Some states require Health Savings Accounts (HSA) employer contributions to be included in employees’ state taxable income, even though these contributions are never paid directly to employees.
Other states require HSA employee deductions to be included in state taxable income, even though these deductions are fully exempt from all Federal taxes including FICA and Medicare.
Still other states require that both be included in state taxable income.
This topic explains how to complete the setup for each of these situations — include employer contributions, include employee deductions, or include both.
With these settings, HSA employer contributions will be included in employees’ state taxable income, but employee deductions will not be included.
In Payroll Configuration, set Withhold State Tax on HSA Contribution to Yes.
In Manage Deductions, on the HSA deduction, make the following changes:
In the Primary Deduction Information section, select HSA Deduction from the HSA Support pull-down list.
In the Employee Information section, check the Affects State Taxable Income box.
Click Save.
With these settings, HSA employee deductions will be included in employees’ state taxable income, but employer contributions will not be included.
In Payroll Configuration, set Withhold State Tax on HSA Contribution to No.
In Manage Deductions, on the HSA deduction, make the following changes:
In the Primary Deduction Information section, select HSA Deduction from the HSA Support pull-down list.
In the Employee Information section, uncheck the Affects State Taxable Income box.
Click Save.
With these settings, both HSA employee deductions and HSA employer contributions will be included in employees’ state taxable income.
In Payroll Configuration, set Withhold State Tax on HSA Contribution to Yes.
In Manage Deductions, on the HSA deduction, make the following changes:
In the Primary Deduction Information section, select HSA Deduction from the HSA Support pull-down list.
In the Employee Information section, uncheck the Affects State Taxable Income box.
Click Save.
Return to HSA Deductions and Withholdings
Return to Manage Deductions Overview