Overview: 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!
Author: Rena Pirsos, JD, Legal Editor
Some states that require employers to withhold income taxes from employees' wages tie their definitions of "wages" to the federal Internal Revenue Code (IRC). However, many states update their IRC references to a specific date every year or so, while others roll their references into the current version of the IRC. Even with IRC conformity, some states have important exceptions. This Quick Reference Chart summarizes each state's IRC conformity reference.
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.
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.
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.
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.
The value of health insurance benefits provided to an employee's same-sex spouse or partner and/or their dependents is taxable in Oklahoma.
The value of health insurance benefits provided to an employee's same-sex spouse or partner and their dependents is taxable in North Carolina.
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.
The value of health insurance benefits provided to an employee's same-sex spouse or partner and/or their dependents is taxable in Missouri.
The value of health insurance benefits provided to an employee's same-sex spouse or partner and their dependents is taxable in Louisiana.
HR guidance on the taxation of employee benefits.