In Wave, it's important to properly enter benefits and deductions that will impact employees' taxable earnings. Proper entry will allow these benefits and deductions to be accurately reflected on Form W-2.
To enter a deduction to an employee's wages, go to the Payroll menu on the left-hand side:
- Click Employees
- Click the name of the employee
- Click Benefit & Deductions
- Choose to Deduct from Pay
- You will be able to choose which type of deduction you are using, and how often you would like it to occur
Amounts deducted must be deposited to applicable accounts outside of Wave.
Insight on each deduction option is included below:
Section 125 - cafeteria plan should be used for any health, dental and vision deductions as well as life insurance up to $50,000. These amounts reduce taxable wages reported in Boxes 1, 3, and 5 on Form W-2, Wage and Tax Statement, as well as under Box 12 with Code DD. It's important to note that although Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) Dependent Care and Medical contributions are reported separately, the premium health plan amounts (including a Health FSA) are to be deducted using the Section 125 deduction. Additionally, employer contributions will only need to be reported on Form W-2 if you have 250 employees or more during the year.
Health Savings Account (HSA) is a savings account to which both employees and employers can contribute, and can be used to pay or reimburse medical expenses. Contribution amounts roll over year after year. The contribution limit can vary from person to person and is determined by a number of different factors. Please note that this feature in Wave is for HSA contributions only and not for your employees health premium contributions (such as a High Deductible Health Plan).
The employee contribution amount reduces wages in Boxes 1, 3, and 5 and is also reported in Box 12 with Code W on Form W-2.
At year-end, if you have made any employer contributions to the HSA, these must be reported as well. Please reach out to support by clicking on the help icon in your Wave account to let us know the employer amount you have contributed, as well as the employee name for whom the reporting is needed. We don’t need to know the employee contribution amount as this should already be recorded in Wave.
Flexible Spending Arrangement (FSA) Dependent Care & Medical Contributions are contributions your employees can make through their FSA that also reduces taxable income. There is a limit to how much can be contributed to both, as well as specific reporting requirements on Form W-2:
- Dependent Care Contributions: Reduces wages in Boxes 1, 3, and 5 and is also reported in Box 10 on Form W-2. The contribution limit for 2021 is $10,500 if you file as single or married jointly. If you file as married but filing separately, the contribution limit for 2021 is $5,250.
- Medical Contributions: Reduces wages in Boxes 1, 3, and 5 on Form W-2 but is not reported in a separate box. The contribution limit for 2021 is $2,750 regardless of marital status.
401(k) contributions should be used for employee contributions to their 401(k) plan - this includes Traditional 401(k), safe harbor 401(k), and SIMPLE 401(k) plans. These contributions will reduce amounts in Box 1 on Form W-2, but not 3 and 5, as this kind of deduction is still subject to Social Security and Medicare. Contribution amounts will also appear in Box 12 with Code D, and Box 13 will be marked under "Retirement Plan." Please be advised that this deduction feature in Wave is not to be used for Designated Roth contributions. The maximum employee contribution for 2021 is $19,500.
Employee Roth 401(k) contributions should be used to record and deduct an after-tax dollar amount from an employee’s wages as an elective contribution to a Roth 401(k) plan. It is your responsibility to ensure contributions don’t exceed the IRS annual contribution limit. Any amount deducted from employee wages must be deposited to the applicable account(s) outside of Wave.
Wave automatically reports this benefit as follows: Box 12: Code AA. Total of all employee Roth 401(k) contributions attached to the tax year’s payrolls. Box 13: "Retirement Plan" is checked.
Employee SIMPLE IRA (Savings Incentive Match Plan for Employees) contributions are usually used by employees of small businesses to make tax-deferred contributions to a retirement plan (learn more). Use this feature to record and deduct a pre-tax dollar amount from an employee’s wages as a contribution to a SIMPLE IRA plan. A SIMPLE IRA contribution reduces taxable wages in Box 1 on Form W2. Examples include: SIMPLE IRA (408(p)) plans). It is your responsibility to ensure contributions don’t exceed the IRS annual contribution limit. Any amount deducted from employee wages must be deposited to the applicable account(s) outside of Wave. Do not use this benefit to record a 401(k) contribution. Wave automatically reports the amounts you add using this benefit as follows: Box 12: Code S: Total of all SIMPLE IRA contributions attached to the tax year’s payrolls, Box 13: "Retirement Plan" is checked.
To enter a benefit to an employee's wages, go to the Payroll menu on the left-hand side:
- Click Employees
- Click the name of the employee
- Click Benefit & Deductions
- Choose to Add to Pay
- You will be able to choose which type of benefit you are using, and how often you would like it to occur
Insight on each benefit option is included below:
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Use this to record the total eligible allowance offered to an employee as part of a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), regardless of how much is reimbursed. The amount you enter using the QSEHRA is not added to the employee’s wages. It is your responsibility to ensure you don’t exceed the annual maximum or the 50 full-time employee limit. Note that S-Corp +2% shareholders are not eligible. This will appear on the pay statement as “non-taxable non-cash benefits.”
Wave automatically reports this benefit on Forms W-2 and W-3 as follows:
Box 12: Code FF: Total of all QSEHRA benefits attached to the tax year’s payrolls
Shareholder Medical Premiums This benefit for S-corporations with employees that own 2% or more of the company. It is also referred to as the 2% Shareholder Health Insurance Benefit.
Adding this benefit will include the premium you add as wages subject to income tax withholding, but not subject to Federal Unemployment Tax, Social Security, or Medicare. The premium amount is reported in Box 1 and Box 14 on Form W-2 (not in boxes 3 and 5).
- If your S-corporation employs one or more employees owning 2% or more of the company, you may be able to claim a benefit that will reduce payroll taxes and counts as an above-the-line deduction on your personal income tax return. The premium is considered self-employed health insurance and is therefore deductible on your personal income tax return, Form 1040 at year-end. This is considered an “above-the-line” deduction. The IRS states that the S-corporation can either obtain and pay for the entirety of the health insurance coverage for the shareholder, or reimburse the shareholder in full for the coverage, as long as it is included as a premium payment on the shareholder’s Form W-2. In order to claim this benefit, your S-corporation must pay for the entirety of your health insurance coverage and report it as compensation: Use this benefit in Wave to do so.
Check with your state agencies for specific rules around this benefit.
To review the benefits and deductions included on previous payrolls navigate to the Reports page through the left navigation menu in your Wave account and select the Payroll Benefits and Deductions Report.