Can Employers Tax Health Insurance?

A new federal law requires employers to include the value of the health insurance premiums they pay for you on your W-2 for tax year 2011, received in 2012. However, that doesn't mean that you'll pay taxes on that amount. It simply meant the employer must report that amount. The reason for the report is to check for health coverage required in 2013. Most health benefits aren't taxable, but a few are.

Health Insurance for Domestic Partners

• Your company might offer group health insurance for your domestic partner and even pay for it, but you'll pay extra taxes because of this. The tax law allows you to receive spousal or family coverage tax-free but coverage for a domestic partner doesn't receive that benefit. It doesn't matter whether you have a same sex or opposite sex domestic partner. If they aren't tax dependents, you pay the tax on the benefits. Consequently, if your employer pays for the benefit, you pay for the tax.

Disability Insurance Is Health Insurance

• You might not like to pay taxes, but it certainly is a benefit to you if you pay tax on the money your employer pays for your disability insurance premium. By withholding tax for the premium payment, the employer changes his contribution to income for you. Since it's your income and you pay with these "after-tax" dollars, you don't pay income tax on any benefits for a disability. If you pay premiums with pretax dollars or your employer pays the premium without charging you the tax, all your benefits are taxable.

Some Fringe Benefits Are Taxable

• The Internal Revenue Service notes that some fringe benefits, such a company vehicle for personal use, means the employee pays additional tax. However, the IRS excludes the cost of accident or health insurance from taxation, including the cost of long-term care insurance and money the company contributes to a health savings account. It also excludes from taxation money the company reimburses the employee for medical expenses.

The Employers Don't Tax

• Employers don't make up the rules and decide how much to withhold or tax. The IRS determines what counts as taxable income and the amount to withhold. Employers must pay any money they withhold into the federal government. Even if the employer mistakenly withholds too much from your check, you'll receive it back at tax time if you don't have to apply it against another tax liability that year.