4 Steps To Calculate Healthcare Deductions In Payroll

4 Steps To Calculate Healthcare Deductions In Payroll

One important aspect of payroll processing is performing deductions from the paychecks of employees, both voluntary and mandatory. An example of a voluntary deduction is healthcare benefits. When an employee accepts this benefit they will pay for the premiums in the form of payroll withholding. The employer is considered the payroll representative and as such must calculate the healthcare deductions based on their corporate policy, as well as applicable state or federal regulations.

Figure Out Whether A Healthcare Deduction Is After Tax or Pretax

It is essential to familiarize yourself with the type of deduction you’re dealing with. Health plans which are pretax will need to be in compliance with section 125 within the internal revenue code.

Figure Out What Type of Health Premium Your Employee Has

In most cases an employee’s premium will be determined by the contribution of their employer, as well as the type of plan the employee chooses and the rates of the provider. For instance, if an employer contributes eighty percent for an HMO plan for an employee and their family, the employee would need to pay the remaining twenty percent for the premium. However, should the employer pay one hundred percent of an HMO which is employee exclusive then the payroll withholding for that particular worker would be zero.

Understand Guidelines Regarding Deductions

It is possible for an employer to deduct healthcare premiums pretax from the worker’s gross income prior to subtracting taxes for Social Security, income, Medicare and in some cases state taxes. Post tax healthcare premiums can be deducted from the worker’s wages once payroll taxes have been subtracted.

Keep Track of Your Receipts

It is also a good idea for employees to keep track of receipts which they acquire from stays in the hospital or treatments. Add to this the cost for food, lodging or other things the hospital charges you for. Having this information will make it easier for you to determine healthcare deductions. Once you’ve collected information regarding health expenses you’ll next need to determine whether or not they are higher than 7.5 percent of your gross income when adjusted. After this, you can make a comparison between this number and the complete estimate of all your medical costs.

Both employees and those who are self-employed may be subjected to out of pocket medical expenses which are outstanding. Understanding the expenses that are eligible for tax deductions can be complex, so it is crucial to become familiar with the qualifications. The best way to do this is to maintain receipts for the expenses that may be deductible. Keeping up with all this information can be tedious and confusing, and it also requires a bit of arithmetic skills to make sure everything is accurate.

What’s The Best Solution?

One great solution to the problem is TRAXPayroll, as it can perform all the calculations on your behalf. This will make it easier to ensure that every healthcare deduction you take is eligible and it will also allow the calculations to be performed on your behalf automatically, which substantially reduces the chances of error. What’s more, our payroll management software can help with tax filing, which helps you stay in compliance and enjoy peace of mind.

Request Quote