Most employer contributions — like the company portion of a group health plan or a 401(k) match — are not taxed as income to the employee. Some employer-paid benefits, however, count as taxable income under IRS rules. The most common example is health insurance premiums paid on behalf of company owners, such as 2% S corporation shareholders. These premiums are generally subject to federal and state income tax, but not to Social Security, Medicare, or unemployment taxes.

Workforce supports this through the Taxable setting on a custom benefit's contribution type. When a contribution is marked as taxable, every amount contributed is added to the employee's wages subject to federal and state income tax, and the year's total is included in Boxes 1 and 16 of their W-2.

If you're not sure whether a benefit you offer is taxable, the IRS Fringe Benefits Guide (Publication 15-B) is the best reference.

Navigate to Payroll Settings, click the card labeled Benefits and Misc. Deductions, then click the + New button to open the benefit form. This section covers the settings that matter for a taxable contribution — for a full walkthrough of the form, see Benefits & Deductions.

Benefit step — Name the benefit and select Custom as the benefit type. The Taxable option is only available for custom benefits; every other benefit type has its tax status determined automatically. If the benefit provides health coverage (as owner health insurance does), also check This is a health benefit. Hit Next.

Deduction step — If the company pays the full cost of the benefit, which is typical for owner health insurance, select No. If employees also pay a share of the cost, set up a deduction type as well. Hit Next.

Contribution step — Select Yes, then name the contribution type and select the Expense (Debit) Account and Liability (Credit) Account it should post to (see Journal Setup). Check the Taxable checkbox. Hit Next.

Review step — Confirm that Taxable is checked in the summary, then hit Submit.

On every pay run that includes the contribution, the contributed amount is added to the employee's wages subject to federal income tax and state income tax. The contribution itself is paid by the company — it is not added to the employee's pay or deducted from it — but because income tax withholding is calculated on the higher wage amount, the employee's withholding will be slightly higher.

The contribution does not add to any other wages, including:

On the pay stub, the amount appears in the Employer Contributions section with current and year-to-date totals. Employees can view their pay stubs under My Profile > Payslips — see Employee Self-Service for Payroll.

Two things happen at year end:

Boxes 1 and 16 — automatic. Because the contribution increases federal and state income tax wages, the year's total is automatically included in Box 1 (Wages, tips, other compensation) and Box 16 (State wages). Boxes 3 and 5 (Social Security and Medicare wages) do not include it. No configuration is needed for this.

A separate reporting line — configured by you. If the amount should also be itemized on the W-2, add a W-2 classification to the benefit. Custom benefits do not get W-2 classifications automatically, so this step is up to you. Go to the benefit's page, click Manage W-2 Classifications, and add a row with the box number and code the amount should report under. For owner health insurance, the usual choice is Box 14 with a short label such as 2% SH INS (Box 14 codes can be up to 15 characters). Hit Update to save. For more detail, see the Managing W-2 Classifications section of Benefits & Deductions.

Employees can download their W-2s under My Profile > Tax Forms — see Employee Self-Service for Payroll. For an overview of year-end filings, see Tax Filings.

Once the benefit is created, add it to each owner or employee it applies to, with the amount contributed per pay run — either a fixed dollar amount or a percent of income — along with any caps or effective dates. The contribution then populates automatically on every pay run for that person. For the full process, see Recurring Benefit Templates.

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