GRADUATE, GET A JOB WITH BENEFITS - AND PAY YOUR TAXES

If your child recently graduated from high school or college and is starting a full-time job with benefits, now is a good time to review relevant tax issues.

New hires should make sure they set the right level of withholding. They are asked to complete Form W-4, "Employee's Withholding Allowance Certificate," to allow the employer to calculate how much federal and state income tax to withhold from each paycheck. More withholding allowances result in less income tax being deducted.

Graduates starting a new job may be eligible to receive benefits provided by their employer. The type of benefits offered will vary from employer to employer.

Typical employee benefits include:

    • Health insurance benefits - Some employers subsidize the cost of health insurance premiums, with the employee paying a portion and the employer paying the remainder. Other employers have employees pay the full cost of the benefits.

Amounts paid by the employer aren"t added to gross pay. These payments are not subject to the federal income tax, Social Security and Medicare taxes, and possibly state income taxes.

    • Medical expense reimbursement - Some employers offer reimbursements for out-of-pocket medical expenses. Reimbursements may be made directly by the employer or through a flexible spending account (FSA) or a health savings account (HSA).

These two types of accounts have subtle differences. FSAs must be used up during the year, and any unspent funds are forfeited. HSAs can accumulate funds year after year without a forfeiture feature.

Some employers fund all or part of the HSA, which is tax-free to the employee. Funds contributed by an employee to an HSA may be tax-deductible.

    • Life insurance coverage - Some employers sponsor a group term life insurance plan. These plans provide employees with the opportunity to purchase term life insurance at a group rate. If the employer pays part or all of the cost of the insurance, premiums on the first $50,000 of coverage are tax-free to the employee.
    • Retirement savings plans - Many employers offer a group retirement savings program for their employees. Such plans are designed to enable employees to set aside either a percentage of their income or a fixed-dollar amount each paycheck. The earlier people start saving, the less they may need to set aside later in life to reach their retirement goals. Those savings are deposited in a separate trust managed by the employer.

There are several types of retirement savings plans offered by employers. The most common are the 401(k) plan and the 403(b) plan. These plans provide the opportunity for employees to save money on a pretax basis. As an option, the employer may contribute additional funds.

While investments in these accounts generally accumulate tax-free, taxes may be imposed when funds are distributed from the account, and additional penalties may occur if an employee withdraws funds prior to reaching retirement age. Some plans also permit additional after-tax contributions.

  • Transit benefits - Some employers offer subsidies for taking public transit, carpooling or bicycling to work. Depending on how the plan is designed, these benefits can be tax-free to the employee.
  • Education benefits - Some employers offer subsidies for employees to continue their college studies. Employers can reimburse employees tax-free for tuition expenses of up to $5,250 per year. For 2012, this benefit is also available for graduate-level courses.
 
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