Here at year-end, company personnel responsible for record-keeping should prepare for W-2 and other tax form reporting by collecting their corporate health insurance information.
S-Corporations (S-Corps) must segregate payments made to employees, and their spouses and dependents (which are not wages and are therefore not subject to withholding), from payments made on behalf of officers, owners or employees who own more than 2% of the company’s stock. For the latter 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.