Business Income Tax - Chapter 15

employee

An individual who performs services for compensation and who works under the direction and control of an employer.

independent contractor

A self-employed individual who performs services for compensation and who retains control over the manner in which the services are performed.

expatriate

An individual who is a U.S. citizen and resides and works for an extended period in a foreign country.

foreign earned income exclusion

An annual amount of foreign source earned income on which expatriates are not required to pay federal income tax.

fringe benefits

Any economic benefit subject to valuation received by an employee as additional compensation

restricted stock

Corporate stock transferred as compensation to an employee that is either nontransferable or subject to a substantial risk of forfeiture.

stock option

The right to purchase corporate stock for a stated price (the strike price) for a given period of time.

bargain element

The excess of fair market value over cost of stock acquired on exercise of a stock option.

incentive stock option (ISO)

A qualified stock option for federal tax purposes. Individuals do not recognize the bargain element as income on the exercise of an ISO.

qualified retirement plans

Retirement plans that meet certain statutory requirements and that allow participants to save for retirement on a tax-deferred basis.

required minimum distribution (RMD)

The annual withdrawal an individual must make from a qualified retirement plan beginning no later than April 1 of the year following the year in which he/she reaches age 70½.

premature withdrawal

A withdrawal from a qualified retirement plan made before the individual reaches age 59½.

rollover contribution

A distribution from one qualified plan contributed to another qualified plan within 60 days.

employer-provided plan

A retirement plan sponsored and maintained by an employer for the benefit of the employees.

defined-benefit plan

A qualified plan under which participants are promised a targeted benefit, usually in the form of a pension, when they retire.

defined-contribution plan

A qualified plan under which an annual contribution is made to each participant’s retirement account.

profit-sharing plan

A defined-contribution plan under which an employer regularly contributes a percentage of current earnings to the employee’s retirement accounts.

employee stock ownership plan (ESOP)

A qualified defined contribution plan in which contributions are invested primarily in the corporate employer’s common stock.

Section 401(k) plan

A defined-contribution plan under which employees elect to contribute a portion of current year compensation to an employer-provided retirement plan.

deferred compensation

A nonqualified plan under which an employer promises to pay a portion of an employee’s current compensation in a future year.

Keogh plan

A qualified retirement plan for self-employed individuals.

SEP

A SEP is a retirement plan that allows an employer (sole proprietor, partnership, or corporation) to administer and contribute to a qualified plan for themself or their employees.

Simple IRA

A Simple IRA is a retirement plan established by a small business owner (typically less than 100 employees) on behalf of the businesses owner or employees.

traditional IRA

An investment account through which individuals with compensation or earned income can save for retirement on a tax-deferred basis.

Roth IRA

An investment account through which individuals with compensation or earned income can save for retirement on a tax-exempt basis.

rollover IRA

An IRA created to receive a distribution from another qualified retirement plan.