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FSA – Flexible Spending Arrangements – Tax Guide
2016 © BDS Accounting & Tax - Gladstone Missouri Z3
Flexible Spending Arrangements (FSA) Beginning in 2013 medical expenses must be over 10% of taxpayer’s income to be deductible, therefore, most taxpayer’s (thankfully) cannot take advantage of this deduction. Therefore making any expense a pre-tax item is generally to the taxpayer’s advantage. FSA’s are a method an employee can exclude a portion of their income from wages.  The amount excluded is saved for future medical costs – on a pre-tax basis. The amount excluded is held by the employer (or trustee).  Once the employee incurs the medical costs, she provides documentation to the employer, and requests reimbursement.  The employer reimburses the employee with no taxes withheld. If a company adopts a FSA, employees are allowed to contribute to the plan, but the contribution rate established by the employee must remain in effect the entire year, and can be changed for the following year. Sole Proprietors and Partners (more than 2%) in a partnership are not allowed to participate in an FSA.  Their employees can participate. Benefits The benefits to the employee: The employee does not pay Federal, State, or City income tax on the amount contributed to the FSA. The employee does not pay Social Security Tax on the amount contributed to the FSA. If the employee terminates employment, they still have until 75 days after year end to spend the Medical benefits related to the amounts contributed to the FSA prior to their termination. The benefits to the employer: The employer does not pay Social Security Tax on the amount the employee contributed to the FSA. The disadvantage to the employee: The employee must incur medical expenses equal to the amounts deducted from his paycheck within 75 days of year end.  Any amount not used for medical costs – is forfeited. Beginning in 2013, if the employee’s company adapts a carryover policy, employees are allowed to carryover up to $500 each year. Example: Mary, a single employee, Kansas City resident, with no dependents, makes $30,000.  Last year she incurred $1,100 in out of pocket medical expenses.  She decides to contribute $1,000 to a FSA. A comparison of pay is: Employee No FSA   FSA Wages 30,000 30,000 FSA Contribution     1,000 Taxable Wages 30,000 29,000 Federal Withholding   3,743    3,592 Social Security/Medicare   1,695    1,659 Missouri Withholding         993          942 Kansas City Withholding         300          290 Take Home Pay 23,269 22,537 FSA Reimbursement      0     1,000 Total After Tax Receipts 23,269 23,357 Employee Savings with FSA          268 Employer Company Social Security/Medicare   2,295    2,219 Employer Savings with FSA             76 IRS Circular 230 Notice:  Unless expressly stated otherwise in this transmission, any tax advice contained herein, forwarded with or attached to this message was not and is not intended to be used, nor may it be relied upon or used, by any taxpayer for the purpose of (1) the avoidance of any tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any tax transaction or tax-related matters that may be addressed herein.
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