Paying taxes twice on imputed income as it relates to domestic partner medical coverage

[obrienrj]

imputed income related to employer sponsored medical plan and covering a domestic partner. The payroll deductions for the domestic partner are paid post tax. The imputed income is then reported on the W-2 as wages. Does this mean you pay taxes twice? through payroll then again when filing taxes when the amount is reported on the W-2 as wages?

[LeslieB · Accepted solution]

Hello obrienrj,

Imputed income in this instance refers to the employer paid portion of the domestic partner medical coverage. If you add a dependent to your health insurance coverage who does not qualify as a tax dependent under the Internal Revenue Code Section 152 and Notice 2010-38, the Fair Market Value (FMV) of the employer contribution toward that coverage is considered a taxable fringe benefit, subject to tax withholding. This calculated fringe benefit is known as imputed income. This fringe benefit will increase your taxable income. Therefore, your federal, State, Social Security and Medicare taxes may increase and your net pay will decrease.  You are not paying taxes on the same monies twice.  Your employer is just accounting for the benefit you are receiving from them as "income" to you.

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For example:   Let's say your normal weekly Gross Pay is $1,000 and your Net Pay after all deductions is $700.

1. Normal Gross Pay $1,000

2. Non-taxed Deductions: $100

3. Total Taxable Income:  Line 1 -minus- Line 2  =>  $900

4. Value of Employer Paid Insurance for Domestic Partner:  $75

5. Total NEW Taxable Income:  Line 3 + Line 4   => $975

6. Taxes: $210

7. After Tax Insurance Deduction:  $75 (Insurance Premium for DP)

8. Net Pay:  Line 5 -minus- Line 6 -minus- Line 7 => $690  (The decreased net pay is due to additional tax owed on the value of the insurance premium.

Your taxes are calculated aainst your Actual Wages (what you are used to seeing)  PLUS the Value of the insurance your employer pays on your behalf. 

As you can see, you are not being doubletaxed, you are just being taxed on your regular wages and the additional benefit you are now receiving.

The above example is generic and is not meant to account for any specific W-2 scenario.

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Consult IRS Publication 501 and IRS Notice 2010-38 for tax dependent guidelines and tests

Hope this resolves your question. 

Thank you so much for choosing TurboTax.  Have a wonderful day!

[scornell330]

Do you know how the FMV of the employer contribution is determined?

[SweetieJean]

The FMV of coverage is often  determined based on the amount an individual would have to pay for the particular coverage in an arm’s-length transaction. The most common way to determine that amount is the difference between the cost of employee-plus-one and employee-only coverage, after deducting any portion of the cost the employees paid.

[sullivbd]

Re #8 in the calculation above: But your take-home pay would be = Line 3 - Line 6 - Line 7, not Line 5, right?

[MaryK11]

Thank you for contacting Turbo Tax.  No, you are not paying tax twice on the same funds.  An imputed income benefit is the value of the non-monetary compensation given to an employee by an employer in the form of a benefit.  The payroll deduction is the amount that you contributed for health insurance. 

Health Insurance Cost      $300

Employer paid                   $200 (Imputed Income included on W-2)

Employee paid                  $100 (Paid with after tax funds and deducted from pay)

The good news is under the United States Supreme Court decision in United States v. Windsor, 570 U.S. ___, 133 S.Ct. 2675 (2013), you may be able to make claims for refund or adjustments (referred to in this notice as corrections) of overpayments of Federal Insurance Contributions Act (FICA) taxes and Federal income tax withholding (employment taxes) with respect to certain benefits provided to same-sex spouses and remuneration paid to same-sex spouses. 

If you have any other questions or need clarification, please add to this post!

[cruz630]

Question on how to make claims or offset this amount.  I am in a domestic partner relationship and cover my partner on my insurance.  I see the imputed income on my W2.  When using Turbo Tax, I complete the Federal Married mock form and go into the State married.  One of the questions early on is about imputed income and money paid on behalf of your domestic partner.  Is this where we could offset?  I have never quite understood this question.

[hongkongfuey]

That's what we call [removed]. What's happening is you're being taxed on an artificially inflated wage. You pay for your befits through your employer, and now you're paying the fair market value for your domestic partner coverage even though you're already paying premiums on it. The penalty for not being covered is actually cheaper.  Saying this......

"Your taxes are calculated aainst your Actual Wages (what you are used to seeing)  PLUS the Value of the insurance your employer pays on your behalf.  

As you can see, you are not being double taxed, you are just being taxed on your regular wages and the additional benefit you are now receiving"

Is a nice way of saying you're being double taxed, but not technically. It's also a load of bullocks. My advice: vote republican and burn the whole thing to the ground. 

[StarryR]

I have a similar issue, except that the employer issued a separate 1099-NEC for the imputed amount.  This was NOT an informational notice.  It is clearly a 1099-NEC filed with the IRS.  When I try to input the form into TurboTax it automatically tries to create a Schedule C for me, but this is not self-employment income.  If this amount was added to the salary on W-2 as imputed income, then the amount will be taxed twice (actually worse because it'll include self-employment tax).  

Near as I can figure I shouldn't follow TurboTax down that "rabbit hole" to create a business and should file the Form 8919 to report that the employer did not include the imputed income as they should have.  This may help relieve any penalty as the domestic partnership medical benefit was very large.  Am I wrong here?  Does the employer have the option to add to W-2 income and send a Form 1099-NEC placing the extra burden on the employee?  Seems off because their representation that this is income to a non-employee is factual incorrect.  

[MarilynG1]

If you paid the premiums for your partner's health insurance from your paycheck, you are correct that the benefit should be added as taxable wages to you on your W-2.

You could report the 1099-NEC as self employment income, and enter an equal amount as a self-employment expense for health insurance.  The net effect would be $0 and no self-employment tax would be assessed.  Obviously, the optimal solution is to get your employer to report it correctly, either on a Corrected W-2 or on a 1099-Misc (which can be reported and taxed as 'other income'). 

Click this link for more info on Employer Paid Insurance Premiums on 1099-NEC.

You could generate Form 8919 to pay the Medicare/SS tax on the the income, and enter the 1099-NEC (to match what the IRS has), but it will be reported as self-employment income and subject to SE tax. 

This link has details on Form 8919.