Pretax insurance benefits offered under a Section 125 cafeteria plan aren’t taxable, so they’re taken out of your gross wages before taxes are deducted. Your annual W-2 includes your taxable wages for the year. Since your insurance plan isn’t taxable, your employer does not include your premiums on your W-2. To determine your total gross wages earned for the year, factor in pretax insurance.
Figure your insurance amount for each pay period. When you enrolled in the plan, your employer should have given you the amount which would be deducted from your paychecks. Check your pay stubs, as they might show the individual deductions for all your insurances. This includes Section 125 medical, dental, vision, accident, disability and/or life insurance.
Multiply your insurance premium for each pay period by the number of pay periods in the year to arrive at your annual insurance payment.
Calculate your annual gross wages or salary; this includes all wages paid to you from the first pay period through the last pay period of the year. You might find this data on your pay stub under the year-to-date gross earnings column.
Subtract your annual insurance premium from your annual gross wages or salary to arrive at your annual federal taxable wages, which should go in box 1 of your W-2.
Verify your calculation by subtracting your annual insurance premium from the year-to-date gross shown on your last pay stub for the year. The result should match the amount in box 1 of your W-2.
Consult your payroll department if the W-2 and your last pay stub for the year do not balance after you factor in insurance deductions. Perhaps the department made an error and needs to give you a corrected W-2. It’s also possible you have nontaxable wages such as mileage or meal reimbursements or other pretax deductions besides your insurance, which you didn’t consider. If applicable, to arrive at the year-to-date gross shown on your last pay stub, add any nontaxable wages or additional pretax deductions that you might have to the amount shown in box 1 of the W-2.
- If necessary, ask your payroll or human resources department to explain your nontaxable wages and pretax deductions.
- Most pretax insurance benefits are exempt from federal income tax, Social Security tax, Medicare tax, and in most cases, state and local income tax. An exception applies to life insurance premiums on coverage that exceeds $50,000; in this case, your excess premiums are subject to Social Security and Medicare taxes, but not federal income tax.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.