How to Handle S Corp Health Insurance on a W-2

An S-Corporation is a business entity that passes corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. This structure avoids the double taxation often associated with C-Corporations, where both the corporation and its shareholders are taxed on profits. While S-Corps offer distinct tax advantages, the treatment of health insurance premiums paid for shareholder-employees who own more than 2% of the company’s stock has specific rules. This article guides readers through the proper reporting and tax handling of these premiums.

Identifying Applicable Premiums and Shareholder Status

A “more than 2% shareholder” for S-Corporation health insurance purposes is defined by the Internal Revenue Service (IRS) as any person who owns, or is considered to own, more than 2% of the outstanding stock or voting power on any day during the tax year. Ownership includes direct holdings and indirect ownership through family attribution rules, where stock owned by an individual’s spouse, children, grandchildren, or parents is also considered owned by that individual.

Health insurance premiums subject to these rules include medical, dental, vision, and qualified long-term care insurance. The IRS mandates these premiums be included in the shareholder-employee’s gross income as additional compensation, differentiating them from health insurance benefits provided to regular employees that are typically excluded from taxable income. This ensures the benefit is accounted for in the shareholder’s income while allowing the S-Corporation to deduct the premiums as a business expense.

Calculating and Including Premiums in Gross Income

The amount of health insurance premiums paid by the S-Corporation on behalf of a more than 2% shareholder-employee must be added to their wages. This amount is included in Box 1, “Wages, Tips, Other Compensation,” of the shareholder’s Form W-2. For example, if an S-Corp pays $600 per month in health insurance premiums for a qualifying shareholder, $7,200 ($600 x 12 months) would be added to their Box 1 wages annually.

These premiums are subject to federal income tax withholding but are not subject to Social Security (FICA) or Medicare taxes. This exemption applies if the payments are made under a plan or system that provides for all or a class of employees. The health insurance premiums are included in Box 1 but excluded from Box 3 (“Social Security Wages”) and Box 5 (“Medicare Wages and Tips”) on Form W-2.

Reporting Health Insurance Premiums on Form W-2

S-Corporations must report these health insurance premiums on Form W-2. The calculated premium amount is combined with the shareholder’s regular wages and reported in Box 1, “Wages, Tips, Other Compensation.” This ensures the amount is subject to federal income tax withholding.

While these premium amounts are not included in Box 3 (“Social Security Wages”) or Box 5 (“Medicare Wages and Tips”), this exclusion from FICA and Medicare taxes applies to more than 2% shareholder-employees if the health plan meets criteria such as being offered to all employees or a class of employees. The health insurance premiums must also be separately reported in Box 14, “Other,” on Form W-2. Common labels in Box 14 include “S-Corp Health Ins,” “SEHI,” or “Hlth Ins,” providing clarity for the shareholder. Reporting in Box 14 enables the shareholder to claim the self-employed health insurance deduction on their personal tax return.

Shareholder’s Deduction for Health Insurance Premiums

After the S-Corporation reports health insurance premiums on the W-2, the shareholder-employee can claim the “Self-Employed Health Insurance Deduction” on their personal income tax return. This “above-the-line” deduction reduces the shareholder’s Adjusted Gross Income (AGI) and is taken on Schedule 1 (Form 1040).

To qualify, several requirements must be met. The health coverage plan must be established by the S-Corporation, either by directly paying premiums or reimbursing the shareholder for premiums paid, with proof of payment. The shareholder must not have been eligible for a subsidized health care plan through another employer or their spouse’s employer for the months claimed. The deduction is also limited to the taxpayer’s earned income from the trade or business providing the health insurance plan. This deduction offsets the income inclusion from the W-2, making the health insurance premiums tax-free for the shareholder when all conditions are satisfied.