QuickBooks

QuickBooks Payroll – How to Adjust W-2s to Report Shareholder Health Insurance

Written by Doug Sleeter

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.

Add New Payroll Item to Report Shareholder Health Insurance

Payroll Item Type

Name used in paychecks

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.

Liability and Expense Accounts

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.

Tax Tracking Type

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.

Taxes

Calculate based on...

Default rate

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.

Payroll item type

Name used

Expense account

Tax tracking type

 

Taxes

Calculate based on...

Gross vs. Net

Default rate

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.

Preview Paycheck

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.

W-2

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.

About the author

Doug Sleeter

DougSleeter (@dougsleeter) is the founder and former CEO of The Sleeter Group, an international network of accounting software consultants, and the former producer of SleeterCon, an annual conference and tradeshow for accounting professionals.

In 2015, he sold The Sleeter Group to Diversified Communications (www.divcom.com) and the company has since become The Accountex Network.

He is a passionate leader of innovation and change in the small business accounting technology world. As a CPA firm veteran and former Apple Computer Evangelist, he melded his two great passions (accounting and technology) to guide developers in the innovation of new products and to educate and lead accounting professionals who serve small businesses.

Always in search of the next big thing, he is currently focusing on digital currencies and blockchain technology. He believes these technologies will change virtually everything in global commerce.

The CPA Practice Advisor recognized Doug as one of the "Top 25 Thought Leaders" in the accounting profession and he has been named to Accounting Today's "Top 100 Most Influential People in Accounting" each year 2008 through 2015. In 2013, he was recognized by Small Business Trends with the Small Business Influence Champion award.

In the early 1990s, Doug was a pioneer in developing the first QuickBooks seminars in the country and has since built the largest group of accounting software consultants in the small business accounting profession. Doug serves on several advisory boards for technology companies and has consulted with numerous industry leaders including Intuit, Sage, Apple, and Adobe Systems. 

Doug is the author of numerous books and courseware materials including The QuickBooks Consultant’s Reference Guide, and QuickBooks Complete, a college textbook.
 
Doug attended both the University of California Santa Cruz and Santa Clara University and holds a Bachelor of Arts degree in Computer Information Systems. Doug and his family live in Pleasanton, CA. Doug's hobbies include woodworking, golf, and lifelong learning.

75 Comments

  • Hi Doug:

    Not looking to find an error and appreciate your articles. I’ve just spent an inordinate amount of time on this in the last couple of weeks trying to get a single, straight-forward answer and nobody seems to be able to give one, including Intuit Payroll. Thankfully I work pretty closely with one of our local CPA’s and he shared the info with me. I’m baffled by the lack of conversation regarding the change as it is a significant change and if not done on the last paycheck of the year will require wages be grossed up to cover the tax. Not sure all are going to appreciate having to do that, nor is the employee going to appreciate a substantially smaller net paycheck to cover the amount of an entire year’s worth of Health Insurance FICA. Gotta love our government and their well thought out plans…..

    • Hi Michele,

      Health insurance is not subject to FICA tax. The shareholder gross up of wages for Medical insurance only affects income tax withholding on payroll. None of the other payroll taxes (FICA, FICA Medicare, FUTA) are due nor calculated on a gross up.

  • Marlene: Not sure if this is your issue, or not – I always setup the S Corp Medical at the beginning of the each year (total health insurance divided by pay periods). S Corp was already a part of the Federal and State wages and taxed appropriately (which was previously correct). Because you can’t reverse the payroll item and enter the entire amount under a new, now correct payroll item, I setup an S Corp Medical Adjustment item only for Social Security and Medicare wage base and tax calculation for the entire amount of the Health Insurance contribution. Then I setup a brand new S Corp Medical > 2014 taxable for Fed, State and FICA for 2015 and going forward. Clear as mud, right? It works, though.

    • My situation might be different as we are covering this all in one check. The big thing I missed, but just read in a post, is that in the situation where the SS/Med tax applies, the amount does not go in box 14. I assume it will be treated more as more wage, but I’ll wait to see what Doug provides. I so appreciate his research and guidance (and yours) on this matter.

  • Doug: If you do a zero dollar check, then yes, you would need to do the gross up to cover the amount of the EE’s taxes. You have 2 other options if you’re able to make the adjustment on the last paycheck of the year (probably too late for most), 1) Add the entire year’s contribution taking into consideration the last paycheck amount, also (using the new code that only impacts SS and Medicare wages and taxes) and just let it calculate the EE’s/ER’s taxes. The EE’s net check will be significantly lower than normal. 2) Add the contribution, let it calculate the taxes and add to their salary (basically a gross up) until their net check is the same as normal.

  • Another way might be to make a deduction to Owner Distribution and put the tax amount there to zero out. I assume the shareholders would have to report that amount on their taxes, but it could serve the same purpose and not create an additional expense for the company.

  • I’m trying to understand this. Are you saying that all Health Insurance premiums for 2% shareholders of an S corp are FiCA and MEDI taxable even when it’s a group health plan, is qualified and is ACA compliant? Sorry if I’m misunderstanding it.

    • Kristi,

      I have the same confusion, and to be honest, most everyone is confused by this because of what appears to be conflicting guidance from the IRS.

      I initially thought 2% Shareholder Health Insurance was not subject to Social Security and Medicare. That is how we’ve treated it for years. Here is the article from 2012 that treats these benefits as NOT subject to Social Security and Medicare https://www.sleeter.com/blog/2011/12/quickbooks-payroll-report-shareholders-health-insurance/.

      But after writing up my article using the same method as my post from 2012 , two people pointed out that these benefits are now taxable for Social Security and Medicare. So I went researching deeper.

      The authority I’m using (interpreting) is the IRS Circular E (Pub 15 and Pub 15-B).

      Here is a link to the 2014 Pub 15-B – http://www.irs.gov/pub/irs-prior/p15b–2014.pdf

      On page 6 near the top of the table, it says “Accident and health benefits are Exempt from Social Security and Medicare, except for certain payments to S corporation employees who are 2% shareholders.”

      But then at the bottom of page 6 it says: “S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee’s wages subject to federal income tax withholding. However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee’s wages subject to social security, Medicare, and FUTA taxes.”

      So now I’m conflicted. Is the table correct, or is the sentence at the bottom correct? I want to believe the bottom sentence is correct because it’s more fully explained, but then, why does the table at the top say the benefits are taxable for Social Security and Medicare?

      Anyway, you can use my article from 2012 (https://www.sleeter.com/blog/2011/12/quickbooks-payroll-report-shareholders-health-insurance/) if you interpret the section to mean that the benefits are NOT taxable for Social Security and Medicare.

      Use this article (https://www.sleeter.com/blog/2015/01/shareholder-health-insurance/) if you interpret the section to mean that the benefits ARE taxable for Social Security and Medicare.

      In the meantime, I’ve posted this issue to our member’s forum in hopes that someone knows the definitive answer and can explain the apparent contradiction in the Publication 15-b.

      • Doug,

        I’m with ya. The table states “except for certain payments” yet no reference to what these are. I would hesitate to rely on this, especially if one then mistakenly reports exempt insurance as taxable. What a mess! Intuit has researched this too and made no changes to the default set up causing me concern when a user starts over riding things. If a paycheck is accruing something like FUTA, simply editing it on the check may reduce the accrual, but it does not change the 940 return so one has to stop and get to the root of why a pay code is not accruing as desired.

        Why can’t the IRS issue guidance for business owners in straight forward language?

        If this… Than that. Sure would save a lot of grief.

        This article may be helpful.

        https://www.evernote.com/shard/s417/sh/2f75f0c0-3054-4e71-93cf-270f831d6bd4/c1877e45b53dbe3a9e36de6efa68df2f

        • Thanks for the additional reference Sara.

          It does seem that most of us see the conflicting guidance here. But as I keep reading, it seems to tilt in favor of these benefits NOT being subject to Social Security and Medicare. So in that case, use my post from 2012 (https://www.sleeter.com/blog/2011/12/quickbooks-payroll-report-shareholders-health-insurance/).

          I posted a request for other Sleeter Group members to chime in on our member forum. I’m hoping that the combined brain trust of our membership will help us find the definitive answer.

          • Thanks Doug for your detailed reply. I agree that this is confusing and seems to have conflicting guidance. Also I heard there was something that came out in November but I haven’t seen it. This is sure to be controversial and challenged if indeed it becomes taxable. If I understand this correctly, the 2% S Corp shareholder requirement is reporting only. The premium is included in compensation but the taxpayer get a 100% deduction on Line 29 (not schedule A). The premium deduction is taken at the corp level and their K1 income is reduced. Their K1 should also show the premium deduction. For now I’m letting the CPA’s of the S-Corp tell me how to treat these. It’s either as the traditional S-Corp 2% shareholder reporting or fringe benefit that is fully taxable.

      • Doug
        There is a generally doubt about what to do in the CPA community. The best article I have found was one written by the Center for Agricultural Law and Taxation (Nov 10, 2014 by Kristy S Maitre and Kristine A Tidgren titled “Updated: ACA’s Thorny Impact On More-Than 2% S Corporation Shareholders”. This article sites IRS Announcement 92-16 and IRC 3121(a)(2). This topic was also discussed at the Western CPE annual update, the handouts suggested that insurance would not be subject to FICA.
        One thing for sure, the ACA will create more work for everyone.

        • Thanks Michael,

          For sure it’s getting more complex. But for the majority of smaller S-Corps who have “qualifying” group health plans, the shareholder health insurance benefits is not subject to Social Security and Medicare. This post went through several iterations as we waded through the IRS pubs, but we’re pretty confident that for the large majority of cases, our methods in this article will help people make the adjustment with the least amount of effort.

          Thanks!

  • Kristi, I am puzzled, too. I have not read where qualified group premiums are subject to FICA for >2% Stockholders. It still states this in Publication 15b at the bottom of page 6, top of page 7. The default for the code should be fine. Taxable for fed/state, exempt for FICA/FUTA. The S-Corp can not take a health insurance deduction for the >2% stockholders so the expense becomes wage expense. I set up the code to debit a gross wage code and credit health insurance. Using a contra health insurance account and maybe a special GL account for the compensation. Fed/state deductions are optional.

    The question regarding FICA and health insurance for SCorps may be because there is a lot of confusion on the treatment of reimbursing employees for individual policies or where the company pays the employee’s individual policy directly to the insurance company. These health benefits, if substantiated, have been tax free since 1961. This rule has not changed but the ACA (Obamacare) has trumped it. Starting 1/1/14, these arrangements are considered health plans subject to the ACA tests. You can’t test their personal policies or know if they are also being reimbursed with a subsidy. So these “plans” fail. As a result, individual policies can not be on the company books nor are deductible as health benefits. These disbursements are fully taxable to the employee as compensation. That goes for SCorp owners, too. There are exemptions for owners with no employees, so safe to say it is a complex issue with no clear, straightforward guidance. There is no need to add >2% benefits to a W2 if they have already been added as taxable wages because there is no qualified plan. At this late date, any one who has not dealt with taxable fringe benefits risks making a late tax payment.

    Charlie, can we re-address how to deal with SCorps? Or find where these benefits are now subject to FICA?

    • Sara,

      Thanks for the comment. See my comments to Kristi above. I hope to get clarification for absolute certainty. On Page 6 of Pub 15-b, the table at the top seems to indicate that the benefits are taxable for 2% Shareholders.

      • Thanks Sara for the links. So far what I’m seeing is it’s the reimbursements for premiums that is the problem. To avoid the $100/$36,500 per employee penalty for non-complaince of ACA, the suggestions (industry not IRS) are to report the reimbursements as compensation without any reference to it being for a health care plan. This is a bigger issue than just >2% shareholder of S Corp.

  • After exhaustive research, I am now convinced that this was my MISINTERPRETATION of the taxability issue. So, I will be rolling back this post to use the same method as we did in my 2012 article, but with updated screenshots for 2014 as I originally puublished on Friday 1/2.

    My misinterpretation was about the words “certain payments to 2% shareholders.” This appears at the top of the table on page 6 of Publication 15-b http://www.irs.gov/pub/irs-prior/p15b–2014.pdf Those “certain payments” are never really fully explained, but it appears that they are those payments for non-group plans, or other “unqualified” health insurance plans.

    So, this post will only apply to qualifying group health plans, and for premiums paid by the corporation on behalf of 2% shareholders.

    The post will be fixed very soon. Sorry if I cause you confusion. Evidently, LOTS of people were confused by this issue.

  • Hi, Doug, I’m experiencing a problem when I attempt to create the zero-dollar paycheck. Like you, I added all the taxes/FICA/Medicare and used that as the shareholder salary but I still am not getting a 0.00 (I get -$64.00). Comparing your screenshot with mine, the only difference I see is that your has “Lock Net Pay” checked off at the bottom. Mine doesn’t show that at all. I am using QB Pro 2013.

    Also, at this point do you recommend leaving FICA and Medicare checked off or not?

    • Hi, Doug, would it make more sense to edit the last paycheck of the year and add the health insurance info in there rather than create that extra paycheck? I realized this morning that I haven’t deposited my last paycheck of 2014 yet and also haven’t processed any payroll for 2015 yet. Thank you in advance!

  • After reading “But then at the bottom of page 6 it says: “S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee’s wages subject to federal income tax withholding. However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee’s wages subject to social security, Medicare, and FUTA taxes.”

    I believe these amounts should be excluded from Social Security and Medicare. Otherwise, shareholders will just take these amounts as distributions, then take the deduction on their 1040 and avoid the Social Security and Medicare taxes on it.

    I don’t see why they should anyway, regular employees don’t pay social security and medicare taxes on the amount paid by the employer for their health insurance, why should shareholder do? It seems unfair to me.

    Not that tax laws are always fair…Ha..Ha… But they usually make some sense.

    Hopefully the IRS will clear this up soon,

    Thanks for the post and the conversation!

    • Elizia,

      You are correct and this is why we just updated the post this morning (1/5/15) to fix my misinterpretation of that statement you cited from page 6 of Publiciation 15b.

      So, as of now, the post has been fixed to treat the shareholder medical insurance adjustment as subject to FIT and SIT, but NOT Social Security or Medicare.

      Sorry for the confusion.

  • Editor’s note: This article has undergone several revisions since the original publication date. At this point it is rolled back to what we published in the first place, but I’m keeping the comments in place so that people can see the discussion. We may revise it again in the future!

  • Anne,

    I’ve seen it done both ways.
    Some will edit the last check of the year, add the stockholder’s insurance and after it recalculates the taxes, carefully return the Fed/State to the original deductions so net is not changed.

    Personally, I prefer a separate transaction posted on 12/31 so it is clear, without editing a pay stub that an employee has already received.

  • Does anyone have a solution how to do this in QuickBooks Online Payroll? I understand it completely in QB Desktop and have done it for years, but have no such luck trying to get anything to work in QB Online. Thanks for any advice.

  • Cody, I don’t have the exact steps, but I’m certain it can be done in IOP (Intuit Online Payroll) because I have done it before. Perhaps someone else reading this can post the steps here.

  • Great info, but my situation is a bit different. We are a church with 1 full time Pastor who got his own individual plan and the church just paid the premiums for him. Now we are learning that this is apparently against the rules of the ACA, and that this individual plan the church was paying is actually taxable income to our Pastor. So my question is… how do I report this on his W-2 as income using Quickbooks? I followed your tutorial using the S-Corp rules, but I’m not sure this is the best way to go about this, seeing as we are NOT an S-Corp, but a Non-profit. Any help would be appreciated.

    • Many companies are currently dealing with this problem.
      A taxable bonus paycheck will need to be posted to offset this benefit taken in 2014.

      Reclass the insurance premiums to an Asset type account, such as A/R-Employee or Due from Pastor, which represents either reimbursements for individual policies or insurance benefits received.

      A net deduction payroll item code needs to be created that points to the Asset account. Say the insurance was $6,000. He owes taxes on the $6k. A decision has to be made on how to deal with the tax liabilities.

      Some clients are grossing up the net to include FICA only.
      (Though with a Pastor, I don’t think wages are taxable for FICA)

      To gross up; $6000/.9235 = $6,497.02 Bonus Less SS & Medicare only = $6,000 less deduction for money already received will equal a -0- paycheck. This will create a tax liability for both shares of the FICA. IF booked in 2014, this tax deposit is now late. For a Pastor, it may be as simple as adding a $6k bonus on 12/31, less the deduction to offset the insurance = a -0- check.

      But remember that Federal, State and Unemployment taxes are affected. If the employee is concerned about not having enough taxes withheld, the bonus could be $6,000, less taxes = the net amount available to apply to the Due from account. Deduct the net for a -0- paycheck and deduct the balance due on subsequent paychecks.

      At this late date, most companies are deciding to run bonuses in 2015 since their 2014 payroll is closed. If the books are kept GAAP accrual, accrued bonuses may be appropriate and for tax purposes, employee (not Scorp owners) bonuses would need to be paid out by mid-February.
      (Consult your tax accountant.)

  • I reviewed the comments and I don’t see where anyone pointed out the issue regarding the Addition item in the example. That is Taxable to the Employee with Tax Tracking = Compensation, if linked as an Expense (in the image) for the employer, and must itself be grossed up to cover the taxes as a result of its inclusion. Or, it is going to Repaid by the employee, and that is Tax Tracking = None and linked to Other Asset for Employee Loan and eventual repayment from the employee.

    As to the combination of ACA and 2% SH, I am following this topic and we have reached some conclusions: https://accountants-community.intuit.com/questions/1040571-question-regarding-notice-2013-54-and-how-it-affects-s-corporations

    • I would think that this is because the article is stating how to add the special >2% Health Ins benefits to a stockholder’s W2 (Taxable for Federal and State and not FICA or Unemployment – fully deductible on personal 1040), which is a different topic than how to add fully taxable as wages company paid benefits to an employee’s W2.

      These taxable reimbursements or payments for individual health policies are treated no differently than how we treat taxable Club Dues or Personal Use of a company auto other than insurance and club dues create a movement of expense in the books and use of auto does not.

      If these benefits are not added to payroll during the year, enabling the employee to cover the taxes, the company and employee have to come to an agreement on how to deal with the tax withholdings after the fact.
      Grossed up, as a loan, or even brought into wages in the next year as a bonus.

      Sara

      • Yes, the whole article is focused on getting the W-2 for shareholders to properly show the amount of health insurance benefits that were paid by the company.

        The assumptions are:
        – The premiums have been paid by the corporation during the year as normal expense payments.
        – the benefits were not recorded through payroll during the year.
        – the final w-2s have not already been issued for the employees.

        This method does indeed create an additional federal and state tax liability for the employee., If the amount of this liability is significant, it may make sense to gross up the check to cover those taxes.

        If you do gross it up, you won’t need to use the clearing item trick, but instead make the the following changes to the method shown above:
        – Enter the S-corp owners health insurance amount just the same as shown here.
        – Notice you’ll have taxes for federal, state, social security, medicare and disability.
        – Do not override any of the taxes to zero.
        – Add a normal compensation item (in the earnings section, or in Other Payroll items), and make the amount whatever it needs to be to zero out the net pay.
        – Pay the tax liabilities to the appropriate government agencies. Of course, depending on when you do this, these deposits may be late.

        • Doug;
          Sorry, I’m confused and lost on where this discussion landed. Your instructions here indicate that FICA *is* due on health insur premiums paid by a company for the shareholders -? So, the article is being revised?

          I have to correct a W2 and W3 originally filed by a payroll company to add health insurance for one shareholder who received payroll all of 2014 and create a new W2 for the other shareholder who did not receive payroll -all for one company. Any advice would be appreciated!

          Once I have that answer, then I have to make the following corrections:

          Can I create a corrected W2 for shareholder #1 and a new one for shareholder #2 and combine them all, along with the other employees, on a corrected W3 – instead of the payroll company doing it?

          I’m coming in to this situation new.

          Thank you for any help.

          • Doreen,
            Sorry for the confusion. The “discussion” you quoted above was about the confusion about FICA taxability, and it was before we revised the article to correct it.

            In our research, we determined that as long as it’s a bona-fide group help plan, then the shareholder health benefits are NOT subject to FICA (Social Security and Medicare). The article, as revised above shows the method for handling the adjustments that is consistent with that determination.

            As for creating corrected W-2s and W-3s, that is something you will need to do if the payroll service cannot do them for you. You may also need to adjust the 941 and 940. Check carefully after you make the above adjustment to see how the totals come out.

            I know this is a HUGE pain. Many payroll services get it wrong, and tax accountants are going crazy because I’m told that unless the Shareholder Health Benefits are on the W-2, the IRS is sometimes rejecting the returns of the shareholders.

            Make good notes for next year so you can handle this adjustment on the final paycheck of the year. That will save you TONS of time relative to waiting till after the end of the year.

  • The addition item is only being used as a clearing trick to get QB to allow the transaction. Notice on line 2 and 3 of the paycheck detail (left side under “Other Payroll Items”), we add the Compensation item (S-Corp Owners Health Insurance) with the full amount (taxable for fed and state), and then the addition item is put in and taken right back out for 1 penny.

    Because the addition item is just a clearing item, it doesn’t matter what taxability you give it. We gave it none.

  • Doug, so sorry to keep this going. Thanks for your reply. Still a question:
    Looking at your method at the top for dealing with this in Qkbks, there’s no FITW in your example – you purposely circle it saying zero. And it doesn’t show as being income on the paycheck at all. Yet, it is subject to income tax withholding, right?
    Thank you, again.

    • Doreen,

      You’re correct. This adjustment does cause additional income that is subject to Federal and State income tax, but we do not withhold it because it’s a zero-check and we’re just adjusting the W-2.

      That does mean that the employee will be technically “underwithheld” by the amount of tax on the transaction. I should have made a bigger deal of that in the article. But, as I said in paragraph 2, the amount of tax is usually relatively small, so it shouldn’t cause any type of penalty in most cases.

      Also, since my assumption is that you’re doing this adjustment so far after the fact, you don’t have the ability to deposit withheld taxes for the prior period because the adjustment date is last year, but the day you’re doing this is way past that date. So if you DID withhold taxes on this adjustment, you would only be able to deposit those taxes in the current period. Hope that make sense…

      I recommend you warn the shareholder that they will be underwithheld, and that they could have tax due on their 1040 and state return because of this.

  • I don’t understand why you need to withhold more federal or state tax it is a wash the wages are grossed up for the medical insurance then it is taken off as a deduction as self employed health insurance on the 1040 leaving it a zero tax event.

  • How do I enter on the final paycheck of the year the S-Corp owner for his INDIVIDUAL health insurance policy for year 2015? The health insurance policy was paid by the owner PERSONALLY. Not offered to the two employees.

    • Sally,

      It is my understanding that individual health insurance policies purchased by the owner with personal funds do not belong on the W-2 at all. They have nothing to do with owner compensation, or company provided benefits.

      If I’m missing some nuance here, I’m sure someone will fill us all in.

    • Sally,

      I did a bit more research and I think the premiums “may” be eligible to be added to the W-2. See this: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues

      If you determine that your 2% shareholder does fit the scenario, then I believe you need to have the S-Corp actually reimburse the shareholder for the cost of the premiums (coded to wages). Then add those costs onto the W-2. You could use the method above to create the zero-dollar paycheck.

      • This is excellent info! I actually need to do this myself – cut a check to reimburse the shareholder for the cost of the premiums and have it added to the W-2. Would I do a separate reimbursement check, or do it through Payroll incorporating the payroll items you laid out in this article? Thanks!

        • Katie,

          In your situation, you’ll do both.

          1) Write a separate check to the shareholder, coded to wages (Officer’s Comp).
          2) Next, use the method above to add the premium amounts to box 14 on the W-2. Since the payroll item (S Corp Owners Health Insurance) washes in and out of the Health Insurance expense account, there is no net change to the GL.

          The net result of your two steps is to credit cash and debit officer’s comp for the reimbursed amount to the shareholder.

      • If the insurance policy is purchased by the owner and reimbursed by the s-corp, wouldn’t it then be considered a non-group plan, and then if it was reimbursed and included on W-2, wouldn’t it then be subject to FICA, State Unemployment and FUTA?

        • Nicole,

          I think it depends on several factors. Read the IRS instructions in the link above and other pubs determine whether your specific situation is or isn’t subject to FICA. If so, you’d need to modify the steps here.

  • Is there any reason why I can’t just change the W-2 as I’m printing them for the owner to reflect the correct numbers – i.e. add the health insurance to Box 1 and 16, and add the amount with the note in box 14.

    I tried the zero check method above last year, and it didn’t work out correctly, and I had to reissue the W-2 anyway. There isn’t any point in my case of creating a zero check that I can see, is there? As long as I reflect the correct amounts in the 941, too?

    Helen

    • Helen,

      I think it will work if you manually adjust box 1 and 16 on the W-2 and also adjust the 941.

      But you have to be very diligent when you make those manual changes directly on the forms. Check and recheck your numbers everywhere. Also, the 940 should be checked.

  • Is this still working for 2015? I have used this process before with no issues but now I can’t get it to work. It adds to the income but nothing is showing up in Box 14.

    • Vicki,

      I have not rechecked this with QB 2015, but it should work exactly the same. I hope someone reading this will confirm.

      Go back through each screen shot above and make sure you didn’t skip something, or set up the items wrong.

      • Hi Douglas, I’m struggling to find IRS support requiring health insurance premiums must be reflected in Box 14. I understand that it’s best practice, but I can’t see the requirement anywhere. I reviewed IRS Publication 15-B, but the only thing I found was: “Include the value of the fringe benefit in box 1 of Form W-2. Also include it in boxes 3 and 5, if applicable. You may show the total value of the fringe benefits provided in the calendar year or other period in box 14 of Form W-2.” It appears that the IRS is giving the option to report in Box 14, no?

  • Hi Doug

    Interesting article to read. Thank You. I have a question. I have a 2 member S corp (My wife and I). However, I pay my health insurance premium personally. Because the health insurance is in my name personally and not setup by my company. In this situation, this premium amount should not be included in Box 1 of W2, correct? We take 50% salary and 50% profit distribution from the company

  • Hi Vega,

    I did a bit more research and I think the premiums “may” be eligible to be added to the W-2. See this: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues

    If you determine that your 2% shareholder does fit the scenario, then I believe you need to have the S-Corp actually reimburse the shareholder for the cost of the premiums (coded to wages). Then add those costs onto the W-2. You could use the method above to create the zero-dollar paycheck.

    You should really check with your tax advisor as to whether you want to go this route.

    • Jeff,

      These payments should increase the following boxes on the tax forms:
      – Box 1, Box 14, and 16 on the W-2
      – Box 1 and 16 on the W-3
      – Line 3 and 4 on form 940
      – Line 2 on form 941

      If that’s not working, please re-check the setup of the “S-Corp Owners Health Insurance” company contribution item (the first item we created above).

  • Doug,

    Thank you this is a very helpful contribution. If I only had the s corp owner this would handle it all, but there are two other issues to tackle, an employee who is not an owner (on same health plan), and both the owner & the employee contribute to the plan. It would be great if you could at some point amend this post to account for this scenario which is probably common(?). I believe I have it right, but the detail you provided was great.

    Additional Payroll items needed:
    Health Insurance (pre-tax) – Premium Only / 125 – posts to Health Insurance Liability
    Health Insurance (company paid) – None – posts to Health Insurance Liability & Employee Health Benefits expense

    Regular Paychecks:
    Non Owner employees – Have the Health Insurance (pre-tax) & Health Insurance (company paid) amounts listed on check.
    2%+ Owner – Has just the Health Insurance (pre-tax) amount — Is this correct?

    At year end I make the adjustment paycheck as detailed in your article for the owner, for the full amount the company paid (not including the amounts of pre-tax contributions the owner made?).

    Thanks for any clarification you can provide.

  • Hi.
    Just started using QB Payroll Enhanced for Accountants.

    The workaround is confusing but very helpful.

    Questions:
    1. If health insurance is part of wages, why not leave it as ‘wage expense’ so it matches W-2 box 1 instead of separating out (which it currently is categorized) as ‘insurance expense’?

    The original entry is to record the health insurance payments as Insurance expense.
    This workaround is suppose to remove that entry from Insurance expense to Wage expense.

    – Remember the IRS’s Matching process…
    If the Scorp shows wages less health insurance, then it won’t match to the W-2 which includes the health insurance amount in box 1.
    – Guess it’s more of a tax return issue since tax profs like to break out the Wage amount and the owner’s health ins premium separately.
    – Then again, some tax profs do leave a note on the K-1 to the amount of the health insurance cost so the owners/tax profs will know what the amount is to deduct on Form 1040.

    2. Here’s the confusing part…
    The health insurance premiums are subject to FIT and to SIT but the FIT/SIT is not calculating in the QB payroll module.

    Does FIT/SIT = FWIT/SWIT as in ‘withholding’ tax?

    We all know that it’s subject to Federal and state income tax… but that’s on the tax returns.
    Are those health insurance premiums subject to Federal/state ‘Withholding’ tax?
    There is a slight difference! QB does NOT calculate the Fed/state withholding tax even based on the user checking the boxes that the payments ARE subject to those taxes, based on your example.

    Even QB Payroll tech support staff could Not duplicate the effort of making it subject to FIT/SIT even with the boxes checked ON.

    BTW…. can you please show us how it’s ‘normally’ recorded IF health ins payments are included in wages properly when one writes a check instead of the YE adjustment?

    Thanks!

  • I adjusted the W-2 to reflect the S Corp Health Insurance as per your instructions. It worked! Yea. The problem is that my Payroll Summary report for the last quarter does not show the added wage amount and therefore my 941 is incorrect also. What to do?

    Thanks

  • I have found it easier to just change the W-2 as you go to file it – and change the corresponding 941.

    Manipulating QuickBooks to track it was just too much – and didn’t work very well for me.

  • If my business is an LLC taxed as an Scorp and my husband and I are the owners and only employees how do we apply for obamacare? More specifcally…. we are paying ourselves a salary, is that the number we use to determine if we get a premium tax credit?

    Just for example… if our business makes 100K a year and we are paying ourselves 20K each do we use the 20K to determine what we pay for health insurance? Does anything else effect that? Such as any untaxed draws we take from our business?

  • Doug,
    My owner/officers are no longer on our group insurance as S-Corp company paid premiums. This year they have both moved over to Medicare plans that are paid by the company. I need to run the total amounts paid by the company for each owner/officer through our last payroll this year. Is it similar to S-corp premiums? Could you please advise me how I can do this? I have been paying the premiums directly to the officers and coding it to a payroll asset account until I could run it through payroll at year end. I appreciate your help!

  • We have set up the Sub S health insurance for QB’s as instructed. The wages show up in box 1 and box 14, but do not show up in box 16 for State wages. We cannot find out why the State quarterlies and W2 are incorrect. Please help. Thanks.

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