When, as part of your compensation, your employer grants you a stock appreciation right, you should not include it in your income until you actually exercise the right. At the time you exercise the right, you will be entitled to a cash payment equal to the fair market value of the corporation’s stock on that date, minus the fair market value of the stock on the date the right was granted. This cash payment will then be included in your taxable income at that time.
Advance Commissions
Advance commissions and other payments for services to be performed in the future are reported for tax purposes when you receive them, if you are on the cash basis. If you later have to repay any of the commissions or other advance payments in the same year, you would reduce the amount you report as income. If you make a repayment in a subsequent tax year, you may be able to claim the repayment as a miscellaneous itemized deduction. Repayments of up to $3,000 are miscellaneous deductions subject to the 2% of adjusted-gross-income limit (line 22 of Schedule A). If the amount of the repayment is over $3,000, you can deduct the excess as a miscellaneous deduction not subject to the 2% of adjusted-gross-income limit (line 27 of Schedule A), or you can claim a tax credit. The credit would be the decrease in your tax for the year you reported the income, had you calculated your tax excluding the income.
Back-Pay
Amounts you are awarded for a settlement or judgment for back pay must be included in your employee compensation in the year you receive them. These amounts should be included in your W-2 and in addition to back pay, they include damages, unpaid life insurance premiums and unpaid health insurance premiums.
Foreign Employer
If you are a U.S. citizen or resident, you have to report income from all sources, including foreign employers, unless the income is exempt by U.S. law. If you work outside the U.S. for a U.S. employer, you should receive a W-2. But if you work for a foreign employer and do not receive a W-2, you still need to include that compensation in the wages, salaries, tips, etc. line of your tax return. If you reside outside the U.S., you may be able to exclude your foreign earned income up to a certain maximum amount. You can exclude income earned outside the U.S. by filing Form 2555 – Foreign Earned Income, or the simplified Form 2555-EZ, Foreign Earned Income Exclusion, if you qualify.
Severance Pay
Severance pay, or any lump-sum payment to terminate your employment contract, is taxable and must be included in your income in the year you receive it.
Outplacement Services
If you accept a reduced amount of severance pay so that you can receive outplacement services, you must include the unreduced amount of severance pay in your income. The value of the outplacement services can be deducted as a miscellaneous deduction (subject to the 2% limit) on Schedule A.
Childcare and Babysitting
If you provide childcare or babysitting services, either in the child’s home, your own home, or in a place of business, the pay you receive is taxable compensation. If you are not an employee, you are probably self-employed and would have to report your income on Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business. You may also be subject to self-employment tax if you had net earnings of $400 or more for the year. In this case, you would also have to file Schedule SE, Self-Employment Tax.