How to Report 2% Shareholder Health Insurance on W-2 Box 14

S corporations must follow a specific procedure for reporting health and accident insurance premiums for shareholders who own more than 2% of the company. This process influences the corporation’s payroll filings and the shareholder’s personal income tax return. The premiums are included in the shareholder’s gross income and then deducted on their personal return, creating a flow-through tax treatment. Correctly handling this mandatory reporting is necessary for compliance for both the business and its owners.

Eligibility and Plan Establishment

A “more-than-2% shareholder” is an individual who owns more than 2% of the S corporation’s outstanding stock on any day of the year. This calculation includes shares owned directly and those owned indirectly through family members. Under the family attribution rules of Internal Revenue Code Section 318, an individual is considered to own the stock held by their spouse, children, grandchildren, and parents. This means a person who owns no stock directly can still be treated as a 2% shareholder if a family member owns a qualifying interest.

The tax treatment is contingent upon the health insurance plan being formally “established by the business.” This means the S corporation must either make premium payments directly to the insurance company on behalf of the shareholder or reimburse the shareholder for premiums they have personally paid. If the shareholder pays for their own policy and the corporation does not reimburse them, the plan is not considered established by the business. The business must create the plan or formally adopt an existing plan to meet this requirement.

Corporate Reporting on Form W-2

The total amount of health and accident insurance premiums paid by the corporation must be included in the shareholder-employee’s gross wages on their annual Form W-2. This figure is added to the amount reported in Box 1 (Wages, tips, other compensation) and is subject to federal income tax withholding. This treatment distinguishes the benefit from non-taxable health insurance provided to non-shareholder employees.

While the premiums increase federal taxable wages, they are exempt from Social Security and Medicare (FICA) taxes. The premium amount is not included in the totals for Box 3 (Social Security wages) or Box 5 (Medicare wages). This exemption applies as long as the premiums are paid under a plan for employees or a class of employees.

The corporation must also report the premium amount in Box 14 (Other) for informational purposes. Companies often use a descriptive label such as “S CORP HI” or “2% SH INS” to identify the amount. The premium amount is also generally included in Box 16 for state wages, though rules can vary. On its corporate tax return, Form 1120-S, the S corporation deducts the premiums as compensation or wages.

Shareholder Personal Tax Deduction

The shareholder uses the information from their Form W-2 to take a personal tax deduction. The amount reported in Box 14 is deductible on the shareholder’s Form 1040. This is accomplished by claiming the self-employed health insurance deduction, an “above-the-line” deduction taken on Schedule 1 of Form 1040. An above-the-line deduction reduces a taxpayer’s adjusted gross income (AGI).

This deduction effectively reverses the inclusion of the premiums in wages, making the health insurance benefit tax-free for federal income tax purposes for the shareholder. The ability to take this deduction is contingent on the S corporation having correctly reported the premiums on the W-2.

There are limitations to this deduction. The shareholder cannot claim the deduction for any month in which they were eligible to participate in another employer-subsidized health plan, such as one offered by a spouse’s employer. The deduction is also limited to the amount of wages the shareholder earned from the S corporation.