Taxation of Employee Benefits

expand

Federal

(Jump to state content for this section)

Original Author: Ryan F. Donovan

Updating Author: Alice Gilman

Summary

  • Most employers offer their employees several different types of benefits, such as health insurance, sick pay, disability pay, workers' compensation insurance and retirement savings plans. Employers offering these benefits need to know how each particular type of benefit plan must be structured and how to properly tax and report contributions, reimbursements and distributions in order to ensure compliance with the various rules and regulations of the Internal Revenue Code (IRC). See General Tax Considerations.
  • Contributions to pay for health insurance benefits are taxed differently when made by an employer and when made by an employee. Taxes that may apply include federal income taxes (FIT), Social Security and Medicare (FICA) taxes and federal unemployment insurance (FUTA) taxes. See Taxability of Contributions.
  • The Patient Protection and Affordable Care Act (PPACA), the massive federal health care overhaul legislation enacted in 2010, expanded health insurance coverage for adult dependent children, redefined medical care expenses, and imposed a new Form W-2, Wage and Tax Statement, reporting requirement on employers and had many other health care implications. See Health Care Reform Legislation.
  • In addition to health insurance, many employers offer various other types of health care related benefits to employees, such as Medical Savings Accounts (MSAs), long-term care insurance, health care continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), Health Flexible Spending Arrangements (FSAs), sick pay plans, permanent disability benefits and cafeteria plans. How each of these benefits work, when they can be offered, and their payroll tax and reporting implications varies among the benefit types. See Medical Savings Accounts (MSAs); Long-Term Care Insurance; COBRA Noncompliance Penalties; Health Reimbursement Arrangements (HRAs); Health Savings Accounts (HSAs); Health Flexible Spending Arrangements(FSAs), Sick Pay; Permanent Disability Benefits; Cafeteria Plans.
  • Workers' compensation benefits are provided to employees who suffer a work-related injury or illness. The amount of an employer's workers' compensation premiums is based on the employer's gross payroll and the type of business it engages in. Workers' compensation is mostly regulated by state law. Four states impose a workers' compensation payroll tax. See Workers' Compensation Benefits; Payroll > Federal Unemployment Insurance Tax > State Requirements.
  • Employers commonly offer employees various benefit plans that enable them to defer compensation to an investment vehicle in order to save for retirement. Some of the most prevalent types include qualified pension and profit sharing plans, IRC § 401(k) plans, Individual Retirement Accounts (IRAs), Simplified Employee Pensions (SEPs), Employee Stock Ownership Plans (ESOPs), and nonqualified retirement plans. Different payroll tax and reporting rules apply to each of these retirement plan types. See Retirement and Deferred Compensation Plans.

State Requirements

The following states have additional requirements for this topic under applicable state law.