As the year draws to a close, company personnel charged with record-keeping should collect their corporate health insurance information in preparation for W-2 and other tax form reporting. (MarathonHR clients should send this information to us as soon as possible.)
For S-Corporations (S-Corps), this information should be segregated by payments made to employees, and their spouses and dependents (which are not wages and are therefore not subject to withholding), and payments made on behalf of officers, owners or employees who own more than two percent of the company’s stock. For these individuals, the amount paid on their behalf must be reflected on their W-2s.
Shareholders cannot take their income as distributions to avoid this outcome. In fact, the courts have consistently held that S-Corp officers/shareholders who provide more than minor services to their corporation and receive, or are entitled to receive, compensation are subject to federal employment taxes and must receive a W-2.
If a shareholder performs no or minor services, or the S-Corp’s net income is so low that the shareholder receives very little income, they may take it as a distribution—but they still must report income for any insurance premiums that were paid on their behalf. The way to do that, in this scenario (and the way that LLC’s handle insurance payments made on behalf of partners), is to report it on the K-1 (Form 1065) as guaranteed payments to be included in gross income.