Payroll is a complex part of every bookkeeper’s job, new requirements for 2012 include showing company paid health insurance premiums on employees W-2′s; making things even more complex. See this question asked by a reader of our blog.
I have a question that I’ve been searching for an answer to, I’ve even asked our Tax Accountant about it. In 2012 it is mandatory that we show the company share of employee health insurance on W-2′s, do you know if there is there a way in QuickBooks to track this on a regular basis, so that it shows on the employees paystubs and then have it flow through onto the W-2 at the end of the year? Thanks, Kathleen S.
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Answer:
Hi Kathleen,
Yes, you can set QuickBooks up to track employer paid health insurance contributions, have those contribution amounts appear on employee pay stubs and then have the full yearly contribution appear on the employee’s W-2. I’ve been doing this for a long time – thankfully the QuickBooks payroll module is pretty flexible, the hardest part is the setup – and then the maintenance.
Important things to take into consideration prior to setting up QuickBooks to track this information – OR the planning stages:
- Health insurance premiums for all employees are usually paid on a monthly basis in one lump sum made up of a specific amount for each employee based on the type of plan or coverage each employee has. The chances are that you pay your employees more often than that – so you want to set up a method of tracking company contributions for health insurance based on how often you pay your employees – so that the contribution is done automatically for you when you run your payroll rather than having to “remember” to do something once a month.
- Will the company pay 100% of the cost of health insurance or will the employee also pay a portion through a payroll deduction?
- How many pay periods your company actually has during the year.
- When does your company health insurance policy renew?
- Will you also be using/taking credit for company paid health insurance against the full fringe benefit amount that must be paid when employees work on prevailing wage jobs?
We’ve put together a video demonstrating the required QuickBooks setup and a free Excel Spreadsheet for tracking the costs of 100% company paid health insurance.
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Information from the IRS regarding Employer Paid Health Insurance Reporting:
Employer-Provided Health Coverage — Not Taxable; Reporting is Voluntary for All Employers for 2011 and Small Employers for 2012
Starting in tax year 2011, the Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. To give employers more time to update their payroll systems, Notice 2010-69, issued last fall, made this requirement optional for all employers in 2011. IRS Notice 2011-28 provided further relief for smaller employers filing fewer than 250 W-2 forms by making the reporting requirement optional for them at least for 2012 and continuing this optional treatment for smaller employers until further guidance is issued. Notice 2011-28 also includes information on how to report, what coverage to include and how to determine the cost of the coverage.
The 2011 Form W-2 is available for viewing on IRS.gov. This is the W-2 that most employees will receive in early 2012. The form includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan. {Currently, as of 12/12/2011, you will report Health Insurance Costs in Box 12 of the W-2 using code DD}.
This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee’s income, and it is not taxable.
What types of health care coverage must be included in the amount reported on the Form W-2?
A. Employers are required to report the total cost of all “applicable employer-sponsored coverage” provided to an employee. For any employee, “applicable employer-sponsored coverage” is coverage under a group health plan that the employer makes available to the employee that is non-taxable to the employee (or that would be non-taxable if the coverage were employer-provided).
Certain types of coverage are excluded from the definition of applicable employer-sponsored coverage and are not included in the amount reported. These types of coverage are:
- coverage only for accident, or disability income insurance, or any combination of these coverages;
- supplemental liability insurance;
- liability insurance (including general liability insurance and automobile liability insurance);
- workers’ compensation or similar insurance;
- automobile medical payment insurance;
- credit-only insurance; and
- other similar insurance coverage specified in regulations, if the benefits for medical care are secondary or incidental to other insurance benefits.
In addition, employers should not include the following amounts in calculating an employee’s total cost of coverage:
For additional information on this topic, visit these links:
- Affordable Care Act Tax Provisions - http://www.irs.gov/newsroom/article/0,,id=220809, 00.html
- 2011 Form W-2 - http://www.irs.gov/pub/irs-pdf/fw2.pdf
- IR-2011-31 - http://www.irs.gov/newsroom/article/0,,id=237870,00.html
- Notice 2010-69 http://www.irs.gov/pub/irs-drop/n-2010-69.pdf
- Notice 2011-28 http://www.irs.gov/pub/irs-drop/n-11-28.pdf
- Employer-Provided Health Coverage Information Reporting Requirements – Q & A - http://www.irs.gov/newsroom/article/0,,id=237894,00.html
- IRS YouTube Video – Health Care: W-2 Health Insurance Reporting - http://www.youtube.com/watch?v= TFepqFnEj5I&feature= youtu.be
- IRS Webinar - Reporting of Employer Healthcare Coverage on Form W-2 - http://www.irsvideos.gov/ReportingEmployerHealthcareCoverage/
- New Info added 1/3/2012 – IRS Notice 2012-09 – http://www.irs.gov/pub/irs-drop/n-12-09.pdf – Interim Guidance on Informational Reporting to Employees of the Cost of Their Group Health Insurance Coverage
We hope that you’ve found this post informative, if so please take a moment to leave a comment or share it on your favorite social network.
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Update 12/16/2011 – Intuit Releases Payroll Update 21201
Late yesterday afternoon Intuit released Payroll Update 21201, which includes revised tax tables and several form updates. Included in this update is the option for reporting Health Insurance under Code DD on employee W-2′s.
When creating or editing an existing Company Contribution item type for Employer Paid Health Insurance, when you get to the Tax Tracking Type window, from the drop down list, select Health Coverage Cost, as shown in the screenshot below:
Right click on the image to enlarge it
We will be updating our video by the first of the year to reflect the actual selection of the correct tax tracking type.
QuickBooks Payroll, when properly set up, is capable of tracking and including the cost of your General Liability Insurance; as well as many of the other things that costly construction software does automatically – with a little more effort on your part and without the big price tag.
Tracking General Liability Insurance, when it is based on gross payroll, and getting those costs into Job Costing Reports is vital for many businesses, especially the construction industry.
NOTE: The best time to implement this procedure is when your General Liability Insurance Policy period starts.
The following instructions will allow you to track your General Liability Insurance costs when it is based on gross payroll and get those costs into your job costing reports without making complex journal entries. It will also help you be aware of how much your premium payment will be so that you aren’t in for an unwelcome surprise when the bill comes in or your policy is audited.
QuickBooks Setup for accruing the cost of General Liability Insurance
Example:
In our example general liability insurance is calculated at $6.36 per $1,000.00 in wages for field workers – realize that each type of work that you perform could very well have a different experience rate (just like Worker’s Comp).
Step 1:
Come up with a rate per $100 in wages so this can be calculated for each employee with each paycheck, if paychecks are usually less than $1,000.00 per employee per week.
- $1,000.00 divided by 10 = $100.00
- $6.36 divided by 10 = $0.636
If your policy has different experience rates for different work or employee classifications you’ll want to determine this cost for each different rate.
Step 2:
Create an Other Current Liability Account on your Chart of Accounts to track your Accrued General Liability Insurance. From the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left –> click New –> select the radio button next to Other Account Types and choose Other Current Liability from the drop down menu.
Right click on the image to elarge it.
Click the Continue button and add the details for the account.
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Click Save & Close.
Step 3:
Create the Cost of Good Sold and/or Overhead accounts to track the expense to the company. A Cost of Goods Sold account would be used for field workers and an Expense Account for Overhead and Office workers. From the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left –> click New –> select the radio button next to Other Account Types and choose Cost of Goods Sold from the drop down menu – OR – click the radio button next to Expense.
Right click on the image to elarge it.
Click Save & Close.
Step 4:
Create Company Contribution Payroll Items to track the costs while running payroll. From the Lists menu –> choose Payroll Item List –> click the Payroll Item button at the lower left –> choose New –> select Custom Setup –> click Next –> click Company Contribution –> click Next –> type in the name for this item and select the Track Expenses by Job option –> click Next –> choose your General Liability Insurance Carrier –> from the Liability Account drop down select the account you created in Step 2 –> from the Expense account drop down select the account you created in Step 3.
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Click Next –> Tax tracking type should be set to None –> click Next –> Taxes window should have no tax types checked –> click Next –> Calculate based on quantity window select the radio button to Calculate this item based on quantity –> click Next –> Default rate and limit window, enter the amount that you calculated in Step 1 and make sure that the This is an annual limit option is NOT checked. Click Finish.
Step 5:
Add the company contribution item(s) to Employee Defaults so all new employees who are hired will automatically have this item automatically included in their employee records.
From the Edit menu –> choose Preferences –> select Payroll & Employees –> click on the Company Preferences tab –> click the Employee Defaults button –> click into the Item Name column of the Additions, Deductions and Company Contribution section and select the item(s) you created in Step 4.
Step 6:
Add the company contribution item(s) to existing Employee Records in order to calculate your accrued liability when processing payroll.
From the Employee Center, edit each employee record going to the Payroll & Compensation tab –> click into the Item Name column of the Additions, Deductions and Company Contribution section and select the item(s) you created in Step 4.
Calculating General Liability Insurance Costs When Running Payroll
When running payroll you’ll want to open (view) the detail of each employees paycheck –> determine gross payroll ($280.00 + $1,120.00 = $1,400.00 – per the sample paycheck below) –> take total gross and divide it by 100 (1,400.00 divided by 100 = 14) –> enter 14 in the Quantity column next to the company contribution item and click Enter. QuickBooks will then calculate the General Liability Insurance for this employee and display that amount in the Company Summary section.
Right click on the image to elarge it.
By implementing and following this procedure your General Liability Insurance will be included in your Payroll Summary Reports, Profit & Loss, and Profit & Loss by Job Reports. Additionally, your accrued liability will be displayed on Balance Sheet Reports and can be viewed at any time simply by viewing your Chart of Accounts List.
One final note; when it’s time to pay your General Liability Insurance policy premium you will cut the check using the payroll Pay Liabilities function – DO NOT USE the Write Checks feature.
Each Friday, here on the QuickBooks for Contractors blog, we will be offering a free QuickBooks related eBook, offering tips, tricks, and training – so stayed tuned, visit often or sign up to have our posts delivered daily via email.
This week’s eBook provides information and tips for setting up a system to track Subcontractors Workers Compensation and General Liability Insurance expiration dates.
When a contractor works on a construction project and he/she hires subcontractors; one of the things that he is required to keep on file is a CURRENT copy of each subcontractors Worker’s Compensation Insurance Policy and a copy of their General Liability Insurance.
Keeping track of expiration dates and making sure that you always have a copy of the current policy on hand, can be a daunting task.
A reader wrote to ask the following question:
I have a vendor (subcontractor) whose general liability insurance expired. In QuickBooks I was able to produce a check for them. How do I QuickBooks to notify me that their insurance has expired?
Answer:
Unlike some of the more costly construction specific software programs out there, QuickBooks wasn’t designed to prevent us from generating a check to a Vendor/Subcontractor whose General Liability or Worker’s Compensation insurance has expired.
The QuickBooks Premier (or Enterprise) Contractor edition does have a “section” in the Additional Info tab of the Vendor Record where you can enter an expiration date for both Worker’s Comp and General Liability insurance – and if you enter dates in these fields you will get a warning when using a vendor whose insurance has expired – however, it will not prevent you from writing the check, entering the bill, or creating a purchase order.
In other versions of QuickBooks Pro, Premier, or Enterprise; you can create “Custom Fields” to use in the Vendor record – but they will not produce even a warning.
There are several things that you can do – but none of them will automatically “warn” you before the Subcontractors insurance does expire OR prevent you from writing them a check after it has expired.
One thing that you can do is have your Vendors/Subcontractors request a Certificate of Insurance from their insurance company, listing you as a Certificate Holder. That way you receive a Certificate showing the policy period AND you would also be notified if the coverage was canceled or if it expired.
Even having access to this information directly from the Vendors insurance agent isn’t enough if you don’t have a policy and/or procedure in place for tracking this.
While QuickBooks won’t do anything automatically for you, it will provide you with tools (date tracking, report generation, letter creation, Reminders, and To Do Notes) to implement a good system for tracking this information.
Request our FREE eBook – “QuickBooks Tips & Techniques – Setting Up & Tracking Subcontractors Worker’s Comp Insurance”.
This FREE 13-page eBook will provide you with complete instructions for setting up and maintaining a system for tracking expiration dates of Subcontractors Worker’s Comp AND General Liability Insurance.
Sam Subcontractor already uses QuickBooks, he has more complex job costing needs due to certified payroll reporting requirements, payments of prevailing wage fringe benefits and AIA billing. High overhead costs, specialized equipment, materials, labor charges are other things that must be taken into consideration.
QuickBooks Estimating, Job Costing, and payroll needs will vary depending on the type of contractor you will be dealing with, so if anyone dares to suggest that one “Chart of Accounts or bookkeeping method” will work for all contractors – well you just shouldn’t listen to them, and here’s why:
Meet Sam Subcontractor:
I have worked for a lot of “Sam’s” they are great people too. They usually have the same basic philosophy as Harry the Handyman; however, because they have employees and bigger “operations” they realize that they need to consider more things when they go out to bid on a job; but they do not always realize all of what they need to take into consideration.
Sam has overhead costs, employees, specialized equipment, company vehicles, materials, and more that he needs to take into consideration when estimating. He works on private and prevailing wage jobs. When he works on prevailing wage jobs he has to pay his employees a much higher rate of pay plus prevailing wage fringe benefits and submit weekly certified payroll reports. Billing requirements for his jobs include Time & Materials and Percentage of Completion, where he needs to submit AIA billing forms and track retainage.
Sam tells you that he was just awarded a contract on an ARRA funded construction, the job will last about 18 months and he has to pay prevailing wages to his employees, submit certified payroll reports, monthly ARRA reports, and AIA format billings and will need to hire 5 additional employees. He is nervous – his workers comp and general liability insurance premiums are killing him; he knows that part of his high overhead is due to the fact that he is paying the prevailing wage fringe benefit it cash to his employees.
Sam has QuickBooks Pro 2008 and he has used it to run payroll for his employees. He has been using Excel to do his bidding, billing, certified payroll reports, and his job costing. He knows that he has to make sure that he is bidding high enough to make a profit and stay in business; yet not so high that he is no longer competitive.
Let’s look at some of Sam’s costs that you as his bookkeeper, ProAdvisor, CPA should help him identify for estimating and job costing purposes.
- Overhead – rent, phone, electric, trash service, etc.
- Liability Insurance
- Worker’s Compensation Insurance
- Wages (private & prevailing wage jobs)
- Employee Benefits – health insurance (?)
- Tool Purchases
- Materials
- Prevailing Wage Fringe Benefit Costs
- Insurance for vehicles and equipment
- Registration for vehicles and possibly some equipment
- Repairs to vehicles and equipment
- General Maintenance for vehicles and equipment
- Gasoline and/or Diesel fuel to run vehicles and equipment
- Vehicle & Equipment costs on his jobs
As a bookkeeper, ProAdvisor, or CPA with a client like Sam, you are going to have to spend some extra time helping Sam set up his books.
You will find that Sam is going to be more than willing to make changes – but that he is NO bookkeeper! He also knows that he needs to make things easier because he is spending too much time in the office doing paperwork – when he needs to be on the jobsite.
One of your biggest challenges with Sam will be communication – he is going to talk construction and you are going to be talking accounting…..learn his language and help him learn yours.
A basic plan of action for Sam would be to:
- Move his Excel based tasks into QuickBooks
- Turn his Estimating Cost Code list into a QuickBooks Item List
- Teach him to use the QuickBooks Estimate function to do his bidding
- Teach him how to use QuickBooks for Job Costing
- To automate his Time & Materials Billing
- To run Estimate vs Actual Reports so he can tell how much money he’s making & if he is bidding accurately
- Teach him how to job cost his payroll by using Weekly Timesheets
- Teach him to use Purchase Orders to track material purchases
- Implement Workers Comp and General Liability tracking
- Implement Vehicle and Equipment Costing procedures
- Implement a Retainage Tracking system
- Research ways in which to lower General Liability and Worker’s Compensation costs
- Implement QuickBooks integrated applications to deal with AIA Billing, Certified Payroll, and the ARRA Reporting
Sam will feel very overwhelmed and out of his element, he will probably want to hire you for on-going review of his QuickBooks file, just to make sure that he is doing things right – he may even want to hire you to come in on a weekly basis to help him out.
TIP: Paying prevailing wage fringes in cash will increase Sam’s General Liability and Worker’s Compensation costs, especially if they are based on gross payroll instead of gross sales.
Request our free eBook on 4 Ways Contractors Pay Prevailing Wage Fringe Benefits.
