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S Corp Health Insurance Premiums

Overview

This article provides guidance on handling health insurance premiums for 2% or more shareholder-employees in an S corporation. The IRS requires specific reporting for accident and health insurance premiums paid by an S corporation for 2% or more shareholder-employees, but only if not excludable under section 3121(a)(2)(B). ProPay supports two scenarios: when the employer pays the premium and the employee pays taxes, and when the employer pays both the premium and taxes.

Decision Tree: Does S-Corp Health Insurance Reporting Apply?

Use this decision tree to determine if and how you need to report health insurance premiums for an employee.

Step 1: Is the business an S corporation?

  • No - S-Corp health insurance rules do not apply. Use standard health insurance reporting.
  • Yes - Continue to Step 2.

Step 2: Does the employee own 2% or more of the S corporation?

  • No - Standard health insurance exclusion applies. Premiums are typically excluded from wages.
  • Yes - Continue to Step 3.

Step 3: Does the S corporation pay health or accident insurance premiums on behalf of this shareholder-employee?

  • No - No reporting required in ProPay for S-Corp health insurance.
  • Yes - Continue to Step 4.

Step 4: Who pays the taxes on the premium amounts?

  • Employee pays taxes - Use Scenario 1 (single match field INS PREM-1)
  • Premium is added to taxable wages for federal/state withholding
  • Premium is excluded from FICA, FUTA, and SUI
  • Taxes are deducted from employee's net pay
  • Employer pays taxes (gross-up) - Use Scenario 2 (two match fields INS PREM-1 and INS PREM-14)
  • Employer calculates gross-up to cover employee's tax liability
  • Both premium and gross-up amounts must be tracked separately
  • Best for quarterly or annual premium entries

Scenario 1: Employer Pays Premium, Employee Pays Taxes

Setup instructions

  1. Go to Employer > Deductions Setup.
  2. Create a match field with the following settings:
    • Field Name: INS PREM-1
    • Type: (M) Match
    • Check boxes to exclude from FICA, FUTA, and SUI
    • W-2 CODE: Enter 3
    • Check the box Check if used

    Usage

    Each pay date, enter the amount paid by the employer on behalf of the employee. The federal and state withholding will be deducted from the employee's net pay.

    Scenario 2: Employer Pays Premium and Taxes

    Setup instructions

    1. Go to Employer > Deductions Setup.
    2. Create two match fields:

    Field 1: INS PREM-1

    • Type: (M) Match
    • Check boxes to exclude from FICA, FUTA, and SUI
    • This amount should be reported in W-2 Box 1
    • Check the box Check if used

    Field 2: INS PREM-14

    • Type: (M) Match
    • Check all boxes to exclude it from all taxes
    • W-2 CODE: Enter 3
    • This amount should be reported in W-2 Box 14
    • Check the box Check if used

    Usage

    This method is typically used for quarterly or annual premium entries. Follow these steps:

    1. Go to Paychecks > Enter Manual Checks and enter a paycheck for each affected employee.
    2. Set Reg Pay to zero.
    3. For INS PREM-1, enter the cost of health and accident insurance premiums paid on behalf of the 2% or more shareholder, including any applicable gross-up amounts for federal and state income tax withholding.
    4. For INS PREM-14, enter health and accident insurance premiums, excluding any applicable gross-up amounts for federal and state income tax withholding.

    Reporting and W-2 Form

    After entering the premium data, print the W-2 form for each employee to ensure proper reporting. Verify that:

    • Health insurance premiums appear in W-2 Box 1 (included in gross wages)
    • Additional premium information appears in W-2 Box 14 (as applicable)
    • The appropriate W-2 code (Code 3) is used for reporting

    Troubleshooting

    Issue: W-2 form not showing correct premium amounts

    1. Double-check that you entered the correct amounts in the appropriate fields (INS PREM-1 and INS PREM-14).
    2. Verify that the Check if used boxes are checked for both fields.
    3. Ensure the W-2 CODE is set to 3 where required.

    Issue: Deductions not appearing on employee paychecks

    1. Verify that the deduction fields are set up correctly in the Employer Deductions Setup screen.
    2. Ensure the match fields are properly assigned in the employee's paycheck entry.
    3. Check that the employee qualifies as a 2% or more shareholder-employee.

    Issue: Incorrect tax withholding

    1. Verify the correct boxes are checked to exclude premiums from FICA, FUTA, and SUI.
    2. For Scenario 1, confirm federal and state withholding are being calculated on the premium amount.
    3. For Scenario 2, verify gross-up calculations include the proper tax amounts.

    Issue: Premiums not excluded from payroll taxes

    1. Confirm the deduction type is set to (M) Match, not (D) Deduction.
    2. Verify the appropriate exclusion boxes (FICA, FUTA, SUI) are checked in the employer deduction setup.
    3. Review the employee's paycheck to ensure the exclusions are being applied correctly.

    Important Notes

    • Health insurance premiums paid by an S corporation for 2% or more shareholder-employees must be included in the employee's W-2 wages (Box 1).
    • These premiums are subject to federal income tax withholding but are generally excluded from FICA, FUTA, and SUI taxes.
    • The shareholder-employee may be able to deduct the health insurance premiums as a self-employed health insurance deduction on their personal tax return, subject to IRS limitations.
    • Always verify current IRS guidelines, as tax treatment of S corporation health insurance premiums may change.

    See Also

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