When S-Corp shareholders (those who own more than 2% of the company shares) are covered by the company health insurance plan (or long-term care plan), the IRS specifies that the benefit must be reported in box 14 on their W-2.
Read IRS Publication 15-B for more specifics about which benefits are taxable, and how they are treated.
The easiest way to handle this in QuickBooks payroll is to create one single zero-dollar paycheck at the end of the year to record the total benefit amount onto the W-2.
This article is updated for 2014 and applies to the desktop version of QuickBooks Payroll (Basic, Enhanced, and Assisted) but not QuickBooks Online Payroll, and it only applies to S-Corporations.
The article has been revised multiple times since the initial publication, as there are some confusing references in several IRS publications. Please review the comments to see the discussion – and keep in mind that the article was undergoing revisions as the discussion continued.
Note that S-Corp Medical health premiums increase taxable wages (Federal and State) and are subject to federal and state income tax. Therefore, the shareholders might prefer to have the health insurance premium added to each paycheck throughout the year so that they pay the taxes with each paycheck instead of having a lump of taxes due at the end of the year.
However, since the amount of tax is usually relatively small, I prefer doing a single adjustment (zero-dollar paycheck) at the end of each year, before the W-2s are prepared. Another reason I prefer the year-end adjustment is because premiums are paid during the year by the company and they are paid directly to the insurance company. As the company records those payments, it’s best (in my opinion) to code the payments to the health insurance expense account (for regular employees), and to a separate shareholder health insurance account for the 2% shareholders. Follow this simple approach for handling shareholder health insurance.
- During the year, as you record bills for health insurance, simply record and pay them normally like all other company bills.
- Code the bills separately for employees and shareholders into separate GL accounts. e.g. “Health Insurance Expense” and “Shareholder Health Insurance.”
- After the last insurance expense for the year is paid, use the total health insurance expense amount to create an adjustment in QuickBooks Payroll to increase wages and box 14 of the W-2.
You have to trick QuickBooks into making this adjustment, as I will explain here.
Making the Adjustment
To create your adjustment, you’ll need to create two payroll items and a zero-dollar paycheck for each shareholder.
Creating the Payroll Items
First, create a company contribution payroll item in the payroll item list.
In the Liability and Expense Account fields, select the same account because we want this item to debit and credit the same account when we use it on paychecks. It’s best to use the account you use to track your health insurance premium expenses.
The tax tracking type determines how this item will affect the W-2, so it’s critical that this is set to SCorp Pd Med Premium.
Leave the default checkmarks on the Taxes screen. These settings mean that the amount of health insurance premiums you add to paychecks are subject to Federal and State income taxes, but not Federal Unemployment, Medicare, or Social Security taxes.
Next, create an addition item. This is needed to trick QuickBooks into creating the zero-dollar paycheck. Normally, if you try to create a paycheck no earnings items but with other items that affect taxes, QuickBooks will calculate and deduct taxes, which results in a negative net check. However, QuickBooks won’t let you create a paycheck with negative net pay.
So we need a trick. My trick is to create an Addition payroll item that will act as a clearing item, similar to the one above. This item will be used to cover the employee paid taxes calculated on paycheck so that the end result is a net amount of zero.
Creating the Adjustment using a Paycheck
Create a zero-dollar paycheck for each shareholder as shown below. Make sure the date of the paycheck is within the year you want to affect. Clear out the earnings section of the paycheck and use the two items we created above in the Other Payroll Items section of the paycheck. Note that the S-Corp Adj Clearing item is added on one line, but then subtracted out on the next line. This is the trick that lets QuickBooks create this zero-dollar paycheck.
Note that you may have to override the taxes to zero. Make sure the net pay is zero, and confirm that the Company Summary section shows the correct information.
After you record this paycheck, preview the W-2 and verify that Box 1 and 16 increased by the amount of your health insurance adjustment. Also, verify that box 14 has SCorp MP followed by the correct amount.
Note: If you use Assisted Payroll, you must send the paycheck to the payroll service. See the help screens if you need help sending paychecks to the service.