Special Rules For Health Insurance Costs
of Two Percent Shareholders
The IRS has recently released special rules on the treatment of shareholder health insurance paid by the corporation for shareholders owning more than 2% of the stock of the "S" corporation. Notice 2008-1 mandates that the payments made by the corporation must be included in the shareholder's wages and reported on the shareholder's Form W-2.
The "S" corporation is entitled to deduct the cost of such employee fringe benefits. The shareholder is entitled to a deduction on his or her individual tax return as self employed health insurance. The amounts included on the W-2 are not subject to Social Security or Medicare taxes. The amounts included in income are not wages for Pennsylvania, local or City of Philadelphia income tax purposes, but are considered wages for New Jersey income tax and must also be included in NJ wages on the W-2. Please follow the instructions below in order to facilitate the appropriate reporting of shareholder health insurance.
Internally Prepared Payroll:
The following guidelines have been provided in order to assist you with this process:
Payroll Prepared by Payroll Service:
If you are not already reporting shareholder health insurance to your payroll service, please provide them with the annual amount of health insurance paid by the corporation on behalf of each of the greater than 2% shareholders. In general, we recommend doing this no later than the second to last payroll of the year. Your individual payroll service may have its own deadline for this information.
Payroll Returns Prepared by Wouch Maloney & Co.:
In order to accurately and timely prepare your payroll returns, we ask that you provide us with the total amount of health insurance paid by the corporation on behalf of each greater than 2% shareholder no later than the second to last payroll period of the year.
If you have any questions regarding this article, please do not hesitate to contact Terry Martin or Michael Sexton, Tax Managers, by email or phone at 215-675-8364. We very much appreciate the opportiunity to serve you.
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