Treating Medical Insurance Premiums and HSA contributions as Wages - Overview
Health and accident insurance premiums and HSA contributions 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 or HSA contributions 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?
Situation 1 - When S-Corp owners contribute to the health premiums or HSA
If S-Corp owners also contribute to the health premiums or HSA then the first step would be to set up such employees as S-Corp owners on Uzio. A new section “Owner details” has been introduced on the Federal taxation screen where you can first specify company owners and then set them as S-Corp owners.
The owner setup was earlier present in each employee profile which has now been moved to the company level. S-Corp owner setup is the new setting which will appear only if Company type is S-Corp or LLC.
Once S-Corp owners are set up in Uzio, rest of the unique taxation rules are automatically taken care of by the system.
Situation 2 - When S-Corp owners do not contribute to the health premiums or HSA
Please note that this method is useful only if the company only contributes to the health premiums or HSA and there are no contributions from S-Corp owner employees. If S-Corp owners are also contributing towards their health premiums or HSA then you just need to set up the owner details as explained above.
- 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 and Exit
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 on their W2.
At the end of the year, the total amount for employee and employer contribution will show up in Box 14 with label: SEHI on the Form W2 of an employee.
In either of the business situations mentioned above, relevant steps can be followed as long as there is at least one payroll remaining in the year to be processed.
Note: If there are no payrolls left and S-Corp owner benefits need to be processed, you can reach out to firstname.lastname@example.org to process year end adjustments for the same.