Your client emails a final pay stub, four 1099s, and a $128 state refund check. Before any number hits Form 1040, you need to know which receipt is taxable, which form feeds which line, and which 1099 the client should correct before signing.
W-2 box 1 lands on line 1a. Everything an employer pays for services is wages unless a Code section excludes it: salary, hourly pay, commissions, bonuses, severance, back pay, vacation cash-out, jury duty kept by the employer, and the taxable portion of fringes.
Tips are wages. Cash tips of $20 or more in a month must be reported in writing to the employer by the 10th of the next month. Unreported tips go on Form 4137 with the employee Social Security and Medicare share owed.
Fringe benefits are taxable at fair market value (FMV) unless excluded. Common exclusions: qualified health coverage, qualified transportation ($325/month for 2025), de minimis, working-condition, no-additional-cost services, qualified employee discounts, and qualified educational assistance up to $5,250.
Common mistakes
- Treating a personal Venmo 1099-K as taxable. Report gross on line 8z, offset on line 24z with a reconciliation note.
- Reporting muni interest as fully invisible. It is federal-exempt but enters MAGI for SS taxability, IRMAA, and the premium tax credit.
- Claiming qualified rates on stock held 60 days or fewer in the 121-day window. The cutoff is more than 60, not "60 or more."
Bottom line
- Wages from W-2 box 1 flow to Form 1040 line 1a; tips, bonuses, severance, and fringes are wages unless statutorily excluded
- Schedule B is required when interest OR dividends exceed $1,500, or when there is a foreign account (which triggers Part III regardless of amount)
- Treasury interest is state-tax-exempt; muni interest is federal-tax-exempt but enters MAGI for Social Security taxability, IRMAA, and the premium tax credit
- Qualified dividends need a U.S. or qualified-foreign payer plus more than 60 days held inside the 121-day window straddling ex-dividend; rates 0 / 15 / 20%
Exam shortcut
See "state refund" on the intake? Ask one question: did the client itemize last year? If standard, the refund is not income. Stop. See "qualified dividend" with a short holding period? Count days inside the 121-day window starting 60 days before ex-date. Less than 61 days held inside means ordinary. See 1099-NEC? It is Schedule C plus Schedule SE.
The full lesson (about 2,067 words, 14 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
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