S-Corporation Shareholder Health Insurance Instructions

Accounting for S-Corporation Shareholder health insurance premiums

Whenever an S-Corporation pays the health insurance premiums of a > 2% shareholder (including premiums for the shareholder’s spouse and dependents), those premiums are required to be reported on the shareholder’s W-2 to be deductible.

A few rules to note:

  • The shareholder’s health insurance premiums are NOT subject to FICA taxes.
  • The premiums cannot be covered under a separate group plan (e.g. through a spouse’s separate employment).
  • The company must either pay the premiums, or reimburse the shareholder for their premiums (even if recorded through the draw account).
  • The premiums need to be included in Boxes 1 and 16, as well as being noted in Box 14 of the W-2, following the steps below.
  • Total premiums should include health, dental, vision, and Medicare.

Recording S-Corp Shareholder Health Insurance Premiums

There are two different ways that you can record this in QuickBooks. The first (Method 1) involves using an “Addition” payroll item and “Deduction” payroll item. We have sent instructions out for this method in prior years, so this may be what you have used in the past if you have been recording this adjustment for several years. We have also included instructions for a second way (Method 2) for recording this that uses a “Company Contribution” payroll item. You will need to choose Method 1 or Method 2 – do not do both. If you have used Method 1 in the past, continue to use it. If not, use Method 2 as it is a bit simpler.

Method 1:

Check to see if the two applicable payroll items are already created. From the QuickBooks Home Screen, click on “Lists”, and then click on “Payroll Item List.” In the Item Name column look for two items: an addition named “S-Corp Medical” and a deduction named “S-Corp Reimbursement.” These two items may have slightly different names in your file but should refer to the Officer’s Health Insurance. If they do exist review them because the taxability of these items may have changed from the prior year, as there was an IRS change in taxability requirements. To review, open the Addition item to make sure it is not set up as being subject to FICA taxes. From the Payroll Item list, find the Addition item titled S-Corp Medical (or similar title), and double click on it. Hit the “Next” button until you get to the screen titled “Taxes”. Make sure only the Federal Withholding and State Withholding lines are checked, NOT the Medicare or Social Security lines.

If they do not exist create them using the following steps:

For the “Addition” item:

  1. From the Payroll Item List, click “Payroll Item” in the bottom left corner of the screen and then click, “New”. Select “Custom Setup” and click “Next.”
  2. Select “Addition” and click “Next”.
  3. In the “Name” field, enter “S-Corp Medical” and click “Next”.
  4. In the “Account” field select “Officer Payroll Expense” from the drop down box and click “Next.” Your specific Payroll Expense account may be named slightly differently, or you may need to create a new account. Contact us if you’re not sure which expense account to select.
  5. In the “Tax Tracking” field, select “SCorp Pd Med Premium” and click “Next.”
  6. On this screen (Taxes), leave the default settings and click “Next.” Default settings should only check off “Federal Withholding” and “CO Withholding”. If any other taxes are checked off, uncheck them.
  7. On this screen (Calculate based on quantity), select “Neither” and click “Next”.
  8. On this screen (Default rate and limit), enter “0.00” for the default rate and click “Finish”.

For the “Deduction” item:

  1. From the Payroll Item List, click “Payroll Item” in the bottom left corner of the screen and then click “New”. Select “Custom Setup” and click “Next”.
  2. Select “Deduction” and click “Next”.
  3. In the “Name” field, enter “S-Corp Reimbursement” and click “Next”.
  4. On this screen (Agency for employee-paid liability), leave the first two spaces blank and in the “Liability account” field, select your health insurance expense account (or wherever the expense is booked when the insurance premiums are entered/paid) and click “Next”.
  5. On this screen (Tax tracking type) select “None” from the drop down box and click “Next”.
  6. On this screen (Taxes) no payroll items should be selected. Click “Next”.
  7. On this screen (Calculate based on quantity) select “Neither” and click “Next”.
  8. On this screen (Gross vs. net) select “Net pay” and click “Next”.
  9. On this screen (Default rate and limit) enter “0.00” for the default rate and click “Finish”.

Once these payroll items are set up, you are ready to record the shareholder health insurance premiums. On the paycheck enter the total shareholder insurance amount for the applicable time period as both an addition and a deduction in the “Other Payroll Items” section when creating the paycheck. The S-Corp Medical will be a positive amount; the S-Corp Reimbursement will be negative. They will cancel each other out on the paycheck but the benefit will show on the W-2 form as an increase to the box 1 wages for the shareholder and will also show as a box 14 benefit, which is the method required by the IRS.

If you prefer to record the health insurance premiums on one annual paycheck (or other frequency) throughout the year, contact us if you need help to get that recorded.

Method 2:

Check to see if the one applicable payroll item is already created. From the QuickBooks Home Screen, click on “Lists”, and then click on “Payroll Item List.” In the Item Name column look for one item: a Company Contribution named “S-Corp Medical Insurance.” This item may have a slightly different name in your file but should refer to the Officer’s Health Insurance. If the item is not there create it using the following steps. Because the taxability of this item may have changed from the prior year, if this item already exists in the file, open the item to make sure it is not set up as being subject to FICA taxes. From the Payroll Item list, find the item titled “S-Corp Medical Insurance” (or similar title), and double click on it. Hit the “Next” button until you get to the screen titled “Taxes”. Make sure only the Federal Withholding and State Withholding lines are checked, NOT the Medicare or Social Security lines.

For the “Company Contribution” item:

  1. From the Payroll Item List, click “Payroll Item” in the bottom left corner of the screen and then click, “New”. Select “Custom Setup” and click “Next”.
  2. Select “Company Contribution” and click “Next”.
  3. In the “Name” field, enter “S-Corp Medical Insurance” and click “Next”.
  4. You can leave the fields blank for name of agency to which liability is paid and number that identifies you to agency. These fields are not necessary to record the S-Corp medical insurance.
  5. In the “Liability Account” field select your Health Insurance Expense account (or whichever account the expense is booked to when the insurance premiums are entered/paid) from the drop down box. Your specific Health Insurance account may be named slightly differently, or you may need to create a new account. Contact us if you’re not sure which expense account to select.
  6. In the “Expense Account” field select Officer Payroll Expense from the drop down box and click “Next.” Your specific Payroll Expense account may be named slightly differently, or you may need to create a new account. Contact us if you’re not sure which expense account to select.
  7. In the “Tax Tracking” field, select “SCorp Pd Med Premium” and click “Next.”
  8. On this screen (Taxes), leave the default settings and click “Next.” Default settings should only check off “Federal Withholding” and “CO Withholding”. If any other taxes are checked off, uncheck them.
  9. On this screen (Calculate based on quantity), select “Neither” and click “Next”.
  10. On this screen (Default rate and limit), enter “0.00” for the default rate and click “Finish”.

Once this payroll item is set up, you are ready to record the shareholder health insurance premiums. On the paycheck enter the total shareholder insurance amount for the applicable time period in the “Other Payroll Items” section when creating the paycheck. Choose “S-Corp Medical Insurance” and enter the shareholder health insurance as a positive amount. The benefit will show on the W-2 form as an increase to the box 1 wages for the shareholder and will also show as a box 14 benefit, which is the method required by the IRS.

If you prefer to record the health insurance premiums on one annual paycheck (or other frequency) throughout the year, contact us if you need help to get that recorded.