Health and accident insurance premiums (this includes premiums for spouse and family coverage as well) paid on behalf of a 2% S corporation shareholder-employee should be reported as wages on the shareholder-employees Form W-2.
Noncompliance with this requirement can result in the disallowance of the health insurance deduction to the 2-percent shareholder-employee.
The following guidelines should be followed to report on Form W-2 the cost of the medical insurance paid by the S corporation on behalf of a 2-percent shareholder-employee:
The health insurance premiums are additional wages reportable in Box 1 (Wages) of Form W-2, and Box 16 (State Wages) and are subject to Federal and State income tax withholding only, computed using the rules for withholding on supplemental wages.
The premiums are NOT included in Boxes 3 and 5 of Form W-2 and are not subject to Social Security, or Medicare (FICA), or Unemployment (FUTA) taxes.
The health insurance premiums paid by the S corporation are reported on Form W-2, Box 14. There’s no standard list of W2 codes for Box 14, so employers can list any description they choose for 2% health premiums including SCORP; SEHLTH, INS; 2% SH; etc. are some of the common ones we see.
Treatment by 2% Shareholder-Employee
A 2-percent shareholder-employee of an S corporation can deduct the medical care premiums (as reported/ indicated above) as an “above-the-line deduction” in arriving at Adjusted Gross Income (AGI). This deduction occurs on Line 16, Schedule 1 (Form 1040) as a self-employed health insurance deduction.
This has the effect of making the additional wages nontaxable on the shareholder’s personal tax return. This deduction is only allowed if the health insurance premiums are reported as taxable compensation in the wages of the 2-percent shareholder-employee’s Form W-2.
Treatment by S corporation
Properly treated as wages to the 2-percent shareholder-employee, the S corporation deducts the full premiums paid as compensation expense on Form 1120S.
The S corporation can either obtain an accident and health insurance plan in the name of the S corporation and make the premium payments for the 2-percent shareholder-employee (and spouse and dependents) to the insurance company, or, alternatively, a 2-percent shareholder-employee can obtain a policy in his or her name and have the S corporation reimburse the shareholder for the premium payments.
Follow the rules or lose the deduction. Your payroll companies will surely be reaching out for this information very soon so best to be prepared! For our payroll clients please provide this information to our office just as soon as possible but no later than December 8, 2020.
For further help or explanation on compliance with the above rules, please contact our office.