This article discusses the 2% Shareholder Medical Premium benefit for S-corporations with employees that own 2% or more of the company. This is also referred to as the 2% Shareholder Health Insurance Benefit.
If you fit the above description, you may be able to claim a benefit that will reduce payroll taxes and counts as an above-the-line deduction on your personal income tax return. The bottom line of this article is that in order to claim this benefit, your S-corporation must pay for the entirety of your health insurance coverage and report it as compensation.
If you own at least 2% of shares of your S-corporation, you should be able to save additional payroll tax by having your S-corporation pay for your family health insurance coverage as long as it is included as part of your wages and your spouse is not eligible for coverage under a subsidized health insurance plan. The premiums are to be included as wages and are subject to income tax withholding.
That said, the amount paid is deductible as a wage expense by the S-corporation and isn’t subject to Federal Unemployment Tax, Social Security, or Medicare. The premium is considered self-employed health insurance and therefore deductible on your personal income tax return, Form 1040 at year-end. This is considered an “above-the-line” deduction.
The IRS states that the S-corporation can either obtain and pay for the entirety of the health insurance coverage for the shareholder, or reimburse the shareholder in full for the coverage, as long as it is included as a premium payment on the shareholder’s Form W-2. The premium amount is to be reported in Box 1 and Box 14 on Form W-2 (not in boxes 3 and 5).
Check with your state agencies for specific rules around this benefit.
How to add this in Wave:
When logged into your Wave Business Payroll Account, use the menu on the left-hand side, under Payroll:
- Click Employees
- Click the name of the employee
- Click Benefits & Deductions
- Choose to Add to Pay
- Choose the Shareholder Medical Premiums