Page 188 - Essentials of Payroll: Management and Accounting

Benefits
insurance plans, then any benefits received from them by employees are
taxable income to the employer. However, if the employees pay some
portion of the cost of these plans with after-tax dollars, then only the
employer-paid portion is recognized as taxable income to them.

Alternatively, if employees pay for their share of these plans through a
cafeteria plan, then they are doing so with before-tax dollars, which
makes the proceeds from the insurance taxable.
Example. Molly Hatcher mistakenly ate a piece of the Humble Pie
Company’s namesake product and is out sick with a severe case of meek-
ness. She had been paying for 40 percent of the cost of short-term dis-
ability insurance, with the company paying for the remainder of this cost.

Under the policy,she is entitled to $350 per week.Of this amount,60 per-
cent will be recognized as taxable income to her,which is $210 per week.
Example. Molly Hatcher has elected to pay for half of her 40 per-
cent share of the short-term disability insurance through the corporate
cafeteria plan, which means that 20 percent of the total payments are
made with pretax funds, 20 percent with after-tax funds, and 60 per-
cent by the company. Under this scenario, 80 percent of the weekly
short-term disability payments are subject to income taxes, thereby
increasing her proportion of taxable income to $280.

Under a third-party liability insurance plan, the insurance carrier is
responsible for all withholding, if the recipient asks it to do so by filing
a Form W-4S. If the insurance carrier transfers this responsibility to the
company, then the company must report the amount of taxable liability
income received by an employee on its W-2 form at year-end.

Stock Options 3

A stock option gives an employee the right to buy stock at a specific
price within a specific time period. Stock options come in two varieties:
the incentive stock option (ISO) and the nonqualified stock option (NSO).

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