1. Open Quickbooks desktop and click on the Lists menu and select Payroll Item List.
    1. Note: If payroll is not turned on in your Quickbooks file, then you will not see the Payroll Item List selection.
  2. You will need to create a new payroll item for the employee deduction portion of an employee’s health insurance plan, so to do this click on Payroll Item at the bottom of the screen, or simply select Ctrl+N.
  3. Select Custom Setup and click Next.
  4. Select Deduction and click Next.
    1. Note: Be sure to not confuse employee deductions with company contributions.
  5. Enter a name for your new payroll item, such as Health Ins. Deduction and click Next.
  6. Choose the vendor name whom your health insurance premiums will be paid to and an account number identifier if applicable.
  7. Select the Payroll Liability account where the health insurance employee deductions will be tallied up for later payment.
    1. Note: This selection is important because this is the liability account where health insurance premium payments will be applied against for future bookkeeping.
  8. Click Next.
  9. For the Tax Tracking Type, choose Premium Only/125.
    1. Note: Be sure your company is actually indeed paying on a Section 125 Premium Only Cafeteria plan. Otherwise you may have to alter your tax tracking selection here.
    2. Note: This selection is important because it affects the following payroll tax forms: Form 940, Form 941 and the employee’s W-2 form.
  10. Click Next.
  11. Click Next. Note: You should not need to change anything in the Taxes section of this wizard.
  12. If you plan on having the payroll software calculate the health insurance deductions costs based on a manual quantity you enter in on EACH PAYCHECK or based on the employee’s hours worked on EACH PAYCHECK, then choose one of these selections.
    1. Note: Most of the times you probably will select Neither as this amount probably will be preset within each employee’s payroll profile, either as a flat amount or a percentage of wages.
  13. Click Next.
  14. Enter a Default Rate & Limit only if you want this information to be the company default choices for all employee profiles.
    1. Note: Most of the times you probably will want to leave this section blank as it is most accurate to simply set up the actual amounts manually within each employee’s profile, especially for employees that choose not to have employer-sponsored health insurance.
  15. Click Finish.
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