HR Support on Taxing Benefits

Editor's Note: Health care reform law and same-sex marriage issues affect payroll.

Rena PirsosOverview: Most employers offer several different types of employee benefits, such as health insurance, sick pay, disability pay, workers' compensation insurance and retirement savings plans. Whether employer and employee contributions and benefit payments received by employees are subject to withholding for certain payroll taxes, such as federal income tax (FIT), Social Security and Medicare (FICA) taxes or federal unemployment (FUTA) tax, varies among benefit types.

Trends: The following important issues will affect the taxation of employee benefits in 2014!

  • Form W-2 reporting of health insurance costs - Regarding Forms W-2, Wage and Tax Statement, that employers are required to provide to employees every January, if an employer provides group health care coverage that is not taxable to employees, it must report the aggregate cost of certain types of coverage on the employees' Forms W-2 to inform them of coverage costs.
  • Additional Medicare tax on high earners - An additional 0.9 percent Medicare tax (AMT) rate applies to single employees who earn more than $200,000 and to married couples who file joint tax returns and earn more than $250,000. For high earners, the total Medicare tax rate is 2.35 percent. For all other employees, the rate is 1.45 percent. The IRS issued final regulations, which apply starting January 1, 2014, governing the implementation of the AMT. The final regulations detail an employer's withholding obligation, and how it should treat repayment by an employee of wage payments received in a prior year for AMT purposes (e.g., sign-on bonuses paid to employees that are subject to repayment if certain conditions are not satisfied).
  • Health flexible spending account (FSA) rules relaxed - The IRS issued a new rule that modifies the "use it or lose it" rule for health FSAs and provides clarification regarding transition relief available for non-calendar year salary reductions. The change to the long-standing "use it or lose it" rule took effect October 31, 2013.
  • Taxation of benefits provided to same-sex spouses - The IRS has issued Notice 2014-1, which further clarifies the various effects of the US Supreme Court's decision in US v. Windsor and IRS Revenue Ruling 2013-17, regarding same-sex marriage, on cafeteria plans, including flexible spending arrangements and health savings accounts. The Notice was issued in question and answer (Q&A) format and provides detailed examples of each scenario covered by the Q&As.

Author: Rena Pirsos, JD, Legal Editor

Latest items in Taxing Benefits

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    Date:
    17 September 2014
    Type:
    Editor's Choice

    The 7th Circuit Court of Appeals upheld recent lower court decisions invalidating Indiana's and Wisconsin's laws banning same-sex marriage.

  • Taxation of Employee Benefits: Indiana

    Type:
    Employment Law Manual

    The value of health insurance benefits provided to an employee's same-sex spouse or partner and/or their dependents is taxable in Indiana.

  • Federal and State Tax Treatment of Same-Sex Couple Benefits - Chart

    Type:
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    Despite the DOMA decision handed down by the Supreme Court in Windsor, state laws still vary greatly regarding both the recognition of same-sex marriage and the taxation of benefits provided to an employee's same-sex spouse by an employer. This Quick Reference Chart summarizes federal and state law regarding whether same-sex marriages, civil unions and/or domestic partnerships are recognized, and whether the value of benefits provided by an employer to an employee's same-sex spouse or civil union or domestic partner is taxable. This chart will be updated when any changes in these laws occur.

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    Type:
    Employment Law Manual

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    Date:
    13 August 2014
    Type:
    Editor's Choice

    Courts in Colorado, Indiana and Virginia have held that state laws banning same-sex marriage are unconstitutional. However, each decision has been stayed and same-sex couples in these states currently cannot get married.

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    Type:
    Employment Law Manual

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  • Truncated Taxpayer ID Number Regulations Finalized: Employment Law Manual Updated

    Date:
    08 August 2014
    Type:
    Editor's Choice

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  • Same-Sex Marriage

    Date:
    02 July 2014
    Type:
    Editor's Choice

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    Date:
    04 June 2014
    Type:
    Editor's Choice

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    Date:
    29 May 2014
    Type:
    Editor's Choice

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