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 While this income is not subject to tax when contributions are made, it is subject to tax when plan contributions are withdrawn.