Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.
Question: How is the annual Form 940’s Line 3, total payments to all employees, reconciled with the quarterly Form 941’s Line 2, wages, tips, and other compensation? Should the two totals be the same?
Answer: The amount reported on Line 3 of Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, likely would not be the same as the total of amounts reported for Line 2 on Form 941, Employer’s Quarterly Federal Tax Return.
Form 941’s Line 2, wages, tips, and other compensation, should report wages subject to income tax, including taxable amounts that are not subject to income tax withholding, such as employer-paid premiums on excess group-term life insurance.
The Line 2 amount also may be different from the amounts reported for Social Security and Medicare wages and tips reported in Column 1, Lines 5a to 5d, of Form 941. Some items, such as employee pre-tax contributions to a Section 401(k) plan, are taxable for Social Security and Medicare, but not for income tax. Additionally, the amount for Social Security wages would not include amounts paid to employees in excess of the Social Security wage base for the year.
Form 940, Line 3, total payments to all employees, should include all payments made related to employee services. This includes payments that are not subject to FUTA tax. For example, include such items as Section 125 benefits and employer contributions to a 401(k) plan even though those amounts are not subject to FUTA tax. Page 8 of the Form 940 instructions provides examples of amounts to include on Line 3.
FUTA wages are generally defined as the same as Social Security and Medicare wages, so the inclusion of non-FUTA wages on Line 3 will create differences from the amount of Social Security and Medicare wages reported on Form 941.
For Form 940, Line 4, for payments exempt from FUTA tax, enter the total amount for items included on Line 3 that are not subject to FUTA tax. Such items are exempt because the payments are for items not included in the definition of FUTA wages. This includes payments for health and accident insurance, excess employer paid group term life insurance and employer contributions to retirement plans. While excess employer paid group-term life insurance is not subject to FUTA tax, it is subject to Social Security and Medicare taxes.
Payments made as compensation for services that are not included in the definition of employment for FUTA purposes, such as wages paid by a 501(c)(3) organization, also should be included on Line 4. Page 9 of the instructions for Form 940 provides examples of common payments that are not subject to FUTA tax.
On Line 5 of Form 940, enter the wage amount remaining after subtracting the exempt wages on Line 4 from the total wages on Line 3, but only to the extent that wages paid to each employee exceed $7,000. Do not include wages previously excluded as paid to FUTA-exempt employees, such as those of a 501(c)(3) organization. On Line 6 enter the sum of Lines 4 and 5, subtract that subtotal from the amount on Line 3, and that should give to the amount of wages subject to FUTA tax on Line 7.
The Line 7 amount can be verified by multiplying $7,000 times the number of employees who received FUTA taxable wages of at least $7,000 and adding to that the amount of FUTA taxable wages paid to employees who were paid less than $7,000 during the year.
Question: An employee who was to retire in 2021 decided to retire in 2020 because of coronavirus issues at our company. Our insurance company notified us that the employee was not eligible for retiree insurance because of a change made when our policy was renewed. The change, which we are appealing, came after the deadline to enroll in COBRA.
The employee is eligible for coverage through her spouse’s employer. If we reimburse the cost of this coverage under an accountable plan, would the reimbursement be taxable income to the retiree?
Answer: An accountable plan should qualify payments for coverage heath insurance provided by the spouse’s employer for exclusion from you employee’s taxable income under accident and health benefit rules.
Employers may provide health insurance coverage for a retiree. The benefit is not taxable for tax purposes as long as the retiree uses the funds to obtain insurance and does not have the option to receive cash in lieu of insurance coverage.
The exclusion from tax applies to contributions an employer makes to an accident or health plan for an employee, including contributions to the cost of accident or health insurance.
An accident or health plan is an arrangement that provides benefits for employees along with their spouses, children, and other dependents in the event of injury or illness. For purposes of the accident and health plan exclusion, the definition of the term employee can include a retired employee or a former employee for whom the employer maintains coverage based on the employment relationship.
Under an accountable plan, the employer could make the payments for the coverage directly to the spouse’s employer or reimburse the employee based on documented payments or deductions for the amount of spousal coverage.
By Patrick Haggerty
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