Accounting question

[Margaret CPA in OH]

There is a difference of opinion in my sole prop group as to the proper way to account for the Form 941 credit for COBRA premiums. Some say it should be a reduction in health insurance premium expense because it was a credit for COBRA premiums. Others say it is a reduction in payroll tax because it reduced the amount of tax due on Form 941. But the first says that the 941 was just a convenient vehicle to help the business and to reduce the payroll tax may skew the taxes actually withheld, among other things. One or the other accounts is affected for year end tax reporting.

What say you all? I really don't like accounting and want to be prepared when this comes up at year end!

[jainen]

>>skew the taxes actually withheld<<

I'm not an accountant, but I don't see how a credit would affect what was withheld or even how withholding was recorded. How do you handle other credits like Advanced EIC? If you claim that on Form 941 for one employee, would it "skew the taxes actually withheld" on other employees?

[Karen Lee]

There is a difference of opinion in my sole prop group as to the proper way to account for the Form 941 credit for COBRA premiums. Some say it should be a reduction in health insurance premium expense because it was a credit for COBRA premiums. Others say it is a reduction in payroll tax because it reduced the amount of tax due on Form 941. But the first says that the 941 was just a convenient vehicle to help the business and to reduce the payroll tax may skew the taxes actually withheld, among other things. One or the other accounts is affected for year end tax reporting.

What say you all? I really don't like accounting and want to be prepared when this comes up at year end!

Margaret:

My "rule of thumb" in this situation would be to reduce the expense account by any refund/rebate/credit. If the Cobra payments made by the employer is expensed (debited) to "health insurance premiums" than the credit would "reduce" or be credited to the "health insurance premiums". Your year end figures would be accurately reflecting "health insurance expense" and "payroll tax expense". The 941 check written will be a "net" figure including both.

Karen

[Margaret CPA in OH]

Well, jainen, I've never had any clients with employees with any employment tax or other credits before - just lucky, I guess. Perhaps that's why I had to ask the question on this one, lack of previous exposure to the situation.

My inclination matches that of Karen Lee, to offset the insurance premium since the credit is to pay for the insurance premium but others in the group felt fairly strongly that, since it was on the payroll tax form and a reduction in the tax remitted, it should be a reduction in payroll tax.

I'm too easily swayed in either direction because of uncertainty and lack of experience in this area. Thanks for the input, folks. I guess very few others on the board have a question about it.

[Maribeth]

Well, jainen, I've never had any clients with employees with any employment tax or other credits before - just lucky, I guess. Perhaps that's why I had to ask the question on this one, lack of previous exposure to the situation.

My inclination matches that of Karen Lee, to offset the insurance premium since the credit is to pay for the insurance premium but others in the group felt fairly strongly that, since it was on the payroll tax form and a reduction in the tax remitted, it should be a reduction in payroll tax.

I'm too easily swayed in either direction because of uncertainty and lack of experience in this area. Thanks for the input, folks. I guess very few others on the board have a question about it.

I agree with Karen Lee. I would reduce the health insurance expense by the amount of the COBRA credit. In my thinking, it is not and could not be a reduction in the payroll tax expense. That does not seem logical to me.

Maribeth

[ACS41]

MaryBeth and Karen Lee are correct. The credit is for health insurance, not payroll taxes. By crediting (or reducing) health insurance expense you are effectivly taking into income the amount of the credit.