Payroll pretax benefits affect on W-2 and Form 941

[Loraine]

We provide medical and dental benefits for our employees under a Section 125 Cafeteria Benefits plan. We have set up our payroll so that the taxes are being correctly calculated on the after-deductions wages (the SS/Medicare wages) and paychecks are correct.

When we ran a test on the Form 941 Quarterly Tax Return and on the W-2’s, the wages did not get reported correctly.
· Form 941 Line 2 contained SS/Medicare wages. This should be Gross wages.
· Form 941 Line 5a and 5c correctly contained SS/Medicare wages.
· W-2 Box 1 contained SS/Medicare wages. This should be Gross wages.
· W-2 Box 3 and Box 5 correctly contained SS/Medicare wages.
Could we be missing something in our setup that is causing this to work incorrectly? We are on Version 11.

Thank you for your help.
Loraine

[Loraine]

Is there anyone that can help me with this problem?

We expected that we would be able to use Power Church to generate our Form 941 Quarterly Report for filing with the IRS. Unfortunately, it is not working correctly with pretax benefits. Do we have to manually complete the report? Will we have to manually complete W-2's at the end of the year since these have the same problem as Form 941?

Thank you, to anyone who can help with this.

Loraine

[NeilZ]

Is there anyone that can help me with this problem?

We expected that we would be able to use Power Church to generate our Form 941 Quarterly Report for filing with the IRS. Unfortunately, it is not working correctly with pretax benefits. Do we have to manually complete the report? Will we have to manually complete W-2's at the end of the year since these have the same problem as Form 941?

Thank you, to anyone who can help with this.

Loraine

Did you setup the deductions as Pretax??

This would be when you added the deduction via the Maintain Item Descriptions module. The first question is Type of Item this would be Other Deduction. Then on the full dialog screen where you would enter the item number, description, etc. You would select the Tax Option of [/b]Pre-Tax Deduction[/b].

The system should understand that this is deducted before Income Tax, but not deducted from the SS/Medicare amount.

[Jeff]

If it is marked as pre-tax, it is pre-tax for all taxes so it would reduce the wages for social security, mediacare, federal withholding, etc.

Selecting retirment will make reduce the federal and state wages, but not social security & medicare wages.

You can select the "More options" settings and specify which wages this pre-tax deduction reduces. It will carry forward to the right places on the W2s and 941 when you do.

Are you sure that your medical and dental benefits are subject to social security & medicare? My understanding was they are not. I just looked at IRS pub 15b (http://www.irs.gov/pub/irs-pdf/p15b.pdf) top of page 5 says that accident and health benefits are exempt from income, social security and medicare taxes.

[Loraine]

My assumption has been that pre-tax medical and dental deductions ONLY affect the employee's salary amount when calculating SS and Medicare taxes. Based on this, I further assumed that the employee's total unadjusted gross salary was subject to Income Taxes and therefore this total unadjusted gross salary would be reported on the employee's W-2 in Box 1. Is my assumption correct?

Thanks,
Loraine

[Jeff]

I would talk with the group that help you setup your cafeteria plan because they would be most familiar with your plan and the tax consequences of it.

Box 1 on the W2 would show the amount of income subject to Federal Withholding. If you have a deduction that can be taken before the federal tax is caclulated (pre-tax in PCPLUS terms) this would reduce the amount of income subject to federal income tax. This would reduce the amount reported in Box 1 of the W2 and line 2 of the 941.

Some deductions are only pre-tax for certain taxes. Retirement deductions typically reduce the income subject to federal and state income tax, but do not reduce the amount subject social security and medicare taxes. So a retirement deduction reduces the amount shown in Box 1 of the W2, but does not reduce income shown in box 2 (Social Security Wages) and box 5 (Medicare wages). On the 941 it reduces the wages shown on line 2 (wages, tips, and other compensation) but does not reduce the income on lines 5a and 5c.

Your cafeteria plan provider will know about your plan and the tax consequences, so I would contact them to make sure your employees are receiving the maximum tax benefits.