There are a number of tax advantages that come with forming your business as an S corporation. For example, S corporations are pass-through entities which means that the profits, losses, deductions and credits pass through the corporation and go directly to the owners or shareholders. In turn, the owners then pay the business taxes as part of their personal taxes. The benefit? You can avoid double taxation on corporate income.
However, when it comes to health insurance, it becomes a little complicated. While employees can claim employee health insurance as a tax-free benefit, shareholders who own more than 2% of the company stock cannot. Here’s how they navigate through the 2% Shareholder Health Insurance Benefit:
What is a 2% shareholder?
According to the Internal Revenue Service (IRS), a 2% S corporation shareholder is someone who owns more than 2% of the company’s stock at any time during the year. This title also applies to those who possess more than 2% of the total combined voting power of all stock of the corporation.
Health insurance premiums paid by an S corporation on behalf of its 2% shareholders should be deducted by the S corporation and reported as wages on Form W-2, Wage and Tax Statement for shareholders.
What is the 2% shareholder health insurance taxability?
As wages, these amounts are subject to state and federal income tax withholding. However, if the 2% shareholders are participating in a corporate plan established for the benefit of employees and their dependents, these amounts are NOT subject to Federal Insurance Contribution Act (FICA) taxes — Social Security and Medicare taxes — and Federal Unemployment Act (FUTA) taxes.
How to handle the 2% shareholder health insurance in Wagepoint.
Since the premium is considered to be self-employed health insurance, it is deductible on your Personal Income Tax Return, Form 1040 at year-end.
What does this look like in Wagepoint? Let’s walk through an example.
John Smith, a 2% Shareholder, earned $50,000 in 2020 but his corporation also paid him $10,000 in health insurance premiums.
In our software, you would navigate to Company > Income Types and select the "2% Shareholder Medical Premium" income type. As you process payroll, enter $10,000 in the "2% Shareholder Medical Premium" column. While the income type is not payable, it will ensure that it will appear in Boxes 1 (Wages, tips, other compensation), 14 (Other) and 16 (State wages, tips, etc.) in his W-2 Form.
John Smith’s 2020 W-2:
State rules around the 2% shareholder health insurance benefit.
Check with your state agencies for specific rules around this insurance benefit.
- District of Columbia (DC)
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
Different reporting requirements for shareholder-employees
Those who own more than 2% of company stock must treat benefits like health insurance differently from regular employees. As a pass-through entity, S corporation profits, losses and deductions go directly to the owners or shareholders. In turn, the owners then pay the business taxes as part of their personal taxes. Although regular employees are able to claim health insurance as a tax-free benefit, 2% shareholders need to report the premiums as wages in their W-2 form. If you have any questions, reach out to your state agency or the IRS.
The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals. Wagepoint assumes no responsibility for errors or omissions in this document.
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