How Carrot Affects Your Taxes
In general, benefits you receive through Carrot for care not classified as a qualified medical expense (QME) are considered taxable income by the IRS and subject to employment tax withholding. A good rule of thumb is if the care you receive is not medically necessary, you may be taxed. When you use Carrot services, UC will withhold taxes based on the value of the services you receive. Since this can reduce your net pay, it’s important to consider the possible tax implications before signing up with Carrot or receiving care.
Don’t forget
Any reimbursement submitted during November and December, or any adjustments made to a reimbursement submitted after Nov. 1, will likely result in you receiving an updated or corrected W-2 in the first quarter of the following year. Contact a tax adviser to better understand imputed income and the potential impact the family-forming program may have on your income.
Talk to Carrot
Carrot can’t offer tax advice, but they can help you understand what services may be taxable. Contact Carrot to schedule a Zoom call with one of Carrot’s benefit experts, who can explain the potential tax implications based on the care you are interested in.
Benefits That Are Not Taxable
Generally, care that qualifies as a qualified medical expense (QME) is not considered taxable income. This includes services for fertility or preservation related to a diagnosis of infertility or medical necessity as determined by a fertility doctor.
Benefits That Are Taxable
Care that does not meet the qualified medical expense standard is generally considered taxable. This includes:
- Fertility* and preservation care not related to an infertility diagnosis or medical necessity
- Donor assistance, gestational surrogacy* and adoption services**
- Doula services and human milk shipping services
*Carrot benefits you receive toward fertility and surrogacy services are considered taxable wages for income and employment tax withholding purposes. See the fertility and surrogacy guides for more details. For more information about the tax implications of fertility services, visit irs.gov/publications/p15b.
**Carrot benefits you receive toward adoption expenses may be excluded from your federal taxable income.
- If you adopt a child, you may claim both a tax exclusion and a tax credit.
- For an expense, you may claim either a tax exclusion or a credit.
- You may not claim a tax credit for a reimbursed expense that is excludable from your federal taxable income.
See the adoption guide for more details.
This should not be construed as tax advice. You are advised to consult with a tax and/or legal advisor before accessing benefits through the UC Adoption Assistance Plan.
Tax Example
Scenario 1
This is an example and used for illustration purposes only. Individual situations will vary. The description below is not representative of any individual or expected tax withholding amounts. Please consult with a tax advisor for your individual situation. The below example shows a moderate effect on net pay.*
A UC resident earns $7,000 monthly in gross earnings and gets paid on the first of every month. $1,400 is withheld for taxes such as federal income tax and FICA tax. The net pay to the resident is $5,600.
The resident’s typical paycheck:
The resident created a Carrot plan and starts a family forming journey for Egg Preservation. The resident informs Carrot they do not have a QME In July and completes services and pays out of pocket for egg preservation. In August, the resident submits $4,000 of expenses to Carrot for reimbursement. The resident receives approval from Carrot that the expenses have been approved. Carrot reimburses $4,000 to the resident on August 20.
Since the resident’s services are not consider a Qualified Medical Expense, they can expect the $4,000 dollars to be reflected as additional income on the next following paycheck (October 1). The resident’s paycheck will have a new line of other earnings on their paycheck.
Note: UC will report the taxable benefits as additional income in the next following month’s paycheck after the date you received your reimbursement. In this scenario, reimbursement was received in August, therefore the taxable benefit will appear on the October 1 paycheck.
For the October 1 paycheck, the resident will see the additional income reported as other non-cash earnings. The resident now sees an additional $800 withheld for taxes. The gross earnings remains the same at $7,000, and $1,400 is withheld for taxes on the gross earnings. An additional $800 is withheld for taxes on the benefit received from Carrot. The October net pay is $4,800.
The resident’s paycheck with Carrot Benefit included reflects the following:
*More significant impacts are possible . Even a net $0 paycheck in certain cases.
Get Started With Carrot
To get started, visit get-carrot.com/signup to create your account. Register using your UC resident or fellow email address as entered in PlanSource or submitted to your program coordinator, so Carrot can confirm you are a UC resident or fellow. You can change your email address after you register.
Want to Learn More?
For answers directly from the experts, view the recorded webinar and Q&A below.
