17 Oct Taxable Benefits Setup
Providing an insurance plan for your employees is not only a great way to help keep them healthy and happy, but if they have an option to include their loved ones, it can keep their whole family healthy as well. Generally speaking, an employee health plan requires some money be paid on the employee’s behalf (for their BENEFIT) and the rest by the company to the insurance company. Even if the employee never actually receives the money that the company pays for this insurance on their behalf, it’s important to understand that all or a portion of this money is considered to be income, and as such needs to be taxed accordingly.
This article will speak in generalities because although most plans are very similar, there can be differences. Be sure to ask the benefit’s provider what parts of the plan are taxable and what parts are not. A client asked me once for clarification on their premiums that looks something like this:
|Emp Name||Life AD&D||Dependent||Ext. Health Care||Dental||Total|
Even though there are a few different amounts listed, not all of them are a taxable benefit! By consulting the provider’s site, they had a handy guide (as most do) that stated only the ‘Life AD&D’ and ‘Dependent Life’ portions were taxable. So really there are two amounts we are considering in this statement.
- The Life AD&D plus the Dependent Life equals the total taxable benefits ($4.53 + $2.51 = $7.04).
- The remainder Extended Health Care plus Dental equals the non-taxable benefit ($75.56 + $115.04 = $190.60).
Now that we have determined the amount of the taxable benefit to be $7.04, the next step is to determine how to apply taxes to this amount. For help with that, the Government of Canada has a few handy guides to help us out, such as this one:
In most (but not all!) cases, this benefit amount counts as Income and Pensionable Earnings, so Income Tax and CPP need to be applied. However, it is not Insurable Earnings, so EI is to be exempt. As such, the first step is to create a Bonus for this employee for $7.04 that is EI Exempt.
If the employer is paying these premiums on the employee’s behalf, then the last step is to recover the Taxable Benefit amount by using a regular deduction of the same amount to recover the taxable benefit amount, and you’re done!
Plans Where the Employee Pays a Portion of Taxable Benefit
In this example however, the employer and employee both pay 50% of the premium, so we have to do a couple more steps before we’re done. The Bonus type and amount are the same, but when recovering the amount, the first step is to recover half of the taxable benefit amount before taxes are applied to it.
This may seem confusing, however it works like this: Even though the full amount of $7.04 counts as employee Income, only the 50% that the employer is paying is considered to be taxable income. So we need to first remove the portion that the employee is paying before taxes can be applied. To do this, create a before-taxes deduction of $3.52.
Lastly the rest of the entire 50% of the premium that the employee is paying needs to be recovered. Remember the Extended Health Care and Dental amounts from above totaling $190.60? Simply divide this in half to get $92.30, and add in the employee’s portion of the taxable benefit. Meaning $92.30 + 3.52 = $98.82 is the amount of the regular deduction to create.
In summary, creating a taxable benefit is a two-step process if the employer is paying the premiums:
- Create a bonus that is EI Exempt for the taxable benefit amount to report it all as Taxable Income
- Create a deduction for the same taxable benefit amount
Or a three-step process if the employee is paying a portion of the premiums:
- Create a bonus that is EI Exempt for the taxable benefit amount to report it all as Income
- Create a before-tax deduction for the employer’s portion to allow the employee’s portion to be Taxable Income.
- Create a deduction for the entire premium amount the employee is paying for.