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Reimbursing Pre-tax dollars

It's 3 p.m. here and my brain is fuzzy.

I started at a new company and have found some errors on pre-tax deductions. An employee has been paying a higher premium than they signed up for in April of this year. I suggested reimbursing the difference to the employee through payroll using the same withholding code but am being told that this is incorrect and will not calculate the wages correctly. I have asked how to reimburse the employee instead but am not getting a straight answer, just that this would increase the employee's wages.
Am I wrong in wanting to reimburse the employee in this manner? How would you reimburse your employee in this situation?

Thanks!

Comments

  • Without knowing the amounts, I am not sure why that would not work. If you can lay the transactions out in "T" accounts that may help. The problem may be that the "buckets" for the deductions may not be adjustable. A special contra liability account may have to be set up which increases taxable pay without increasing gross pay.

    However, depending on the amount (it may be too large to be recovered before the end of the year) - why not suspend deductions for the benefit for the rest of the year?

    Otherwise, I would compute what should have happened and do a journal entry to adjust to the correct amounts - that will involve 941-X Forms for the affected quarters (except the current quarter).

    For example, employee is paid $1,000 semi-monthly, pre-tax insurance deduction was $100, should have been $50, tax withheld was $248.85, should have been $262.68, net pay was $651.15, should have been $687.32.
    For the third quarter, gross wages (wages expense) were $6,000 - this does not change. Ins. W/h = $600, s/b $300. Taxable wages were $5,400 s/b $5,700. Tax was $1,493.10, s/b $1,576.08. Net pay was $3906.90, s/b $4,123.92

    Correcting journal entry should be
    Debit Pre-tax Deduction $300
    Credit FIT payable $60
    Credit FICA payable 22.98
    Credit Wages Payable (or cash) $217.02

    If the computer system will not allow adjustments to the "buckets" you may have to adjust the W-2 information to the correct amounts.
  • Do you use a payroll software program or outsource your payroll to a service provider? Any decent payroll system should be able to handle a "negative deduction" to a pre-tax deduction type, which would automatically make the reimbursement taxable for the "buckets" for which it was not taxable when deducted.

    I have seen some systems, however, which will not allow a separate check to be issued without any gross pay (pay them a penny). Never did like that. :(
  • Thanks for the replies! They really helped remind that I might actually know what I'm talking about..... :wink:

    We outsource to a service provider. I have contacted them and they agree that I can just reimburse through the deduction.
    I thought about suspending the deduction, but there isn't enough time in the year to make it current.

    I'm not sure why the Accounting department was telling me that this wouldn't work. I was starting to think that I had lost my mind when they were telling me that entering it this way was incorrect! They were wanting to do the journal entry to correct everything, but to me, that's the more difficult way to go about correcting this.
    I'm all about simplifying what I can, when I can!
  • Hi pattypa - I agree on the software - however I can also see where access to certain transactions can be restricted for control purposes and the person normally making the entries may not have access to the required functions.
  • I'm not sure why the Accounting department was telling me that this wouldn't work. I was starting to think that I had lost my mind when they were telling me that entering it this way was incorrect! They were wanting to do the journal entry to correct everything, but to me, that's the more difficult way to go about correcting this.
    Oh - that's easy - that was what they were taught in school - there are "correcting entries" which is what they wanted to do -
    I favor "reverse and reenter" but that is not covered in the textbooks - in the textbooks, reversing entries are used to simplify the aftermath of the year end closing for accruals (deferrals do not need to be reversed). And students don't "get" adjusting entries, let alone what reversing entries do, so reversing entries are relegated to an appendix - but only for those of us who insist on attempting to impose the concept on students.

    What you (and your service provider) are doing is essentially reversing the incorrect portion of the original transaction. The income tax withholding reversal may be off slightly due to the graduated income tax rates if the reversal is not made against the same numbers as the original transaction, but that should not be a large amount. The difference can be computed by comparing the original transaction(s) with what the transactions should have been. You should do that anyway to make sure the actual booking achieves the desired results.
  • Patrick Haggerty
    Patrick Haggerty ✭✭✭
    edited November 2010
    Gee David - I probably was speaking "Accountinglish" in my previous post. I even used the guaranteed eye glaziers "accrual" and "deferral". All right - everyone who understood what I said, please raise your hands. Ok, just a couple - now everyone who understood what I said but didn't want to admit it, raise your hands.

    Ok - now here is your assignment - write down in 500 words or less, why are accruals reversible but deferrals are not.

    For extra credit, write down in 200 words or less how you can easily tell if an adjusting entry is an accrual or a deferral. Actually this can be done in about 10 words - so let's say 25 words or less.

    Multiple choice:
    Except in rare cases (I am only aware of one) adjusting entries involve:
    a) moving amounts between accounts reported on the balance sheet
    b) moving amounts between accounts reported on the income statement
    c) moving amounts between the income statement (accounts) and the balance sheet (accounts)
    d) more than one of the above but not all of them and I'm not saying which ones.
    e) none of the above
    f) all of the above except d and e.
    :wink: