Overview
According to the Internal Revenue Service "Safe Harbor" method, an employer may calculate the allowable employee cost of minimum essential health coverage based on a designated percentage (e.g., 9.5%) of the employee's wages reported on Form W-2 in Box 1. Each pay period, WinTeam automatically calculates Federal Taxable Wages (Form W-2 Box 1) and the percentage-based deduction allowable for health coverage.
Because it is based on earnings, the deduction amount could vary from pay period to pay period. But at year-end, total payroll deductions for minimum essential coverage will not exceed the designated percentage (e.g., 9.5%) of Form W-2 Box 1 wages.
Not all health coverage plans are tax-deductible. Several scenarios exist for explaining how a percentage-based health care deduction is calculated. (Your company's human resources department can clarify how your plan cost is calculated/deducted.)
Types of Calculations
In each of the examples below, the designated percentage of 9.5 (0.095) has been used to illustrate how the deduction is calculated.
Scenario One
When the deduction for the cost of health coverage is tax-deductible, this is how it is calculated:
- Gross Wages - (Other Pretax Deductions and Compensations) = Federal Taxable Earnings
- Federal Taxable Earnings / 1.095 = Calculated Federal Taxable Earnings
- Calculated Federal Taxable Earnings * 0.095 = Allowable Deduction Amount
Example: Gross Wages = $1,000.00; Pretax Deductions = $100.00
$1,000.00 - $100.00 = $900.00 (Federal Taxable Earnings)
$900.00/1.095 = $821.92 (Calculated Federal Taxable Earnings)
$821.92 * 0.095 = $78.09 (Allowable Deduction Amount)
Scenario Two
When the deduction for the cost of health coverage is not tax-deductible, this is how it is calculated:
- Gross Wages - (Other Pretax Deductions and Compensations) = Federal Taxable Earnings
- Federal Taxable Earnings * 0.095 = Allowable Deduction Amount
Example: Gross Wages = $1,000.00; Pretax Deductions = $100.00
$1,000.00 - $100.00 = $900.00 (Federal Taxable Earnings)
$900.00 * 0.095 = $85.50 (Allowable Deduction Amount)