WAG payouts are subject to IRS rules that require “appraised income” to include all items and income, but not necessarily the same amounts for all items and income. See IRS Publication 525 for additional information on how WAG payouts are calculated.
If the IRS is paying for WAG, does WAG deduct its cost from the employee compensation of the employer?
No. Instead, WAG deducts for its non-employee compensation taxes based on the cost of its services and its expenses incurred to provide its services. In some situations, WAG will be eligible for the Earned Income Tax Credit – a credit for the costs of services provided rather than the total amount paid. However, it does not qualify for the EITC. See Earned Income Tax Credit – Qualified Small Group Plans for details.
Example A is a WAG plan and pays the salaries only in part, because it only provides coverage for employees to whom the plan is applicable. The premiums and costs of providing these coverage aren’t deductible as a cost of services and aren’t included in the employee’s employee compensation. On the other hand, the employee pays a premium to buy the plan. If WAG deducts the premiums for employee use of the plan and deducts the cost of coverage, the employee is able to reduce his or her total tax liability by the cost of the plan. The employee will be using WAG’s services, even if he or she is never fully paid for those services.
Note Employees pay for WAG plans which are not applicable to them. Therefore, the employer must pay the WAG plan premiums. Employers can also contribute funds to an employee’s WAG plan. However, an employee may not be able to use that contribution for the employee’s benefit. In this case, WAG deducts the premiums and costs of the plan from the employee’s employee compensation and the amounts are not included in the employee’s employee compensation. The employer is required to compensate the employee for WAG services and may pay the employee up to the sum of the employee’s WAG plan costs and the employee’s employee compensation.
If the employee wants to use an employer-provided prepaid health plan (a benefit offered by the WAG plan) for his or her employee compensation, the employee must pay all WAG premiums for the plan. Because WAG premiums are non-furnished and non-transferable, employees are not eligible for a deduction for WAG premiums. However, employees
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