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We pay 100% of employees' disability premiums and "gross up" employees' wages so that, if they become disabled, their pay would not be taxable. Do we have to account for this on each payroll or can we just add this at the end of the year on the W2?

It can be handled in a number of different ways depending on what the employer wants to do. Here are some options:

  1. Enter the cost of the premium each pay as a taxable fringe. (Annual premium divided by 24 or 26 depending on how many pays per year.) This way, the employee pays for the taxes each pay and nothing needs to be grossed up.
  2. Employer pays the amount for FICA & Medicare (SS Tax) only - multiply the per pay premium by 5.65% (or 7.65 after 2/29/12 if Congress doesn't extend the relief) and add that to other wages, thereby paying the employee for the FICA & MC. The premium is added same as #1) above.
  3. Gross up for all taxes - divide the premium by the reciprocal of the total taxes - e.g. if the employee is in the 25% bracket for fed and 8% for state, take those two (.25 + .08) plus .0565 SS Tax for a total of .3865. Subtract that from 1.0 for a reciprocal of .6135. Divide the premium by the .6135 - e.g. if the premium each pay is $100, divide that by .6135 for a total of $163.00. You would enter $100.00 as a fringe for the premium and give the employee $63.00 as other wages to pay for the taxes.

The easiest and least costly for the employer is #1 above. The most costly for the employer is # 3. Whatever way is chosen. It is best to enter it with each payroll rather than wait once a year.

 

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