Do you own an S corporation and offer health insurance to employees? If so, you need to know how 2% shareholder health insurance works for S corporations.
What is a 2% shareholder?
According to the 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 also applies to individuals who own more than 2% of the company’s voting power.
S Corp shareholders include individuals, trusts, or estates. An S corporation cannot have more than 100 shareholders. Shareholders can be employees or they can be individuals who do not perform services for the company.
If you have employees who own more than 2% of your business’s stock, benefits like health insurance are treated differently. Below, learn how health insurance is treated for regular employees. Then, find out how to deal with shareholder-employee health insurance.
Is health insurance a fringe benefit?
Health insurance is a type of fringe benefit. Fringe benefits are benefits you can offer employees in addition to their regular wages.
Some fringe benefits are taxable, but there are others that are nontaxable. Nontaxable fringe benefits are not subject to income, FICA, and/or FUTA taxes. Examples of nontaxable fringe benefits include educational assistance programs, group-term life insurance coverage, and health insurance coverage.
As a nontaxable fringe benefit, health benefit contributions are exempt from income tax, Social Security and Medicare taxes, and federal unemployment tax withholding.
However, S Corp health insurance for 2% shareholder-employees is an exception to the nontaxable health benefit contribution rule.
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2% shareholder health insurance
If you provide health insurance to employees who own more than 2% of stock in your S Corp, the premiums are tax deductible for your company. And, the premium amounts are taxable for your employees.
You must include the amount of the S Corp shareholder health insurance premium in the employee’s taxable wages.
So, what is the 2% shareholder health insurance taxability? Contributions made to a shareholder-employee’s health benefits plan are subject to state and federal income tax withholding. However, these contributions are not subject to Social Security and Medicare (FICA) taxes or unemployment tax.
This IRS rule applies to each state except Pennsylvania. In Pennsylvania, there are some instances where the additional wages are only subject to federal income tax and not state income tax. If you are an S Corp owner in Pennsylvania, contact your state for more information.
S Corp health insurance W-2 box 14
Write the value of the shareholder-employee’s health insurance in box 14, “Other,” of their Form W-2.
You will also include the additional compensation in box 1, “Wages, tips, other compensation.” Because the contributions are not subject to Social Security and Medicare taxes, do not include the amount in box 3,“Social Security wages” or box 5, “Medicare wages and tips.” The health insurance benefit is only subject to income tax.
For more information on S corporation shareholder health insurance, contact the IRS.
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This article is updated from its original publication date of February 19, 2018.This is not intended as legal advice; for more information, please click here.