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 have an effect on the taxation of employee benefits:

  • 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.
  • Health care coverage reporting forms - Employers are required to complete and file with the IRS Forms 1094-C and 1095-C, and Forms 1094-B and 1095-B, to report on their employee health care coverage, as required by the Affordable Care Act and IRC § 6055 and § 6056.
  • Taxation of benefits provided to same-sex spouses - The IRS issued final regulations on September 2, 2016, that define the term "spouse" in a gender-neutral manner under federal law for purposes of employer-provided health and retirement benefits and payroll taxes. The regulations follow up on two Supreme Court decisions that have recognized same-sex marriage at the federal and state levels since 2013

Author: Rena Pirsos, JD, Legal Editor

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HR guidance on the taxation of employee benefits.