Employee medical insurance included in Box 1 on W-2

[ritastone001]

New client's W-2 Box 1  says 10000. As is box 3 and 5. Nothing on W-2 is coded as health insurance.

She states that her medical insurance is not pre tax. Brought end of year check stub showing that indeed  Medical 2000 and salary 8000 for a total of 10000.  This is an example not the actual amounts. 

I am asking for an opinion from the group. Is the check stub enough info to take the amount of insurance as an itemized deduction? I have tried calling the company but only getting a run around.

[Frustrated-in-IL]

My opinion: more than enough.  Keep a copy of the check stub, and document in your file the date the client explained this to you and the date that you attempted to get clarification from employer.

[IRonMaN]

Unless she is a shareholder, why are they adding insurance to her W-2?  Or are they paying her an extra $2000 over her wages for her to buy her own insurance, which means she may have paid more for her insurance?  Lastly, does she have enough other medical expenses for $2000 to make a difference on her return?

[ritastone001]

Probably not enough to help on Federal return. But can make a difference on state returns.

[ritastone001]

On the check stub Medical is listed first. It is added to salary to get the total on the W-2.

I am going to have to have another conversation with this client to easy my own mind!   

[IRonMaN]

But why is it being added to the W-2?

[abctax55]

1) Jeff's question as to whether your client is an S-Corp shareholder remains unanswered.  AND the answer is important.

2) Do some math on SS & Medicare.... are they being computed on the $ 8K or the $ 10K.

If I were a bettin' person, I'd bet the W-2 is wrong.  Is it from a business doing it's own payroll, or from a payroll processing company?  (not that a p/r processing company doesn't get things wrong..)

[qbteachmt]

I've seen this when it is family of a shareholder, e. g. young adult child with first real job, aged out of parent's health insurance coverage.

[Frustrated-in-IL]

The OP says nothing about this being the W-2 of an S Corp shareholder or a relative of such.

In the old days, it was quite common to have have medical paid post-tax.  The amount in Box 1 included the wages which ultimately paid the medical insurance.  I haven't seen it in probably 3 decades plus but back in the early 80s it  happened all the time.  In fact, and I may be wrong on this, but IIRC the law allowing pre-tax on the medical wasn't passed until the late 70s.  I believe the business had to proactively do something to make the deduction pre-tax. Someone feel free to correct me on this.

[IRonMaN]

If Bob finds this post, he will fill in the details that you can't recall.  For any taxing event happening after around 1780, he seems to recall the details 😉

[ritastone001]

This company appears to be a single member LLC.  Real Estate and Rental Leasing business. Payroll is done by a payroll company. Statutory employee not checked.

Social security tax and medicare are figured on the full amount that includes the health insurance amount.

Still waiting on a response from client. 

[ritastone001]

This client is a housekeeper for rental units owned by the LLC. She is not related. Offered money to pay health insurance. It is paid thru the LLC. SS and Medi is taxed on the full amount. In the end it won't help her much on Federal but possibly on state.

Thank you all for the questions and comments. Getting responses helps to ease this older mind!

[qbteachmt · Accepted solution]

I can think of a reason to do this:

"Offered money to pay health insurance."

That's just a negotiating concept for setting a compensation package.

"It is paid thru the LLC."

Which might mean the taxpayer got put on a group plan, and that was the attraction. Or, they don't have any plan, so there cannot be pre-tax deduction or employer payment.

"SS and Medi is taxed on the full amount."

I call this "employer is doing the banking." Because really, that's what is happening. The taxpayer's check is reduced and the employer sends on the funds on behalf of the employee to the coverage provider.

And they might have discussed breaking it out like this, because a housekeeper might have independent clients, as well, and files Sched C, and this would provide clarity and documentation for the self-employed health deduction.

As an example.

Many time good intentions don't really stand up to examination. In this case, someone thought it made sense to frame it like this.