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It means, because most unmarried partners don't qualify as dependents, most employees who use domestic partner benefits must use after-tax dollars to pay their partner's portion of the premium, rather than the pretax money they can use to pay their own premiums. What's more, the premiums paid by the company are added to the employee's gross wages as taxable income, so the employee must pay Social Security and Medicare taxes on the phantom wages.
You are in a situation called "imputed income." If you get married, your spouse is entitled to certain tax free employee benefits. Or, if your DP can be your tax dependent, their benefits can be tax free. But because your DP is not your spouse and not your dependent, your employer can't provide tax-free benefits for them.
Let's say as an example, you have single health insurance that costs you $100 per month and your employer pays an additional $400 per month. Your premium is pre-tax, and your employer's share is deductible on their corporate tax return. To add a DP who is not entitled to tax-free benefits, the employer charges you an extra $100 for your share of their premium, but this is an after-tax deduction. The employer pays their $400 share, but because it can't be tax-free, it is considered taxable income to you, as if you had gotten a $400 per month raise and used it to pay the insurance premiums. The employer will withhold extra income tax and extra social security tax from your paycheck as if you had received a $400 raise.
As a result, your take home pay will go down, possibly by quite a lot (up to 40% of the value of the benefit, depending on your tax bracket and the state you live in.) Your W-2 at the end of the year will show an increased salary, again because the tax effect of DP benefits is the same as if you got a raise and paid for the benefits yourself. Your W-2 will show the value of benefits as additional box 1 income, "imputed income."
The extra withholding that will be taken out of your check should cover the tax you owe so you should not see a large tax bill next year, but you will see a decrease in your take home pay.
This does not apply if the DP can be your tax dependent (lives with you all year, and earns less than $4100 for 2017). And the issue of imputed income stops if you get married, as soon as your tell your employer, so they can switch the person over to spousal tax-free plan.
@AJ0411 wrote:
If you own more than 2% of an s-corp and include your domestic partner on your insurance are you imputed this fair market value twice or is it already covered by the fact that you are imputed it as the s-corp owner? For example, the company pays $2,000 for the family plan insurance. The fair market value of your partners portion is $1,000. Is my imputed income $2,000 or $3,000.
I'm not clear on your example. The company imputes the total FMV of the coverage, it does not have to include the cost twice.
For a regular employer, the issue is that the employee's coverage is non-taxed, but the partner's coverage is a taxable benefit. For a >2% employee, the insurance is all taxable from the start, no matter who or how many people it covers.
What if the employer is NOT paying any additional portion of the premium for the domestic partner's coverage.
For instance, say the employer pays $1,000 per month for the employee, and the employee pays $500 per month pre-tax. The employee's domestic partner total cost would be $1500 (as an add-on to be deducted from the employee's payroll). So the company is not offering any additional 'income' to the employee's wages. The additional premium cost would come right out of the employee's check.
In this case, we would not need to worry about imputed income or a revised W2, correct?
Also - since the employee would be paying the full benefit as one premium, could we deduct it pre-tax (because it is one payment)?
Thanks for your help!
-JB
@JBrulltmann wrote:
What if the employer is NOT paying any additional portion of the premium for the domestic partner's coverage.
For instance, say the employer pays $1,000 per month for the employee, and the employee pays $500 per month pre-tax. The employee's domestic partner total cost would be $1500 (as an add-on to be deducted from the employee's payroll). So the company is not offering any additional 'income' to the employee's wages. The additional premium cost would come right out of the employee's check.
In this case, we would not need to worry about imputed income or a revised W2, correct?
Also - since the employee would be paying the full benefit as one premium, could we deduct it pre-tax (because it is one payment)?
Thanks for your help!
-JB
If the employer is not providing an unallowable benefit, then it won't be taxed. In your example, the employee would see a $500 pre-tax payroll deduction for their own insurance and a $1500 after-tax deduction for the DP insurance. The $1500 after-tax premium is an allowable itemized tax deduction for medical expenses (subject to the usual limitations) but the $500 pre-tax payroll deduction is not allowed as a further itemized deduction.
Hi Opus17,
Thanks so much, that is really helpful!
You've solved a problem I had not ever considered. It really is unfortunate that the Feds won't allow pre-tax deductions for domestic partners.
Now what about at the state level - as in my case NY and CA both allow pre-tax deductions for domestic partners? Would the employee's state income be different than the Federal (assuming the money could be deducted pretax for the partner)?
-JB
@JBrulltmann wrote:
Now what about at the state level - as in my case NY and CA both allow pre-tax deductions for domestic partners? Would the employee's state income be different than the Federal (assuming the money could be deducted pretax for the partner)?
-JB
Probably. You will have to look at your check stubs and W-2. Also, if the premiums for the DP are pre-tax on the state level, you can't use them as medical expense deductions for the state, even though they are deductible on the federal return. This will be a problem, because in Turbotax you only enter your itemized deductions once, in the federal module, and they automatically flow to the state module. You will have to investigate yourself whether there is a state-specific adjustment in the state module, or you may have to manually override the state medical insurance deduction (assuming you are claiming itemized deductions on your state return.)
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