Do you own an S corporation and offer health insurance to employees? If so, handling health insurance may get confusing if you have a 2% shareholder-employee. Learn 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.
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 those employees.
Include the amount of the S Corp shareholder health insurance premium in the employee’s taxable wages. 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.
| 2% Shareholder Health Insurance Premiums Are Subject to… | 2% Shareholder Health Insurance Premiums Are NOT Subject to… |
|---|---|
| Federal income tax | FICA tax |
| State income tax* | Unemployment Tax |
| Local income 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.
**Check with your locality for more information on 2% shareholder health insurance taxation.
How to report 2% shareholder health insurance on Form W-2
Include the additional compensation (aka the health insurance premiums made on behalf of 2% shareholders) in Box 1, “Wages, tips, other compensation.”
Write the value of the shareholder-employee’s health insurance in box 14, “Other,” of their Form W-2.
Include the year-to-date S Corp health contributions in Box 16 (state wages, tips, etc.) and Box 18 (Local wages, tips, etc.), if applicable.
Again, the health insurance benefit is only subject to income tax. 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.”
For more information on S corporation shareholder health insurance, contact the IRS.
2% Shareholder FAQs
Yes, 2% shareholder health insurance is subject to income taxes.
No, 2% shareholder health insurance premiums are not subject to FICA tax (Social Security and Medicare).
No, 2% shareholder health insurance is not subject to federal unemployment tax.
Unlike health insurance to employees who are not 2% shareholders, 2% shareholder health insurance is not a true fringe benefit. 2% shareholder health insurance is subject to income taxes.
Yes, health insurance premiums your S Corp pays on behalf of 2% shareholder-employees are deductible by the S corporation.
Include the health insurance premiums paid on behalf of 2% shareholders in the shareholder-employee’s Box 1 (Wages) of Form W-2. Do not include it in Boxes 3 and 5 since it is exempt from Social Security and Medicare taxes.
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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.
