REPORTING MEDICAL INSURANCE PREMIUMS FOR SHAREHOLDERS

The health and accident insurance premiums paid on behalf of a 2% S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax with-holding purposes on the shareholder-employee’s Form W-2, Wages and Tax Statement. They are not subject to Social Security or Medicare (FICA) or unemployment (FUTA) taxes. Therefore, this additional compensation is included in box 1 (Wages) of the Form W-2 issued to the shareholder, but is not included in boxes 3 (Social Security wages) or 5 (Medicare wages and tips) of the W-2. The health insurance amount is included as shareholder compensation on Form 1120S.

For this purpose, a 2% shareholder is any person who owns (or is considered as owning under the constructive ownership rules of Code Sec. 318), on any day during the S corporation’s tax year, more than 2% of the outstanding stock of the corporation OR stock possessing more than 2% of the total combined voting power of all stock of such corporation.

A 2% shareholder-employee is eligible for an above-the-line deduction for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation. At one time, “established by the S corporation” meant that the medical care coverage had to be in the name of the S corporation. However, in Notice 2008-1, 2008-2 IRB 251, the IRS stated that if the medical coverage plan is in the name of the 2% shareholder and not in the S corporation’s name, a medical care plan can be considered to be established by the S corporation if it (1) either paid or reimbursed the 2% shareholder for the premiums, and (2) reported the premium payment or  reimbursement as wages on the 2% shareholder’s Form W-2.

Health and accident insurance premiums paid on behalf of the shareholder may be further identified in box 14 (Other) of Form W-2. Neither Schedule K-1 (Form 1120S) nor Form 1099 should be used as an alternative to the Form W-2 to report this additional compensation.

About Steven Potts

Steven is a Licensed Investment Advisor Representative working with Transamerica Financial Group. He is also a tax professional with over three decades of experience doing corporate and individual taxes and tax planning. Available by appointment only he is still taking new clients and would love to talk to you.
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