GEORGIA DEPARTMENT OF EDUCATION OFFICE OF THE STATE SUPERINTENDENT OF SCHOOLS TWIN TOWERS EAST ATLANTA, GA TELEPHONE: (404) FAX:

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1 GEORGIA DEPARTMENT OF EDUCATION OFFICE OF THE STATE SUPERINTENDENT OF SCHOOLS TWIN TOWERS EAST ATLANTA, GA TELEPHONE: (404) FAX: (404) January 20, 2006 MEMORANDUM TO: PCGenesis System Administrators FROM: Todd Williams, Director of Technology, Quality Assurance Bob Unger, PCGenesis Lead Developer SUBJECT: PCGenesis Payroll Operations This memo is to inform PCGenesis sites of IRS Regulations regarding imputed income and the correct way to process imputed income in PCGenesis. IRS requires payment of FICA (social security and Medicare) tax on imputed income. It should be included in normal payroll processing throughout the calendar year. This document provides the instructions for processing imputed income in normal payroll for easiest compliance with the withholding requirements. If imputed income is processed on a monthly basis in payroll, all amounts will be properly withheld and annual reporting will be automatic. In the future, these instructions will be included in Section B: Payroll Update Processing, Procedure B2. Processing Imputed Income located at: htm. Many insurance companies provide an annual list of imputed income amounts for processing at the end of the year. The imputed income amounts may be processed during the December payroll to withhold the required social security and Medicare taxes for employee and employer amounts. The problem with this approach is that the withholding social security and Medicare amounts for employees who have imputed income but terminate before the December payroll will be missed. The Internal Revenue Service (IRS) instructions for preparing W-2 s require the collection of social security and Medicare tax for all employees. To report the imputed income and the necessary January 20, :25 PM Page 1 of 12

2 withholding on terminated employees via an end of year adjustment, manual entry of earnings history adjustments and claims must be performed as described in the topic Processing Imputed Income after the Calendar Year s Final Payroll. None of this is an issue if imputed income is processed during each payroll, as mentioned previously. In the event the December payroll has past, and employees W-2 s for the prior calendar year are being prepared, Processing Imputed Income after the Calendar Year s Final Payroll provides the instructions to adjust an employee s earnings history to include imputed income for that year. The instructions for setting up a deduction code are provided in Section F: Description/Deduction/Annuity File Processing which is also located at: htm. January 20, :29 PM Page 2 of 12

3 Overview For federal income tax and FICA (OASDI/Medicare) calculations, the Internal Revenue Service (IRS) requires the cost of employer-paid Group Term Life Insurance (GTLI) for the amount of coverage exceeding $50, to be included in all employees taxable wage base. Either the dollar amount provided by your insurance provider, or the amount listed by the IRS in Publication 15-B, the Employer s Tax Guide to Fringe Benefits, within the Group Term Life Insurance topic must be used. For calendar year 2006 benefits, this publication is provided at: and includes a table listing the cost per $ of coverage for various age groups of employees. For example, if your school system provides $100, of GTLI for an employee 60 years of age at the end of the tax year, the employee would have a monthly imputed income amount of fifty (50) times $0.66, or $ In this example, the employee earns an additional taxable income of $ for the year. As these earnings are subject to FICA, the employee s and employer s Medicare and OASDI amounts if applicable are also increased. Processing Imputed Income through Payroll To include imputed income in normal monthly payroll in PCGenesis, a deduction code for imputed income must be set up. It is suggested the description indicate GTL Imp. Inc. or something similar as this description will be displayed within Deductions on affected employees pay stubs. In this instance, a special deduction type will be used during payroll processing, and the imputed income amount will not be withheld from the employee s pay. Instead, during the payroll calculation this amount will be added to the Medicare and OASDI wage base if the employee is subject to FICA. If this is the first time imputed income is being entered for monthly processing, a memorandum to all employees explaining that the amount for this deduction description will not be deducted from the gross pay but will instead be added to the gross pay for the calculation of Medicare and OASDI for affected employees should be distributed. New employees should also be notified of the imputed income deduction and its purpose on payroll check stubs. Because the IRS does not require withholding of federal income tax from the imputed income amount, PCGenesis does not add the amount to the taxable wage base during the payroll calculations, and does not withhold additional federal or state tax. However, when the employee s W-2 is produced, the taxable wages in Box 1 will include the employee s imputed income and the employee will owe federal and state tax on the amount when the income tax return is filed. For senior employees for whom the school system provides substantial term life insurance benefits, the imputed income could substantially increase the total amount of taxes due. January 20, :35 PM Page 3 of 12

4 Identifying the Imputed Income Deduction Code Imputed income may be assigned to any available PCGenesis deduction code and is entered with a Deduction Type of F (Imputed Income). No vendor is assigned to this deduction code. PCGenesis will automatically create a Fund/Fisc/Program and Function, although this information is not used for imputed income. In our example, deduction code 44 is used. The following screenshot example shows a sample imputed income deduction definition: F (Imputed Income) Refer to Section F: Description/Deduction/Annuity File Processing for additional details and requirements for setting up a deduction code. January 20, :35 PM Page 4 of 12

5 Entering the Imputed Income Amount For each employee, enter the imputed income amount per payroll period on the Update/Display Deduction Data screen as if it were a normal deduction. Remember, the amount is not withheld from the employee s pay. The amount entered for each employee is determined by the amount of employer-paid group term life insurance in excess of $50, of coverage and the employee s age. The following chart for calendar year 2006 is from the previously referenced IRS publication. The employee s age on the last day of the tax year should be used. Monthly Cost Per $1, of Protection for 2006 reporting Employee Age Cost Under 25 $ $ $ $ $ $ $ $ $ $ and Older $2.06 January 20, :35 PM Page 5 of 12

6 In the following example, we will assume the employee is 60 years of age with $200, of employer-provided coverage. The imputed income in this instance would be $99.00 per month, e.g. 150 units times $0.66 per unit. Imputed Income Deduction Amount January 20, :35 PM Page 6 of 12

7 Calculate and Display Payroll Example of Imputed Income Amount Not Processed Calculate and Display Payroll Example of Imputed Income Amount Processed HI Gross (Gr) and HI Amount (Amt) Imputed Income Amount Note the differences in the HI Gross and HI amount. The Federal and State tax withheld does not change because PCGenesis does not withhold federal or state tax from imputed income. January 20, :35 PM Page 7 of 12

8 Setting the Group Term Life Insurance (GTLI) Flag to Y (Yes) When setting up payroll and when performing the Calculate and Display option, be sure to set the GTLI deduction flag to Y (Yes) when appropriate for the payroll run. For instance, the imputed income may be applied only on a monthly basis even though there is a semi-monthly payroll. In our example, the flag on Deduction 44 below is currently set to N (No). Regarding the 941 Report, many school systems use the Georgia Department of Labor (DOL) Quarterly Report as a basis for creating the 941Report for quarterly federal tax reporting. However, the Georgia Department of Labor (DOL) Quarterly Report does not include imputed income because the DOL does not consider these amounts to be wages as does the IRS. If the DOL Quarterly Report is used as a basis to produce the 941 Report, the quarterly imputed income amount must be added to the gross wages on the DOL report to produce the 941 Report. The 4 th quarter 941 report has the same deadline as issuing W-2s: January 31 st. We advise not filing the 4 th quarter 941 Report until W-2s are completed and mailed. This may help prevent filing a 941c. January 20, :35 PM Page 8 of 12

9 Processing Imputed Income after the Calendar Year s Final Payroll Note that the following steps require considerable manual processing. It is much easier to make sure the imputed income is included in payrolls throughout the year, or even in only the final payroll. To include imputed income on an employee s W-2 after the final payroll for the year has been processed, an earnings history adjustment record must be entered for the employee. The imputed income deduction code must already exist. Since the imputed income is subject to FICA (OASDI/Medicare), there will be an employer and employee amount due for FICA for the prior year. It is recommended that the FICA amount due be collected from the employee by entering a FICA adjustment in the first payroll of the new calendar year. For all employees with imputed income, an earnings history adjustment record must be entered in the prior year with the imputed income deduction and the appropriate FICA withholding amounts as if these amounts had been withheld. The FICA amounts must be manually calculated for each employee. If you pay OASDI, you must take care not to exceed the OASDI earnings and withholding limit. For active employees, after entering the prior year earnings history adjustment record, enter a FICA adjustment amount to collect the FICA due on the imputed income in the January payroll, and enter another earnings history record to reverse the FICA gross and tax amount after the payroll. The effect of both earnings history records moves the money collected by the FICA adjustment back to the prior year. For terminated employees, with imputed income reported by your insurance company, you will not be able to collect the FICA amounts due through payroll. However, because you are still responsible for collection, your school system must pay both the employee and employer share of the FICA tax due. Keep a record of the total imputed income and FICA tax amounts entered in adjustment records for terminated employees and create a claim in January to pay the employees FICA amount along with the matching employer share. When filing the 4 th quarter s 941 Report be sure to include these amounts. January 20, :35 PM Page 9 of 12

10 Examples of the FICA and imputed income entries are provided in the screenshot example below: It may be necessary to change the GHI flag to N (No), and to clear the annuity company indicators to save the adjustment record. Entering the imputed income into the earnings history will cause the imputed income amount to be picked up in W-2 processing and included in Box 1. The next step is to enter a FICA adjustment record for each active employee for the January payroll. Enter the imputed income amount for the appropriate OASDI or HI gross and calculate the appropriate tax amount. January 20, :10 AM Page 10 of 12

11 The amount will be taken out in the January payroll and the employer match will be processed. These amounts must be tracked for adjusting the first quarter 941 Report and to prepare a 941c to credit this amount back to the 4 th quarter of the previous year. The final step for active employees is to enter another earnings history adjustment record for January to reverse the FICA Gross adjustment and FICA amount withheld. This earnings history adjustment must be entered after the first payroll for January is completed. This record is the balancing record for the December earnings history record and prevents the FICA adjustment from affecting the current year s W-2. Do not enter the imputed income deduction amount on this record. January 20, :35 PM Page 11 of 12

12 Entering the amounts into the employee s earnings history causes the amounts to be displayed on the reports used to produce the 941 Report. As mentioned previously, the Georgia DOL does not consider imputed income amounts to be wages as does the IRS, so imputed income is not included on the PCGenesis DOL quarterly report. If the PCGenesis DOL Quarterly report is used for creating the 941, the gross wages must be adjusted by the quarterly imputed income totals. If the 4 th quarter 941 was completed and filed before the processing of the imputed income was performed, create a 941c when filing the 1 St quarter 941 Report. Skip part I and II of the 941c form and use the imputed income amounts and the FICA withholding amounts to complete parts III and IV as appropriate for your site. On form 941, the social security and Medicare withholding on lines 5a and 5c plus the social security adjustment amount and Medicare adjustment amount entered on line 7e of the 941 Report (from the 941c) should balance to the total claims paid for FICA for the first quarter, which includes the FICA adjustment and manual claims for terminated employees. January 20, :35 PM Page 12 of 12