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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:
About the Small Business Health Care Tax Credit
Video: Small Business Health Care Tax Credit-Updated English
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:
- September 15. Corporations that file on a calendar year basis and requested
an extension to file to September 15 can calculate the small employer health
care credit on Form 8941 and claim it as part of the general business credit on
Form 3800, which they would include with their corporate income tax return.
- October 17. Sole proprietors who file Form 1040 and partners and
S-corporation shareholders who report their income on Form 1040 and request an
extension have until October 17 to complete their returns. They would also use
Form 8941 to calculate the small employer health care credit and claim it as a
general business credit on Form 3800, reflected on line 53 of Form 1040.
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:
- The tax software industry to improve access to educational information and
to help alert small employers and practitioners when taxpayers may be eligible
for the credit.
- Insurance agents, brokers and carriers who work with small businesses to
help ensure that participants in the health insurance marketplace understand the
features and benefits of the credit. The Department of Health and Human Services
today sent an email to 2,000 agents and brokers alerting them to the credit for
their small business clients.
- The small business and tax practitioner community to provide additional
webinars and educational opportunities about the credit.
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:
- Businesses who have already filed can still claim the credit: For small
businesses that have already filed and later determine they are eligible for the
credit, they can always file an amended 2010 tax return. Corporations use Form
1120X and individual sole proprietors use Form 1040X.
- Businesses without tax liability this year can still benefit: The Small
Business Jobs Act of 2010 provided that for Tax Year 2010, eligible small
businesses may carry back unused general business credits (including the small
employer health care tax credit) five years. Previously these credits could only
be carried back one year. Small businesses that did not have tax liability to
offset in 2010 should still evaluate eligibility for the small business health
care tax credit in light of this expanded carry back opportunity.
- Businesses that couldn't use the credit in 2010 can claim it in future
years: Some businesses that already locked into health insurance plan structures
and contributions for 2010 may not have had the opportunity to make any needed
adjustments to qualify for the credit for 2010. So these businesses may be
eligible to claim the credit on 2011 returns or in years beyond. Small employers
can claim the credit for 2010 through 2013 and for two additional years
beginning in 2014.
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.