taxability of cash-in-lieu?

My wife declines medical insurance benefits offered by her employer because she is covered as my spouse under my employer's plan. Her employer pays her $2000 per year as a substitute for this benefit, not reported on W-2 but on a

1099-MISC, not subject to withholding. The medical benefit is of course not a taxable benefit. But is the cash-in-lieu taxable? How should that be reported?
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Reply to
cagauss
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Yes it is taxable. How to report it is more interesting. In my mind it should have been reported on her W-2 (so it looks like her employer is trying to rip her off a tad by trying to foist the employer half of FICA on that money off on her), which is how I've seen it in cases where I've seen this sort of thing.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Reply to
Rich Carreiro

What I might do is to put the money into a tax-exempt health savings plan. That way it won't be taxed, and you can use it for deductibles and other health related expenses your insurance policy might not cover. Stu

Reply to
Stuart A. Bronstein

The effect is de minimus. She is already over the max for Social Security tax, so only medicare would be owing. This is not the reason they did it this way. I sense it was more to do her a favor ... and keep it off the W2. The 1099-MISC was handwritten with her name and address, with no SSN showing (technically a violation, I believe). Of course no comment or advice was provided, I suspect intentionally. My question really was not how should the payer report it. But where should it be reported on Form 1040 (if we choose to report it)? It is not wages, salaries, tips, etc. Maybe the "Other income " line (Line 21 for 2005)? ... Fred

Reply to
cagauss

What do you mean "if we choose to report it"? You are required to report it. Though if you want to admit publically that you are planning to be a tax cheat, that's your choice.

It *is* wages.

The form that income is reported on does not control the character of the income. That the employer reported wage income on a 1099-MISC instead of a W-2 doesn't magically make it non-wage income. The fact that your wife is an employee of the imployer makes it wage income, regardless of how the employer reported it. If the employer had reported it the way is supposed to be reported (i.e. on the W-2), then Medicare tax would have been paid on it by you and the employer. So I would argue the only proper way to report this is in such a way that at least you pay your share of medicare tax on it. That could be Sched C. It also could be by using the "Unreported Tips" form, where you cross out "Tips" everywhere it appears on the form and write in "Wages" (I believe someone in this very group mentioned that in the past couple of weeks).

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Reply to
Rich Carreiro

Be careful about sounding holier-that-thou when you have a situation where the tax is fundamentally unfair. The employer provides a fringe benefit for employees: paid medical insurance (non-taxable), or a cash-in-lieu option if an employee decides to be self-insured or otherwise provided for in some fashion and declines the employer-paid insurance. But the employee gets screwed by the government if they choose the cash-in-lieu option. The non-taxable fringe benefit becomes taxable, it would appear. You say

"The fact that your wife is an employee of the imployer makes it wage income, regardless of how the employer reported it." Many cash payments by an employer to an employee are not wages. It is even possible for a person to be an employee and an independent contractor to the same organization at the same time [Reece T.C. memo 1992-335]. In the case of the cash-in-lieu, it would seem to be common enough to be discussed one of the regs, but I can't find it. Another example of how absolutely obscure the tax can be for the everyday person or even the everyday employer.

Reply to
cagauss

There are plenty of things about the tax code that are arguably "fundamentally unfair", but that doesn't mean a taxpayer is allowed to report it the way he wished the law read.

Or, rather, the company gives the employee a choice between the fringe and a cash raise.

(1) Such as? [not counting things such as loans or expense/tuition reimbursements made persuant to an accountable plan] (2) It may be possible for a person to be both an employee and contractor to the same org at the same time, but an individual's receipt of both a W-2 and 1099-MISC from the same org doesn't itself prove they are both. The facts and circumstances govern worker status, not what forms the payor chooses to report on. (3) In your situation, on what grounds do you claim your wife is both an employee and contractor? From what you've said in an earlier post, the 1099-MISC was issued to "help her out", not because she was a bona fide contractor. And in any event, if if she were a bona fide contractor the

1099-MISC amount would be taxable and subject to SE tax, so she'd end up in the same position (slightly worse, actually) as if it had been reported as wages.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Reply to
Rich Carreiro

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