or they pay your rent. Well, guess what? That's also considered wages. So as stated above, in cases of non-cash income, property or services is valued at fair value and included in your income. All wages received by employees should be reported on a form called W-2. I will show you one on the next slide. Employers are not required to provide W-2 of the total wages paid that not reach a certain threshold. For example, for 2022 and this could change 2023, 2024, 2025, the amount is 2,400. And again, the amount changes every year. This is what a W-2 would look like. The wages, tips and compensation are provided here, basically how much they pay you. Then they have, they provide you with how much they withheld federal income tax, how much wages of your total wages are subject to social security, how much of it is subject to Medicare taxes, how much social security is taken, how much Medicare taxes are taken as well. And basically, whatever you report here goes on line one on your form 1040. Again, this is year 2021. This could change, but usually line one in any particular year for the past two, three decades, it's on line one. Now, if you're looking at 2026, you might see, you should see wages and salaries on line one because it's the most common, the most common one. The wages, salaries and tips item appeared on line one is basically derived from form W-2. I'd include total wages received from employer in box one. It also include allocated tips in box eight. There's box eight here called allocated tips and what that is. Simply put, if you work in a restaurant, if you work in a casino, if you work in a place where tip is a major source of your income, the employer that's a separate recording, the employer will add what's called allocated tips. Simply put, they assume if you're generated this much sales, you should be receiving that much tips. So in case you did not report all the tips, the tips are allocated in box eight, that's part of your wages. Also, box 10, dependent care benefit, if they provide you with any dependent care benefit, that's also reported on line a box 10, box 10, and that's included. Employers paying wages are required to pay employment taxes, which include social security, Medicare and employment tax. Now, from the employer perspective, sorry, from your company's perspective, they match your social security, they match your Medicare, you don't pay for, you pay for this and they match it and they also pay unemployment tax and the unemployment tax could be state, not could be, it's a state as well as federal. But again, that's beyond the scope of what we need to know for the CPA enrolled agent exam or as an accounting student, just FYI. It's also important to differentiate between compensation received and recovery of capital invested. For example, when we talk about partners later on in a partnership, partners receive guaranteed payment as compensation for services provided to the partnership. Now, bear in mind, those are reported in gross income. However, sometime we have to determine if that compensation is a recovery of capital investment. If that's the case, it should not be included in income. The point I'm trying to make, not necessarily all cash paid to the partners here is taxable. Here partners means we are looking at a partnership situation. We would learn later on that some of that cash is considered return of capital. We'll discuss that later. Let's take a look at a simple example. As a result of meeting her sales target for the year, Jenny received two tickets at this concert from her boss. When received, the ticket has a face price of 250. So if you look at the ticket itself, it says you pay for it 250. However, they were sold on eBay for $320. If anybody wants to buy them, you have to pay 320. Determine the impact of this transaction on Jenny's gross income. What I'm asking you with Jenny report, any income, zero to 50 or 320. What are the rules? Well, you have to receive in your compensation anything that you received at fair value. What is the fair value? Well, the face value is 250. If you want to buy them, it's 320. Therefore, the ticket received is an example of a compensation, not a gift to her. Again, employers don't give gift to employees if it is, it should be very small, $20 to $25. They were received because she met her sales target. So notice here, it's a form of compensation. Therefore, it should be taxed at their fair value, not face value, not face value, which is fair value is 320. Group life insurance. Again, we talked about some fringe benefits are taxable. What are fringe benefits? Fringe benefits are benefit, some sort of a rewarding the employee, but those benefits are rewarding given services to employee that are not taxable. Some of those fringe benefits are taxable, life insurance premium, if it in excess of a certain number, 50,000, it's taxable. So if the employer part of your benefits is paying for life insurance premium, offered by an employer under a group long-term insurance policy is executed from the employee gross income for up to 50,000. So any premium they pay on your behalf, as long as the gross income from the policy is 50,000, you don't have to worry about this. Any premium paid that exceeds 50,000, what is premium? Just in case, I don't wanna skip over this. So when you buy insurance, you have to pay a certain amount every month, let's assume $100 in premium. What is the premium? It's the cost of the insurance. Now, the insurance policy would say, well, if you pay $100 every month and God forbid something happened to that employee, we pay their family $50,000. That's fine. As long as the payout does not exceed $50,000, if the employer paid this $100 per month, that $100 is not included. Now, bear in mind, once that amount, once the benefit exceeds 50,000, then it becomes taxable and we'll look at an example. The premium execution applies only to employees, not owners or partners. So if the employer, if the company is paying that life insurance on behalf of the owners or the partners, it's not excluded anymore. If owners or partners are paying a premium for the group life insurance on their behalf, the total premium is taxable to them. Now, because they are the owners of the company, then it's taxable to them. So let's see how do we deal with this life insurance example. So the IRS will have a table. Age of the employee as of the last day of the tax year, they would look at your age under 25, between 25 and 29 under your age, cost per 1,000 for protection for one month period. And this is again, provided by the IRS. And again, this could change. This is as effective as of June 30th, 1999, and it's still there. Now, in year three, SAM Corporation offered its employee a group life insurance policy with a coverage of 300,000. The fact that the coverage is 300,000, it means it's exceeding $50,000. During the year, Kenneth, who's a VP of the corporation with an age of 51 years, earned an annual salary of 320. Well, 51 falls into this category, 50 to 54. Determine if any of the amount of the premium that Kenneth should include in his income. Should he include any premium? And the answer is yes. Why? Because the payout is the payout. We don't care about their salary. The payout is 300,000. Well, the employer premium is excluded up to 50,000. What is the access? Well, if the up to 50,000, we have to take 300 minus 50. The access is 250. So here's what we do. We're gonna take the access, which is 250,000, multiplied by 0.23, the cost per 1,000 of protection for one month, which is 250, so simply put, it's 250 times 0.23 times how many months? Because this is the cost per month. We assume they were not told otherwise. It means for the whole year. It means the VP will include in their income an additional $690 in compensation. Why? Because the form of this payment is taxable. It's a fringe benefit, but it's way too much. They're allowed up to 50,000. And more than that, the employee will have to pay taxes on that premium. In other words, the premium is considered a form of compensation. And this is basically, in a nutshell, the compensation from W2, what you should be aware of. Now is this the only form of income? No, not at all. We have many forms of income that we're gonna be discussing, which is this is a list of them right here, but today we covered compensation for services provided. What should you do now? Go to Farhad Lectures and look at additional MCQs through false additional lectures. We have a lot to go for sources of income. I'm gonna tackle each one separately. The one that you need to be aware of, whether you are a CPA candidate, enrolled agent, or what's typically covered in a tax course. Good luck, everyone. Study hard, stay safe.