 |
|
QuickBooks and Year end Fringe Benefits
|
|
The tax guy wants
me to include the value for benefits in the owners
W2:
|
| |
| Are the
benefits subject to federal income tax, social security
taxes or state income taxes? |
| |
|
History |
|
Generally, the premiums paid for accident or health
insurance coverage are excluded from non-owner employee's
paychecks under Internal
Revenue Code Section 106.
This same code section excludes the employees contribution
through payroll deductions from taxation if the policy is
under a code section 125 cafeteria plan.
|
| |
| Health
insurance premiums paid by small businesses that are sole
proprietors, partnerships, or S Corps on behalf of the
owners, are NOT deductible by the business. Yet the
amount of the inclusion is generally fully
deductible on page 1 of the 1040 return under code section
162 (1).
S Corporation will get a deduction
"as wages" is permitted for the value of insurance
premiums included in the owners W2 see
Publication 15 (circular E p. 13).
Section 61(a) states the 2% or more shareholder is
required to include that the value of health insurance
benefits in gross income as wages of S Corporation
employees.
So including the health premiums/benefits in the W2, will
generate the same net income/loss that passes through to
the Shareholders personal 1040. Also, section 162(1)
allows for a full deduction of the the included premium in
wages, the net effect on the personal 1040 taxes is zero.
The whole process for most is an administrative pain in
the butt!
However, there is a possibility that the deduction will
not be allowed. If you fail to include the amounts
in the W2, the S Corp will not be allowed a deduction for
the premiums paid and taxable income will increase by the
disallowed premiums. No
deduction will be allowed on the 1040 unless it was
included in the W2.
When is the value included in the W2 not deductible on the
1040?
The deduction on the 1040 is not allowed to the extent
that the deduction exceeds earned income (code
section 401 (c)(2)) derived by the taxpayer from the trade
or business that is providing the medical coverage, and
also the deduction is not allowed for amounts during a
month in which the taxpayer is eligible to participate in
any subsidized health plan maintained by the spouse of the
taxpayer (section 162 (l)(2)(B). |
| |
| Normally,
the amounts are included in wages for income tax purposes
but are
NOT wages subject to Social
Security and Medicare taxes if the
requirements for exclusion under section
3121(a)(2)(B) are satisfied.
If indeed the requirements for exclusion were not met,
there would be an additional tax burden in the form of
Social Security and Medicare taxes to both the business
and the Shareholder/employee. We would all like
to be sure that the requirements for 3121(a)(2)(B) are
satisfied. |
| |
So, what
are their requirements for exclusion? Remember, we
already know that the premiums are included as federal
income taxable wages and we know for the most part a
deduction against these additional wages will be allowed.
We are determining if they are excluded from Social
Security taxes and that is the hard part.
Code section 3121 says the payments must be made under a
plan or system for employees and their dependents for a
Class or (classes of employees) and their dependents.
Where do we find a definition of what qualifies as a
Class of employee?
|
Nondiscrimination rules
applicable to self-insured health plans can
be found under code section 105(h) and to cafeteria plans
under code section 125. A good
overview of Section 105(h) can be
found here. Generally, it states that
the plan must be offered to 70% of employees
(excluding employees with under 3 years of service, under
age 25, part-time, collectively bargained, and nonresident
aliens), 80% must participate, or must be offered to
a "fair cross-section" of employees, under the same type
of rules applicable to qualified retirement plans.
|
| To this
day, there is an UNCLEAR definition of what is
"self-insurance". If you have paid an
insurance company premiums for coverage, haven't you
shifted the risk to them and therefore are not self
insured? This analysis is not supported through the
court cases, however, the rules on how to separate
the "insured" from the "non-insured plans" have never been
explained. |
| |
| With all
this ambiguity surrounding whether the premiums are
subject to Social Security taxes, and coupled with the
fact that no one has seen any IRS audits on discrimination
of health benefits, I will leave it up to you to make the
decision whether to subject these premiums to Social
Security taxes |
|
QuickBooks Payroll - Including S-Corp
Premiums in the W2
Create an
Addition payroll item:
1. Lists menu> Payroll Item List >Right Click and select
New payroll item
2. Select Custom Setup and click Next
3. Select Addition and click Next
4. In the Name used in paychecks and payroll reports
window, enter the name of the new payroll Addition item
("S-Corp In") > Next
5. For the Expense account, enter the account that
normally holds the gross wages for S-Corp owners (officer
compensation* ) >Next
6. In the Tax tracking type window, select S Corp Pd Med
Premium from the drop-down list > Next
7. Click next in the tax window, QuickBooks does a good
job of selecting the appropriate taxes.
8. In the Calculate based on quantity window, select
Neither > Next
9. In the Default rate and limit window, clear both fields
(they should be blank) and click Finish
Create a Deduction payroll item:
1. From the Lists menu > Payroll Item List > Right Click
and select New payroll item
2. In the Select setup method window, select Custom Setup
> Next
3. Select Deduction > Next
4. In the Name used in paychecks and payroll reports
window, enter the name of the new payroll Deduction item
("S-Corp Out") > Next
5. Skip the Agency liability field, in the Liability
account (employee-paid) Type S-Corp Health Reclassified>
click on the tab on your keyboard and add the new account
as an expense account and make it a sub-account of Health
Insurance Expense. > Next
6. In the Tax tracking type window, select None > Next
7. In the Taxes window, do not make any selections. > Next
8. In the Calculate based on quantity window, select
Neither > Next
9. In the Gross vs. net window, select net pay > Next
10. In the Default rate and limit window, clear both
fields (they should be blank) and click Finish
Create a paycheck for each S-Corp
owner that is covered by a company health insurance
policy.
Use S-Corp payroll items you just set up: This adjustment
can be made in a separate paycheck using unscheduled
payroll or in the next regular payroll
1. Click into the Review Paycheck
2. In the Other Payroll Items field, select the Addition
item created, S-Corp In, from the drop-down list, and then
enter the premiums paid for the year in the Rate column
3. On the next line in the Other Payroll Items field,
select the new Deduction item you created, S-Corp Out and
enter the same amount entered for the Addition item in the
Rate column. You will notice that this adjustment will
have a calculation for federal and state income tax
withholding taxes (that should be it, if there are other
taxes withheld, then the payroll item was not setup
properly) Change the federal and state income taxes
withheld to zero and discuss adding that same amount as
additional withholdings on the next regular paycheck.
There should be no other taxes deducted.
4. Once the Check Amount is zero, Click OK
* If you have all your payroll items pointing to payroll
expenses and payroll liabilities, call us for a QuickBooks
support session. We will quickly customize your
QuickBooks so that wages are posted into accounts for each
department (sales, admin, warehouse, officers) and more!
Remember, now is a good time to address including the
value of Fringe benefits provided by the employer in
the W2 too!
For a complete list see
http://www.irs.gov/pub/irs-pdf/p15b.pdf
Common fringe benefits reportable include
Taxable cost of group term life insurance over $50,000
Nontaxable sick pay
Employee personal use of a company vehicle
Employee discounts over certain limits
Meals
Bonuses
Awards
We have a payroll consulting service plan – call and find
out more! It really is comforting to a bookkeeper or
business owner to have someone to guide them through this
maize, the right set-up and training is worth both peace
of mind and avoidance of costly penalties.
|
|
Give us
a call 800-216-0763 to find out about all the support and training
programs we offer
in all
matters QuickBooks, Payroll and accounting.
|
|
|
|
|
|
|
| 777 |
