Chapter 5 of IRS Publication 17 explains what counts as pay for your work and which employer-provided extras you may leave out of income, from fringe benefits and retirement plan contributions to special groups and sickness benefits. It touches Form W-2 (boxes 1, 12 and 14), Forms 8919, 8839 and 8853, Schedules H and SE, and Form 1040 lines 1a to 1h. It runs on printed pages 47 to 54 of the 2025 edition (the last topics spill onto page 54); the 2023 and 2024 editions have the same chapter. Pub 17 handles tips in chapters 4 and 8, so we gather the pointers here. It sits after chapter 4 and before chapter 6 on interest. These are unofficial study notes in our own words; the IRS publication controls.
Key terms
| Term | Meaning |
|---|---|
| Elective deferral | Pay you divert into a retirement plan instead of receiving it |
| Designated Roth contribution | An elective deferral taxed now so qualified withdrawals can be tax free later |
| Catch-up contribution | Extra deferral allowed from age 50 |
| Substantial risk of forfeiture | A real chance of losing a benefit unless you keep working or meet a condition |
| Qualified tips | Cash tips in an IRS-listed tipped occupation, eligible for the new deduction |
| Minimum retirement age | The age you could first draw a pension if not disabled |
Pay and miscellaneous compensation
- Include pay for services on Form 1040 line 1a even without a W-2. An employer need not issue one for household work paid below a cash-wage threshold with no income tax withheld: $2,600 (2023), $2,700 (2024), $2,800 (2025), $3,000 (2026 planning figure).
- If an employer did not withhold social security and Medicare tax and you were not a contractor, use Form 8919. Childcare providers and babysitters who are not employees are self-employed (Schedule C).
- Cash-method taxpayers include advance commissions when received. Repaying them in the same year reduces income; repaying later gives an itemized deduction or a credit.
- Back pay, severance, accrued leave payouts, bonuses and awards are income. A bare promise of a future bonus is not, until paid or made available.
- Differential wage payments (employer top-up during active duty over 30 days) are wages with income tax withholding but no FICA or federal unemployment (FUTA) tax.
- Nonqualified deferred compensation: W-2 box 12 code Y shows deferrals, which are not income; code Z flags a failed plan, and the amount is also in box 1.
Fringe benefits
Fringe benefits are pay unless you pay fair value or a law excludes them. The employer may report on a calendar-year basis or treat the last two months' benefits as paid the next year. Taxable benefits go in W-2 box 1 and boxes 3 and 5.
| Benefit | Rule and reporting |
|---|---|
| Employer health coverage, health reimbursement arrangement | Excluded; long-term care coverage through a flexible spending arrangement is included |
| Health flexible spending arrangement (FSA) | Salary reductions and reimbursements excluded, up to a yearly cap |
| HSA | Employer contributions excluded; yours are deductible without itemizing |
| Archer MSA | Employer contributions excluded; W-2 box 12 code R; Form 8853 |
| Adoption assistance | Excluded up to a yearly limit; box 12 code T; Form 8839 Part III |
| De minimis | Cafeteria discounts, cab fare home after overtime, picnics; a holiday turkey yes, cash no |
| Educational assistance | Up to $5,250 |
| Commuting | Commuter van (six or more adult seats), transit pass, parking at work or a commuting stop, never at home; separate monthly caps |
| Achievement awards | Length-of-service (five or more years) or safety items; not managers or professionals for safety awards |
Group-term life: taxable cost = (coverage - $50,000) / $1,000 x the Table 5-1 monthly rate x months, less what you paid. Entire cost excluded if you are permanently and totally disabled and no longer working, the employer or a charity is the only beneficiary, or a grandfathered pre-1984 plan applies. Entire cost taxed for coverage from a qualified trust or a plan favoring key employees. Former-employee excess shows in box 12 code C, with codes M and N for uncollected tax (Schedule 2, line 13).
Retirement plan contributions
- Employer contributions to a qualified plan are not income when made. Nonqualified plan contributions are wages when made, unless your interest is nontransferable or at substantial risk of forfeiture.
- Elective deferrals (401(k), Thrift Savings Plan, SARSEP, SIMPLE, 403(b), 501(c)(18)(D), 457) skip income tax but are FICA wages. Roth deferrals are taxed now.
- One overall limit covers 401(k), TSP, SARSEP and 403(b) deferrals together. SIMPLE and 457 have their own caps, and 501(c)(18)(D) is the lesser of $7,000 or 25% of pay. You must watch the total; an excess is income that year unless Roth.
- Catch-up deferrals start at age 50 by year-end.
Stock options and restricted property: nonstatutory options usually create income at receipt, exercise or sale; statutory options none until the stock is sold. Restricted stock is taxed when it vests, unless you elect earlier (see stock options and RSUs).
Tips and the 2025 to 2028 deductions
- Tips are pay, on the same line as wages. No tax comes out of the tips themselves (chapter 4, page 39).
- Tips of $20 or more in a month go to your employer by the 10th of the next month (Pub 505 (2026)). Unreported tips go on Form 1040 line 1c; Form 4137 figures their FICA tax.
- Pub 17 (2025) points to the qualified tips deduction on pages 1, 39 and 77 (overtime on pages 1, 39 and 76): up to $25,000, reduced by $100 per $1,000 of modified adjusted gross income (MAGI) over $150,000 ($300,000 joint). It needs a valid Social Security number, a joint return if married, and a listed occupation. It is claimed on Schedule 1-A, not by leaving tips out of wages.
- For 2025 the W-2 and 1099 forms were not redesigned and employers got penalty relief, so Schedule 1-A line 4a draws qualified tips from W-2 box 7, with Form 4137 on line 4b.
- For 2026 (planning), the W-2 shows qualified tips in box 12 code TP and the occupation code in box 14b; qualified overtime is code TT.
Special groups and sickness benefits
| Topic | Rule |
|---|---|
| Clergy | Offerings and fees are income; a housing allowance or home's rental value is excluded from income tax (up to reasonable pay) but counts for self-employment tax |
| Religious orders | Pay turned over under a vow of poverty is excluded only when you work as the order's agent |
| Foreign employer | A U.S. citizen includes the pay; staff of foreign governments and international organizations owe self-employment tax, not employee FICA |
| Military and volunteers | Pay is wages, retirement pay is a pension, VA benefits are untaxed; Peace Corps living allowances are exempt, VISTA meal and lodging allowances are not; volunteer firefighters exclude up to $50 a month |
| Employer-paid sickness plan | Benefits taxable; if you paid all premiums, not taxable |
| Disability pension | Line 1h until minimum retirement age, then lines 5a and 5b; military disability is excluded in four situations |
| Long-term care contracts | Benefits excluded up to a daily cap; Form 8853 |
| Workers' compensation | Tax free, but not retirement benefits based on age or service |
By tax year: 2023, 2024, 2025 and 2026
| Item | 2023 | 2024 | 2025 | 2026 planning figure |
|---|---|---|---|---|
| Commuter or transit, per month | $300 | $315 | $325 | $340 |
| Parking, per month | $300 | $315 | $325 | $340 |
| Health FSA salary reduction | $3,050 | $3,200 | $3,300 | $3,400 |
| Dependent care assistance | $5,000 | $5,000 | $5,000 | $7,500 |
| Adoption exclusion | $15,950 | $16,810 | $17,280 | $17,670 |
| HSA, self-only / family | $3,850 / $7,750 | $4,150 / $8,300 | $4,300 / $8,550 | $4,400 / $8,750 |
| Long-term care per diem | $420 | $410 | $420 | $430 |
| Retirement item | 2023 | 2024 | 2025 | 2026 planning figure |
|---|---|---|---|---|
| 401(k), 403(b), TSP, 457 deferral | $22,500 | $23,000 | $23,500 | $24,500 |
| Catch-up, age 50 or older | $7,500 | $7,500 | $7,500 | $8,000 |
| Catch-up, ages 60 to 63 | none | none | $11,250 | $11,250 |
| Maximum, age 50 or older | $30,000 | $30,500 | $31,000 | $32,500 |
| Maximum, ages 60 to 63 | none | none | $34,750 | $35,750 |
| SIMPLE deferral | $15,500 | $16,000 | $16,500 | $17,000 |
| SIMPLE catch-up, age 50 or older (ages 60 to 63 in brackets) | $3,500 | $3,500 | $3,500 ($5,250) | $4,000 ($5,250) |
| Roth catch-up wage test | none | none | none | prior-year wages over $150,000 |
2026 column: planning figures from Rev. Proc. 2025-32, Notice 2025-67, Pub 15-B (2026) and the 2025 law; Pub 17 (2026) is not yet published. Unchanged in all years: $5,250 educational assistance, $50,000 group-term life, $1,600 and $400 awards, Table 5-1 rates. Pub 17 (2025) page 47 prints $37,750 for ages 60 to 63, but $23,500 plus the $11,250 catch-up is $34,750, which we use. The Roth test was delayed administratively through 2025; for 2026 it looks at 2025 wages from the plan sponsor, and IRS guidance says final rules generally start in 2027 with good-faith compliance allowed in 2026.
What changed:
- 2023 to 2025: only the dollar limits above; 2025 added the age 60 to 63 catch-up.
- 2026: higher limits, a $7,500 dependent care cap ($3,750 if married filing separately) for taxable years beginning after December 31, 2025 (the cap was $5,000, or $2,500 if married filing separately, for 2023 to 2025), employer student loan payments counted permanently toward the $5,250 exclusion, and W-2 codes TP and TT.
Worked examples
Example 1 (tax year 2025): group-term life
Sofia, 47 on December 31, has $90,000 of employer-paid group-term coverage all year and pays nothing. Excess = $90,000 - $50,000 = $40,000, or 40.0 thousands. The 45 to 49 rate is $0.15, so 40.0 x $0.15 = $6.00 a month. 12 x $6.00 = $72.00 is added to wages and shown in box 12 code C.
Example 2 (tax year 2025): tips deduction
Jordan and Priya file jointly. Priya's qualified tips are $30,000 and MAGI is $320,500. Schedule 1-A line 7 is the smaller of $30,000 or $25,000, which is $25,000. Line 10 is $320,500 - $300,000 = $20,500; divided by $1,000 and rounded down gives 20; times $100 is $2,000. Deduction = $25,000 - $2,000 = $23,000.
Example 3 (2026 planning): the deferral limit
Ravi turns 61 in 2026 and had $160,000 of 2025 wages from his plan sponsor. His limit is $24,500 + $11,250 = $35,750. Because the 2025 wages exceeded $150,000, the catch-up part must be Roth under the new rule (plans may use a good-faith approach in 2026), so at most $24,500 can be pre-tax.
Common mistakes and exam traps
- Treating pre-tax deferrals as exempt from FICA tax.
- Using Pub 17 (2025)'s printed $37,750 for ages 60 to 63 instead of $34,750.
- Counting cash or gift cards as achievement awards or de minimis gifts.
- Believing "no tax on tips" removes FICA, covers non-cash tips, or applies to any occupation.
- Reporting a disability pension on line 1h after minimum retirement age.
Forms and lines map
| Form and line | What goes there |
|---|---|
| Form 1040 line 1a | Wages from W-2 box 1, with or without a W-2 |
| Lines 1b, 1c | Household wages not on a W-2; tips not reported to the employer |
| Lines 1e, 1f, 1g | Dependent care benefits (Form 2441); adoption benefits (Form 8839); Form 8919 wages |
| Line 1h; lines 5a, 5b | Disability pension before minimum retirement age; pensions and military retirement |
| W-2 box 12 | C, M, N group-term life; R Archer MSA; T adoption; Y, Z deferred pay; 2026 TP, TT; box 14b occupation code |
| Schedule 1-A Part II (lines 4 to 13) | Tips deduction; total on line 38, then Form 1040 line 13b (2025) |
| Forms 8839, 8853, 8919; Schedules H, SE | Adoption, Archer MSA and care contracts, uncollected tax, household employer, clergy housing |
The 2026 draft moves the Schedule 1-A total to line 44 and Form 1040 line 13a; drafts can change.
Check yourself
1. (2025) Age 38, $65,000 of employer-paid group-term cover all year, no premiums paid. What is added to wages?
Answer: $16.20. 15.0 thousands x $0.09 = $1.35 a month; times 12.
2. (2024) What is the maximum 401(k) deferral for someone aged 52?
Answer: $30,500: $23,000 plus the $7,500 catch-up.
3. (2025) What is the maximum for someone aged 61?
Answer: $34,750 ($23,500 plus $11,250), not Pub 17's printed $37,750.
4. (2023) A worker gets a $300 gift card for a safety record. Excluded?
Answer: No. Cash equivalents never qualify as achievement awards.
5. (2025) A single filer has qualified tips of $26,000 and MAGI of $175,500. What is the deduction?
Answer: $22,500. The cap is $25,000; $25,500 over $150,000 rounds down to 25, times $100 is $2,500.
6. (2026 planning) Which W-2 box 12 codes report qualified tips and overtime?
Answer: TP for tips and TT for overtime; the tipped occupation code is in box 14b.
7. (2025) Employer provides $340 a month of transit passes all year. How much is taxable?
Answer: $15 a month, $180 a year, because the 2025 cap is $325.
8. (2025) A disability retiree is under minimum retirement age. Where is the pension reported?
Answer: Form 1040 line 1h; lines 5a and 5b apply from the day after minimum retirement age.
9. (2024) What is the daily long-term care per diem exclusion?
Answer: $410 for 2024.
Frequently asked questions
Are my 401(k) contributions subject to social security and Medicare tax?
Yes. Pre-tax deferrals avoid income tax now but remain FICA wages.
Do I report tips I never told my employer about?
Yes. All tips are income: use Form 1040 line 1c, and Form 4137 for the FICA tax.
Is workers' compensation taxable?
Generally no, if paid under a workers' compensation law. Retirement benefits based on age, service or contributions are different.
A CPA can review a return with you, including W-2 codes and deferral limits, so each benefit is treated the way the rules intend.
Official sources
- IRS Publication 17 (2025), chapter 5
- IRS Publication 17 (2024), chapter 5
- IRS Publication 17 (2023), chapter 5
- IRS: Publication 15-B (2026), Employer's Tax Guide to Fringe Benefits
- IRS: Publication 505 (2026), Tax Withholding and Estimated Tax
- IRS: Notice 2025-67, 2026 retirement plan limits
- IRS: Rev. Proc. 2025-32, 2026 inflation adjustments
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.