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1. You will need to include it in her wages. You will also need to deduct Social Security and Medicare taxes. She will then need to deposit the amount into her IRA. You can accomplish the IRA deposit for her by reflecting the gross payroll and the aforementioned taxes in her wages and then making an additional payroll deduction for her IRA. She will then show her new gross wages as income and claim an IRA deduction. There is, unfortunately, no way around the two taxes.
2.Health insurance benefits are another matter and will depend on how you elect to handle this. If you are providing health insurance for the other employee (yourself) you already know that it must be included in your income as a 2% or more shareholder. However, for employees other than yourself, you can provide full company paid benefits. Then the insurance will be paid to her without taxation.
You should also be aware of the Small Business Healthcare Tax Credit. Here is some information from the IRS concerning this:
Video: Small Business Health Care Tax Credit-Updated English | Spanish | ASL
IR-2011-90, Sept. 7, 2011
WASHINGTON - As the upcoming filing extension tax deadlines approach, the Internal Revenue Service, in partnership with the Department of Health and Human Services, is announcing a new round of outreach to small employers and the professional service providers they rely on to encourage them to review the new Small Business Health Care Tax Credit to see if they are eligible.
"As the filing deadlines approach, we want to make sure that small business owners don't leave any money on the table," said IRS Commissioner Doug Shulman. "Small businesses that offer health insurance should learn about this credit and claim it if they are eligible."
The small business health care tax credit was included in the Affordable Care Act enacted last year. Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ 25 or fewer workers with average income of $50,000 or less.
Small employers face two important tax filing deadlines in coming weeks:
In addition, tax-exempt organizations that file on a calendar year basis and requested an extension to file to November 15 can use Form 8941 and then claim the credit on Form 990-T, Line 44f.
As these 2010 tax return deadlines approach and businesses begin planning for the end of 2011 and 2012, the IRS's new outreach campaign will focus on working with our partners:
Information will also be available through social media and other venues, including IRS YouTube videos in English, Spanish and American Sign Language. Targeted e-mails and tweets will be sent to the small business community and tax preparers. The IRS's new outreach effort will remind employers about the upcoming extension deadlines and will also provide details on other important information about the credit, including:
In addition to today's IRS announcement, HHS posted additional information on this credit to HealthCare.gov at: http://www.healthcare.gov/news/blog/smallbusiness09072011.html. Additional information about eligibility requirements and calculating the credit can be found on the Small Business Health Care Tax Credit for Small Employers page of IRS.gov.
Here is an excerpt from the IRS:
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 fall 2010, 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 2012-9, issued Jan. 3, 2012, restates and clarifies the guidance provided in Notice 2011-28, including the 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.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.
For more information, see the 2011 Form W-2, IR-2011-31, Notice 2012-9 (restating and clarifying Notice 2011-28), Notice 2010-69, Notice 2011-28, frequently asked questions and our multimedia products - an IRS YouTube video and a webinar, Reporting of Employer Healthcare Coverage on Form W-2.