This is part 2 of 3 from a webinar hosted a few weeks ago concerning tips and tricks for having an efficient, effective, and low-stress year-end payroll. The webinar is above, the transcript below.
Preparing Wage and Personnel Information For W-2s
The IRS requires employers to report an employee’s taxable wages and the amount of taxes withheld from those wages on the employee’s W-2. Many organizations provide employees with additional forms of compensation beyond the regular wages and overtime wages, which might include bonuses, commissions, sick pay and a variation of fringe benefits such as employer provided health insurance, tuition reimbursements, employer provided car, etc.
Sometimes, this can get complicated.
Even though the IRS guidelines state all forms of compensation must be included in the employee’s gross wages unless specifically excluded by the IRS, for some wages:
· Only a portion of the wages must be reported and taxed.
· Are excluded from federal tax but still taxable by social security and Medicare.
· Are not taxable but must show on the W-2 in box 12 with a special code.
If the IRS guidelines state the compensation is not excludable from wages, then it must show on the employee's W-2 in the year it was provided to the employee – same as all other wages. Some employers may forget to record some wage information prior to the end of the year and they will instead add it to next year’s wages. This isn’t accurate – you must make sure all wages and compensation are reported for an employee in the year they occurred.
The IRS’s Publication 15 along with Publication 15a and 15b outline the tax and reporting requirements for different types of compensation and fringe benefits. This is a great resource for organizations to reference when researching types of compensation and benefits.
Employee-Sponsored Health Insurance
This was one of the first ACA regulations instituted and it took effect in 2012. The ACA guidelines state that employers filing 250 or more W-2s for the previous calendar year are required to report the cost of coverage on the employee’s W-2.
What is required to show on the W-2 and how should it be reported?
The health insurance election amounts are generally nontaxable and thus the dollar amount an employee pays towards their health insurance does not need to show in boxes 1, 3, or 5 of the W-2 and the employer paid portion is also nontaxable.
However, the cost of employer sponsored medical coverage is to be reported in box 12 of the employee’s W-2 with a code DD whether it is taxable or not.
The amount that needs to show in box 12 with a code of DD is the total cost of employer provided medical coverage, including any premium costs the employer covers as well as any premium costs covered by the employee.
If you are required to report these amounts on the W-2, you will need to be sure the deduction your employees contributions are set up to be withheld from are set to show those amounts on the W-2s in that box 12. This may be a setting your payroll provider needs to set up, so contact them if you have any questions as to whether this is setup appropriately to show on the W-2s if necessary.
You will also need to be sure to track your employer paid portions of the coverage through payroll as well. This generally will mean a “memo” type deduction or tracking field needs to be setup through payroll and be sure that is set to show on the W-2 along with the employee paid portion. The memo type tracking fields can generally be setup to occur through payroll automatically which can occur on a per payroll, monthly, or quarterly basis.
Many organizations wait until the end of the year to check to see if they need to be reporting this on the W-2 and then when they realize they are required to do so, they have to hurry to get data into payroll prior to the end of the year. This can make year-end processing chaotic; it’s recommended to check how many W-2s an organization provided in the previous year right now so that if you are required to do so you can work on getting this tracked through payroll so it’s entered prior to the end of the year.
Keep in mind that the IRS may make this reportable for all employers in the future; be on alert for this topic in the news and double check what is required of your organization as the end of the year gets closer.
The IRS does state that the cost of accident and health insurance premiums paid on behalf of 2% shareholders of an S Corporation must show on the W-2 in box 1. If you are an S Corporation, then this will most likely apply to you. These premium amounts are not subject to FICA taxes though, so they are not included in box 3 or 5 of the W-2 but they should show in that box 1.
These amounts are generally provided to employers at year-end, so unlike some of the other items we are discussing today, these may be one of those items you have to wait to add to payroll in the last month of the year. Make sure you understand who you should get that data from and when you expect to receive it from so you can communicate with them and get it into payroll by the end of the year.
Health Savings Accounts
Many organizations offer employees a high deductible health insurance plan that also allows them to contribute funds to an HSA bank account with pre-tax dollars. These funds are then available to the employee to pay for eligible healthcare related costs, such as prescriptions.
HSA contributions are exempt from federal income tax withholding, so they won’t need to show in boxes 1, 3, or 5 of the W-2. However, even though the funds are not taxable, the HSA contributions (both employee and employer contributions) must be reported on an employee's W-2 in box 12 using code “W”.
Employees generally contribute to their HSA on a per payroll or monthly basis, but often times employers choose not to show the employer contributions until the end of the year. If your organization does contribute to an HSA account on behalf of your employees then we recommend setting this up through payroll to occur automatically which you may be able to set up on a per payroll, monthly, or quarterly basis just like we mentioned with the employer provided health care costs.
Group Term Life Insurance (GTL)
If you provide GTL insurance coverage in excess of $50,000 and you as an employer cover some or all of those costs, then the imputed cost of coverage does need to be reported on the employee's W-2. GTL can actually be dealt with before year-end because imputed costs for the GTL insurance in excess of $50,000 may actually be able to be calculated through payroll automatically and taxed throughout the entire year.
Calculating the Cost of Imputed Coverage
To find out what the cost of the imputed coverage is, the IRS has published what is called the "Premium Rate Table" which is used for figuring out the calculations. This premium rate table is found in that 15-B publication that I mentioned earlier and it walks you through exactly how to do those calculations.
To calculate the imputed costs you must know:
· The age of the employee as of the last day of the tax year.
· How much coverage in excess of $50,000 the employee has which you can round that to the nearest hundred dollars.
· If the employee covers any of that cost and how much they cover.
Once you have that imputed cost calculated, you need to input that into payroll and that amount is taxable by Social Security and Medicare tax. You can also withhold federal income tax on those wages but you aren't required to do so. But, then on the W-2 that will be required to be reported as wages in boxes 1, 3, 5 and also show in box 12 with a code of "T".
If your organization does provide GTLI in amounts of over $50,000 to any employee, make sure you:
1) Keep track of who those employees are.
2) Contact your payroll provider to set that up through payroll to occur automatically throughout the year.
Third-Party Sick Pay
Sick pay refers to wages paid to an employee under an insurance plan because of an employee’s temporary absence from work due to injury, sickness, or disability. Sick pay is required to be reported as wages for the employee in the year that it was paid to the employee.
Sick pay can be paid directly by:
· The employer.
· Through an employer’s agent.
· A third party provider.
The taxability of the wages depends upon who pays the sick pay, and what the agreement is between the employer and the provider if they go through a third party. It’s important to understand who is paying the sick pay, how the wages should be taxed, who is responsible for those taxes, who is making the tax payments, who will provide this information on the W-2, and how it should show on the W-2. We recommend verifying the requirements for showing this on the W-2 and verifying that everything is setup properly through payroll.
For employers who are required to report the wages on the employee’s W-2s because of an agreement with a third party provider, sometimes these employers do not receive the payment information from the third party sick pay provider prior to the last payroll of the year and so the employer incurs fees by having to have adjustments made after the new year to get that information onto the W-2s. Because of this, it’s important to know your sick pay policies and work with your provider to be sure you understand what is required of you as an employer. You will want to receive this information before the end of the year so it can be recorded within the appropriate year. Failing to do so will result in fees.
These were just a few of the types of compensation and benefits that we see around year-end, but there are plenty more so remember to reference the IRS Publication 15, 15a, and 15b for instructions on what is required for reporting and taxing of these types of compensation.Work to set up as much as possible through payroll now, so you don’t have all of this fall on your plate at year end.
It is also important to know who within your company is compensating employees. This is usually payroll and accounts payable, but there are other people who need to be recorded as well.
If accounts payable writes a check to an employee for missed wages.
If a manager provides an employee with a gift card as a thank you for the hard work.
All players need to know what should be recorded or at least know that these payments need to be communicated to payroll so they can record the wages as necessary and ensure they are taxed appropriately.
We created a spreadsheet as an example of a e a communication tool between accounts payable and payroll or managers to payroll. We recommend setting up a communication tool like this and ensure to communicate these payments on a per payroll, monthly or quarterly schedule.
This is the end of Part 2 of 3 for the webinar series concerning year-end processing. Look for Part 3 next week!