See Payroll - cafeteria plan deductions on the wiki.
If you are below the SS earnings limit, you save 7.65% by using payroll deduction. However, this is not entirely a benefit, as contributing less to SS reduces your benefit. If you are over the second SS bend point, this is close to break-even. If you are below the second bend point, you should not use payroll deduction for HSA contributions, as you would lose more in future benefits than you save in current taxes.
If you are over the SS earnings limit, you save only the 1.45% Medicare tax on payroll deductions. However, this tax is a total loss, as you don't get any more Medicare as a result of paying more Medicare tax.
Also, you don't lose as much in the time value of money. If you delay your HSA contributions, you can still invest the same amount in some other account. And you don't lose the time value of taxes either; if you contribute a lump sum to your HSA in January, you get the tax benefit over the year by reducing your withholding or estimated tax, just as you do by the automatic reduction in withholding if you use payroll deduction. (But if you do use the lump sum, you need to account for that by requesting reduced withholding on the W-4; otherwise, you delay the tax benefit until you get your refund the following year.)
I have been both above and below the SS earnings limit, but the only time I declined payroll deduction was the year that I moved from NJ to MD. NJ does not allow a state tax deduction for HSA contributions, while MD does, so I didn't want to waste the state tax benefit by having the contribution deducted from my NJ salary which MD did not tax.
If you are below the SS earnings limit, you save 7.65% by using payroll deduction. However, this is not entirely a benefit, as contributing less to SS reduces your benefit. If you are over the second SS bend point, this is close to break-even. If you are below the second bend point, you should not use payroll deduction for HSA contributions, as you would lose more in future benefits than you save in current taxes.
If you are over the SS earnings limit, you save only the 1.45% Medicare tax on payroll deductions. However, this tax is a total loss, as you don't get any more Medicare as a result of paying more Medicare tax.
Also, you don't lose as much in the time value of money. If you delay your HSA contributions, you can still invest the same amount in some other account. And you don't lose the time value of taxes either; if you contribute a lump sum to your HSA in January, you get the tax benefit over the year by reducing your withholding or estimated tax, just as you do by the automatic reduction in withholding if you use payroll deduction. (But if you do use the lump sum, you need to account for that by requesting reduced withholding on the W-4; otherwise, you delay the tax benefit until you get your refund the following year.)
I have been both above and below the SS earnings limit, but the only time I declined payroll deduction was the year that I moved from NJ to MD. NJ does not allow a state tax deduction for HSA contributions, while MD does, so I didn't want to waste the state tax benefit by having the contribution deducted from my NJ salary which MD did not tax.
Statistics: Posted by grabiner — Sun Sep 15, 2024 11:24 pm — Replies 1 — Views 72