Health and accident insurance premiums paid on behalf of a 2-percent S corporation shareholder-employee (owning more than 2%) of an S corporation are reported as wages on the shareholder-employee’s Form W-2, subject to income tax withholding. In addition, premiums paid by the S corporation for the 2-percent shareholder-employee’s spouse and dependents should also be included in the wages of the shareholder. 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-2 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, 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 S. This is the amount the shareholder deducts on page 1 of Form 1040, line 29 (Self- employed health insurance deduction)
Treatment by 2-Percent Shareholder-Employee
A 2-percent shareholder-employee of an S corporation can deduct the medical care premiums on page 1, Form 1040 as an “above-the-line deduction” in arriving at Adjusted Gross Income (AGI). 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 premiums paid as compensation expense on Form 1120S.
The S corporation must 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. 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.
Pursuant to IRS Notice 2008-1; a 2-percent shareholder-employee is only eligible to deduct accident and health insurance premiums based on compliance with the above rules.
For further help or explanation on compliance with the above rules, please contact Withum’s Business Tax Services Team.