Health and accident insurance premiums paid on behalf of a greater than 2-percent S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee's Form W-2, subject to income tax withholding.
- A 2-percent shareholder is defined as someone who owns more than 2 percent of the outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all stock of the corporation.
However, these additional wages are not subject to Social Security, or Medicare (FICA), or Unemployment (FUTA) taxes if the payments of premiums are made to or on behalf of an employee under a plan or system that makes provision for all or a class of employees (or employees and their dependents). Therefore, the additional compensation is included in the shareholder-employee's Box 1 (Wages) and Box 16 (if applicable) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2. For more information, refer to the IRS website.
How to setup a company-paid health insurance premium to be used in each payroll?
Set Up Company-Level Contribution
- Click on the Add Contribution button under Company Level contributions.
- Give the name to the contribution as “S Corp Owner Health.” or you can give any other name as required.
- Do not select anything under the field “Link to Company Deduction?”
- Choose the method as Fixed $.
- Once the method is selected, a new question will show up. Is this contribution applicable for 2% shareholders of an S corporation?
- Select Yes. It will make sure that this contribution is processed correctly during each payroll run.
- you select Yes, an answer to the question above, Box 14 will prefill with the label SEHI. You can edit this label if you wish.
- For the question: Do you want to assign this contribution to all employees? Select NO. It will let you add it to the specific shareholder employees.
- Click Save.
Assign the contribution to the shareholder employee
- Select an employee from the Employees list and click on Employee name
- Go to the Payroll section of the employee and then go to the contributions section.
- Click on Add Contribution and Select the contribution you added at the company level, called “S Corp Owner Health” (or whatever description you chose).
- You can also override the contribution amount for each employee.
- Click Save.
Once employees are assigned this contribution, the amount will be processed with each payroll and will be taxable for all taxes except Social Security, Medicare, FUTA, and SUTA taxes. It is an employer contribution amount hence this will not impact the Net Pay of an Employee but will impact the taxable wages of the employee in W2.
At the end of the year, the total contribution amount for this contribution will show up in Box 14 with label: SEHI on the Form W2 of an employee.