Payroll

The following is important to remember at year-end.  For health insurance premium paid on behalf of a more than 2% S-corporation shareholder to be deductible by the S-corporation, the premium must be reported in box 1 on the shareholder's form W-2. The rules are not straight forward, but the below text should help you determine how to handle health insurance premium.

A 2% S-corporation shareholder is defined as a shareholder of an S-corporation who owns more than 2% of the S-corporation or any other type of entity taxed as an S-corporation.  If no wages are reported on the shareholder's form W-2, the health insurance premium paid by the S-corporation on the shareholder's behalf is not deductible by the corporation.  You will want to pay wages of at least the amount of health insurance premium paid on behalf of the shareholder. 

The health insurance premium amount is deductible on Sch A on your individual income tax return if you choose not to follow the IRS rules.  If the health insurance premium paid on behalf of the shareholder is included in box 1 on the W-2, it will be deducted from the front page of form 1040 with a net effect of $0, and THEN it comes through as reduced income from the S-corporation on its Sch K-1.  For the shareholder, this is much preferred to the alternative which does not reduce adjusted gross income and is subject to the medical expense limitation.