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

  • How to Withhold on Supplemental Wages Using the Aggregate Method

    Type:
    How To

    Employees often receive supplemental wages, which are taxable and subject to income tax withholding, FICA, and FUTA. For employees who receive up to $1 million a year in supplemental wages, employers have several different withholding methods from which to choose. This How To shows employers how to withhold on supplemental wages under the aggregate method.

  • Same-Sex Marriages Permitted in Alabama: Employment Law Manual, Charts Updated

    Date:
    24 February 2015
    Type:
    Editor's Choice

    A federal district court ruled that Alabama's same-sex marriage ban is unconstitutional. Same-sex marriages may proceed while the state appeals.

  • Taxation of Employee Benefits: Alabama

    Type:
    Employment Law Manual

    In-depth review of the spectrum of Alabama employment law requirements HR must follow with respect to taxation of employee benefits.

  • Tax Treatment of Same-Sex Couple Benefits by State

    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.

  • IRS Releases Final Instructions to ACA Reporting Forms

    Date:
    12 February 2015
    Type:
    News

    The IRS has released the final instructions to Forms 1094-C and 1095-C and Forms 1094-B and 1095-B. Employers are required to complete and file the forms with the IRS to report on their employee health care coverage, as required by the Affordable Care Act (ACA) and Internal Revenue Code § 6055 and § 6056.

  • Payroll Sections of Employment Law Manual Updated for 2015

    Date:
    04 February 2015
    Type:
    Editor's Choice

    The Employment Law Manual has been fully updated for 2015 with all relevant employer guidance and legislative and regulatory changes affecting the following payroll sections: Withholding Taxes, Taxation of Employee Compensation, Taxation of Employee Benefits, Unemployment Insurance Tax, International Payroll Issues and Depositing and Reporting Withheld Taxes.

  • Taxation of Employee Compensation

    Type:
    Employment Law Manual

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

  • Taxation of Employee Benefits

    Type:
    Employment Law Manual

    Employee benefits, such as health insurance, sick pay, disability pay, workers' compensation insurance and retirement savings plans, may be subject to withholding for federal income taxes (FIT), Social Security and Medicare (FICA) taxes or federal unemployment (FUTA) taxes. This section helps HR professionals understand 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 Internal Revenue Code (IRC).

  • International Payroll Issues

    Type:
    Employment Law Manual

    In today's global economy many US employers send employees to work in foreign countries ("expatriates"), and/or hire individuals from other countries to come and work in the US ("aliens"). Employers of expatriates and nonresident aliens must follow a complicated set of laws and regulations in order ensure that the employees' compensation is properly taxed and to prevent double taxation on the same income (e.g., both in the US and in the foreign country). This section assists HR and payroll professionals understand the laws and regulations that must be complied with when employees are sent to work abroad or are brought from abroad to work in the US.

  • Sick Pay Reporting on New Form 8922 Clarified by IRS

    Date:
    23 January 2015
    Type:
    News

    The IRS has issued Notice 2015-6 to address several issues concerning the new Form 8922, Third-Party Sick Pay Recap, released last year.