Health insurance on W-2

[Strongsilence-CPA]

The amount of health insurance paid for the year is often not known by the time the final paycheck is processed.  What do I need to do to add the correct amount to Box 1 wages?

[BobKamman]

Why would it not be known?  Does Blue Cross accept Bitcoin these days, and you have to figure out a conversion rate?  

[IRonMaN]

I'm not sure why it wouldn't be known either, but you can always run a payroll on its own with gross wages equal to the insurance premiums with an insurance withholding account offsetting the gross wages.  Make sure and show Social Security and Medicare wages as zero on the check.

[qbteachmt]

I don't understand why this is not known, either. It's being paid in some sort of cycle. Even if payroll is quarterly, the business has made payments-to-date for that pay period. Example:

Semi-monthly: Paychecks are issued on the 5th or so (for pay period from prior mid-month to end of month). That will be the first paycheck of the new year, and any health premium paid is added. Paychecks are issued around the 17th or so (for pay period from 1st to mid-month) and any health premium paid is added. It is unusual for there to be two health premium payments each month.

Every pay cycle has a similar pace.

And whoever is doing this payroll isn't done until all year end benefits and fringe and other considerations are included. You don't "add" to a W2. It's not even issued until the data is collected and then it is reported. That's why a W2 isn't due by Dec 31. And that's why payroll clerks don't run the last paycheck of the year until all taxable fringes are known, since there needs to be some sort of way to do withholding (or the employer has to provide an employee advance to cover withholding, and that gets messy).

[Strongsilence-CPA]

Thank you for replying.  This is the heart of planning season, so I need to get clear and I'm refining how to talk with owners about this area of tax.

I don't understand why this is not known,

I think that the policy can be in the name of the business or not.

The owner might not make final insurance payments for insurance until late December.  These payments are made personally for insurance such as CMS, United Health or Delta Dental. These payments are not made from the business account.  Therefore, payroll can't be instructed until the final payment is made by the owner.

Here is the general guidance:

1. Health Insurance in Name of Business: According to IRS Notice 2008-1, the health insurance policy can be either in the name of the S Corporation or in the name of the shareholder-employee, as long as the S Corporation either directly pays the premiums or reimburses the shareholder-employee for the premiums and reports the premium payment or reimbursement as wages on Form W-2.

2. 2% Shareholder-Employee: In the case of a 2% shareholder-employee, the premiums paid for health insurance should be included in the employee's gross income but can be deducted by the individual on their personal income tax return. This is an "above-the-line" deduction under Section 162(l) of the Internal Revenue Code for self-employed individuals, which also applies to 2% shareholder-employees.

3. Payments for Personal Insurance: Payments for personal medical insurance policies could be included in wages and be deductible by the corporation, but it must also be included in the shareholder-employee's gross income. However, the individual may then be eligible for the self-employed health insurance deduction, subject to the limitations and qualifications under Section 162(l)

[Strongsilence-CPA]

Bob, see my answer above.  Bitcoin payments don't make sense.

[qbteachmt · Accepted solution]

"These payments are not made from the business account. Therefore, payroll can't be instructed until the final payment is made by the owner."

It's still only problematic across the year end.

First, most people know what the upcoming payment will be.

Second, payroll processing usually waits for all submissions that affect year end, including health, allowances, taxable fringe such as transportation and tuition, etc.

Third, even if the person has a final late Dec payment that they pay personally, and they don't submit that to be reimbursed until Jan, you put it on the Jan paycheck. Paychecks are not accrual.

"and I'm refining how to talk with owners about this area of tax."

What you might not have is people familiar with being responsible for their own payroll timeliness? Which is why they can use someone, outsource to ADP or a local CPA office which offers payroll services. At least until your client gets up to speed.

Here's a comment I use often: If you are an engineer, you have better things to do than stand at the Kinko's copiers. Let your clerk do that part; your time is more valuable by doing your engineering.

The same is true for payroll. Don't do your own payroll when your business skills give you a higher and better use of that time.

[IRonMaN]

Why are you putting health insurance on the W-2 if the company isn't paying the policy or reimbursing the shareholder?

[Strongsilence-CPA]

The company will reimburse the SH.  That is a good point and I need to train them to get in the habit.  This is part of my fall tax planning.

[BobKamman]

@IRonMaN   If the company doesn't reimburse 2022 payments until 2023, what year would you add it to the W-2?

[PhoebeRoberts]

I believe that the W-2 reporting follows the corporate payment. Don't reimburse until 2024, not SE health insurance until 2024.

[qbteachmt]

"If the company doesn't reimburse 2022 payments until 2023, what year would you add it to the W-2?"

2023.

As I noted previously, it follows the actual payment (cash basis), not the "premium period paid for" and you can see it in reverse.

If employees need to pay into a Sec 125 plan, let's say for Jan, but it is deducted from pay in Dec, that plan payment is part of the Dec year's W2 reporting, even if that is for a Jan premium to be paid by the employer in Jan.

[Strongsilence-CPA]

Thank you.

I think you and Phoebe are in agreement. I think I'll advise the corporation to make a request to the shareholder for the final insurance payment amount, date a check 12/31/23, then finalize and cut the check in the first week of January.

[qbteachmt]

"date a check 12/31/23, then finalize and cut the check in the first week of January."

Just keep in mind that many States have a timeliness requirement for delivering paychecks (and some clients are going to be using direct deposit).

There is another reason not to sit on it: Tax deadline.

I teach payroll as having three dates associated with it:

Pay Period: this is where people often get their Overtime calculation requirements wrong, so we review how to understand it. It is not based on how frequently you issue paychecks.

Pay Date: the date of the paycheck, to understand the pay cycle I already used here for examples.

Liability Date: I draw on the white board, a little comic bomb with a lit fuse. Once you have a dated paycheck, it doesn't matter if you don't print it, or print it and hold it in a drawer. That due date clock has started its countdown to payment for 941/944, 940, retirement match, etc. Especially as you move to supporting larger employers with an accelerated tax deadline, which is 3 business days, you realize everything you do has an impact on something else.

[PhoebeRoberts]

That's still back-dating the check, which is a no-no.

The shareholder knows what their December health insurance premium will be at least a month in advance of the payment date. I could tell you today what my December 31st premium payment will be, because I've already signed the renewal paperwork for 2024. Either have the S-corp pay the December payment directly, have the shareholder actually reimbursed in December, or get the deduction in 2024.

[IRonMaN]

Telling a client to back date a check? I think you might want to scratch that idea from your tax planning ritual.

[Strongsilence-CPA]

they write it prior to 12/31 listing a date of 12/31 and complete it a few days after 1/1.

In this case, the timing of a check for a small amount doesn't bother me.

Thanks for your idea.

[IRonMaN]

If it is such a little amount, why would you play games with the check?

[IRonMaN]

I'm not sure why it is so difficult to determine the amount of the premiums well before 12/31.  The insurance companies that I am familiar with provide the premium amounts well in advance.  However, in a worse case scenario, I would pick up eleven months of premiums and catch that twelfth payment the following year.  But I have to admit, it really bothers me that a licensed CPA would recommend to a client to back date a check.  I am disappointed that you would make such a recommendation no matter what the dollar amount is.

[qbteachmt]

"In this case, the timing of a check for a small amount doesn't bother me."

It's Payroll related. You need to be concerned, if you are trying to teach clients how it works. It's not reimbursement for a ream of printer paper.

I always have a bit of concern for things that don't make sequential sense, when it is discoverable (documented and reported). It's a very slippery slope. They'll play the game of Telephone with any edgy guidance. "I was told I could put it on the check, even if the reimbursement isn't made until later." "I was told to include all the amounts in this year, even if some isn't paid until next year." "I was told that as long as I pay myself for it, I could take it off my taxes, even if it turns out this policy doesn't qualify or I no longer have that coverage."

"I was told..." is where they take bad guidance and make it worse. And they are not the professional that started the landslide or misconception. They are just trying to maximize it to their benefit.

[Strongsilence-CPA]

Thank you. I understand.