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 answered some of the questions regarding the taxation and administration of employee benefit plans that were raised by the recent Supreme Court decision in United States v. Windsor, 2013 U.S. LEXIS 4921 (2013), by issuing Revenue Ruling 2013-17. It provides that same-sex couples who are legally married in jurisdictions that recognize same-sex marriage (i.e., the "state of celebration") will be treated as married for all federal tax purposes as of September 16, 2013, regardless of whether they live in a jurisdiction that recognizes same-sex marriage.

Author: Rena Pirsos, JD, Legal Editor

Latest items in Taxing Benefits

  • Same-Sex Spouse Treatment Under Retirement Plans: New Guidance Requires Employer Action

    Date:
    14 April 2014
    Type:
    News

    The IRS issued Notice 2014-19 and related Frequently Asked Questions providing guidance on how qualified retirement plans should treat same-sex spouses following the Supreme Court's decision in United States v. Windsor. Employers must take action to ensure that plan documents and operations conform to requirements.

  • Taxation of Employee Compensation

    Type:
    Employment Law Manual

    Employees' salary and fringe benefits are subject to federal income taxes, Social Security and Medicare taxes, and federal unemployment insurance tax. However, certain cash and noncash fringe benefits may be offered to employees on a tax-free basis, while an otherwise tax-free fringe benefit becomes taxable compensation to employees if employers do not meet the rules for that particular fringe benefit .This section assists HR professionals in determining which fringe benefits (e.g., company car, health benefits) and other compensation (e.g., bonuses, awards) are taxable or not.

  • Taxation of Benefits Provided to Same-Sex Couples: Federal Guidance and 18 New State Sections Now Available

    Date:
    10 March 2014
    Type:
    Editor's Choice

    Eighteen states have been added to the Taxation of Benefits section of the Employment Law Manual and existing states have been updated to reflect the current status of the taxation of health insurance benefits provided by an employer to an employee's same-sex spouse, civil union partner or domestic partner in all states that impose an income tax.

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

    Type:
    Quick Reference

    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.

  • Taxation of Employee Benefits: Oklahoma

    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 Oklahoma.

  • Taxation of Employee Benefits: North Carolina

    Type:
    Employment Law Manual

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

  • Taxation of Employee Benefits: New Mexico

    Type:
    Employment Law Manual

    The value of health insurance benefits provided to an employee's same-sex spouse and/or their dependents is not taxable in New Mexico. The law regarding same-sex civil unions and domestic partnerships is not yet settled.

  • Taxation of Employee Benefits: Missouri

    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 Missouri.

  • Taxation of Employee Benefits: Louisiana

    Type:
    Employment Law Manual

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

  • Taxation of Employee Benefits: Idaho

    Type:
    Employment Law Manual

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