Set Up State Tax Withholdings for HSA Deductions & Contributions

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.

Include only employer contributions in state taxable income

With these settings, HSA employer contributions will be included in employees’ state taxable income, but employee deductions will not be included.

  1. In Payroll Configuration, set Withhold State Tax on HSA Contribution to Yes.

  2. In Manage Deductions, on the HSA deduction, make the following changes:

  3. Click Save.

Include only employee deductions in state taxable income

With these settings, HSA employee deductions will be included in employees’ state taxable income, but employer contributions will not be included.

  1. In Payroll Configuration, set Withhold State Tax on HSA Contribution to No.

  2. In Manage Deductions, on the HSA deduction, make the following changes:

  3. Click Save.

Include both employer contributions and employee deductions in state taxable income

With these settings, both HSA employee deductions and HSA employer contributions will be included in employees’ state taxable income.

  1. In Payroll Configuration, set Withhold State Tax on HSA Contribution to Yes.

  2. In Manage Deductions, on the HSA deduction, make the following changes:

  3. Click Save.

Return to HSA Deductions and Withholdings

Return to Manage Deductions Overview