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Tax Setup

Track Allowances

You can track allowances given to employees and whether those allowances are exempt from various taxes. An allowance is money the employer gives to the employee to use for a specific item, such as a car, housing, or childcare. Allowances represent additions to an employee's paycheck that have specific tax consequences.

  1. On the Payroll tab, click Tax Setup > Benefits/Allowances > Employee Allowances.
  2. Enter the necessary information.
    • Name—Enter a unique name for the allowance.
    • W2 Letter—Enter a letter code for this type of allowance from the list on the back of the W-2 form. The code letter prints in Box 12 of the W-2. Some common codes used for Box 12 include:
      • Code C – Taxable cost of group-term life insurance over $50,000.
      • Code AA – Designated Roth contributions under a section 401(k) plan.
      • Code DD – Cost of employer-sponsored health coverage.
        Note: The Affordable Care Act requires employers to report employer-provided health coverage costs on employees' Form W-2. For more information, see the IRS requirements for reporting employer-provided health coverage.
    • Exempt From—Select the appropriate checkboxes if the allowance is exempt from that tax. If an item is selected as exempt, the allowance is added after taxes have been calculated and subtracted.
  3. At the top, click Save.
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Last updated: July 10, 2024