SCorp Medical

[AnmarieA]

For an 1120S to deduct the officers Medical (SCorp Medical) expense it must be added to the officer's Box 1 and 14 of the W-2. If one of the officers has payroll withholding for a portion of the cost of the medical premium do you only add the "net" amount to the W-2? The business pays the total cost of the medical premium for both shareholders with more than 5% ownership but one of the shareholders reimburses the business for a share of the cost of the premium. What amount is reported as SCorp Medical on the W-2 the gross or net premium after Payroll withholding? Logically the expense to the business is the net amount after payroll withholding so that I would think is the amount to add to the W-2. Can someone confirm this treatment please.   

[qbteachmt]

"If one of the officers has payroll withholding for a portion of the cost of the medical premium"

"Logically the expense to the business is the net amount after payroll withholding"

If I understand you correctly, you don't consider Net. You consider what is happening.

You need to know if that deduction is pre-tax or from takehome.

If it's pre-tax, it's simply a split off of the gross wage expense amount, and you want to examine how they treated the tax withholding requirements on that portion. The point of that provision is not to tax it the same as ordinary wages:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

If it is a post-tax deduction, you want to confirm they did nothing to affect tax withholding; it would be no different than if the person comes in to pay their share manually and directly as out-of-pocket. In this example, only the company-paid amount is medical (company share) and the medical benefit tax treatment should appropriately reflect that condition. You don't want to double-dip: it's already been gross wages to end up with takehome pay, and only the additional amount the company pays is the medical portion.

The regulation is "more than 2%" not 5%.

[AnmarieA]

Thank for you response qbteachmt. Yes I realize it is for 2% vs 5% that was just a typo on my part.

The payroll withholding is pre-tax so the amount of payroll withholding to cover a portion of the insurance cost is excluded from income. The employer paid the gross premium of $15K to the insurance company for the insurance coverage for the shareholder and the employee through payroll deduction reimbursed the company for $6K.

If I understand your response and the link, I will only add to the W-2 compensation the amount of $9K to the W-2 for SCorp Medical as the $6K was already pretax and reduced the employees Box 1 wages. 

Am I understanding your response correctly. I do not have any other companies that have this situation so I want to ensure I am handling correctly on the W-2. Thanks for your assistance.  

[qbteachmt · Accepted solution]

"The payroll withholding is pre-tax"

The entire $15k is in box 14. Ooof. You can't eliminate that $6k as gross pay and also ignore that $6k for health coverage box 14, though. It's now the opposite of a double-dip. See if this helps:

Basically, then, they're including this as compensation with the appropriate tax treatment as health as if it is paid to the provider, but mistreated for income tax, and then holding it back? Because this $6k isn't supposed to be paid out to the employee; it's part of what is sent to the health coverage provider. That doesn't affect its reportability. So yes, it is part of taxable income and part of what is reported in Box 14.

Pre-tax deduction is not fully the correct status. It is not subject to Social Security, Medicare or FUTA. Paid to the health coverage provider = Box 14 reporting. Isn't subject to income tax withholding, but is reportable taxable income. That's because the shareholder will most likely take it as deduction on the 1040. Otherwise, there should be income tax withholding on it. That's why pre-tax payroll deduction isn't exactly the right treatment.

"only add to the W-2 compensation the amount of $9K to the W-2 for SCorp Medical as the $6K was already pretax and reduced the employees Box 1 wages."

That's the usual employee benefit treatment, which this shareholder doesn't qualify for. The company isn't being reimbursed for the $6k. They are sidestepping the fact that it is sent in as a health coverage payment, along with their $9k. This person's W2 should show $15k as gross compensation, and that amount is not subject to Social Security, Medicare or FUTA. It is part of Taxable income, as part of gross. They are just handling the two portions separately, but the same way.

What they did, then, these are equivalent and just semantics:

Your salary is $52k and we provide $15k health coverage benefit on your behalf which is reported as taxable income to you. The $15k is in box 14.

Or,

Your reportable taxable salary is $67, but $15k is not taxed for Social Security, Medicare or FUTA, and we send that for your health coverage. This $15k is in box 14.

Or,

Your salary is $61k; we keep back $6k untaxed for your health coverage and match that with $9k on your behalf. The $15k total is reported as taxable income to you and is in box 14.

The difference would come from when a person has a stated salary and does not participate in the health coverage. That's why their method is odd.

The company is supposed to pay to the health coverage provider or to reimburse the employee for qualifying coverage paid by the employee. They're sort of doing it half-and-half. Where they have it wrong is that the employee-paid share is not supposed to be first paid to the employee with the tax benefit intact.

[AnmarieA]

Thanks for this thorough response. I have added the total amount of premiums paid by the company to the paystub and looked at the W-2 which shows the wages + premiums paid of $15K in box 1 and a corresponding $15K in Box 14. With this being said it shows a credit in the PL for the withholding from the shareholder which is strange since I put the total gross amount of premiums on the paycheck. 

I also do this shareholders personal return so the amount that is in box 14 it will be entered from the W-2 into Health Insurance paid so it is very strange as this is the first year payroll withholding was recorded. Something just does not feel right about this treatment.

[qbteachmt]

"With this being said it shows a credit in the PL for the withholding from the shareholder which is strange since I put the total gross amount of premiums on the paycheck.:

I think you are referring to the deduction? It should be seen as part of gross compensation, because it is a component of compensation. The way you described their handling of that gross portion, it might be showing as gross compensation, then credited there and offset as benefit? They're running it around a bit, in other words. The point is, the company has it as expense because they reported it as gross income for the shareholder. The difference in doing it as $15k, or splitting it as $6k and $9k, as long as the taxes were handled properly, is clarity of that as a benefit. See how hard they made it for their tax preparer and their payroll people, by splitting it?

Or, are you seeing only the gross and its credit (not gross, credit, and an offset)? In other words, the deduction would be collected as a liability, not an offset to the gross expense. Or, it is part of the gross expense, collected as contra-expense, then they pay out the full benefit as expense. You have to follow what they did to confirm they didn't either double-dip, or bypass something, in other words.

"I also do this shareholders personal return so the amount that is in box 14 it will be entered from the W-2 into Health Insurance paid"

Exactly. The full $15k should show on the W2, since it is considered paid on behalf of the shareholder and they handled it as pre-tax. The other "reimbursement" method, where the employee has a post-tax deduction, would result in the company share of $9k in box 14 (company contribution gross), but your shareholder would still be considered to have incurred the full $15k. It's that weird handling of the portion as pre-tax deduction after being included in gross compensation, that's confusing.

"so it is very strange as this is the first year payroll withholding was recorded. Something just does not feel right about this treatment."

Well, it's not right, really, but the end result is correct. The provision requires the health coverage be paid to the provider or to reimburse the employee-shareholder. The full amount the company paid to the health coverage provider is reportable as taxable income, then your shareholder takes it as an expense.

Adding it to the paycheck Gross, then deducting it pre-tax, is the right reporting. It just implies they paid it to the shareholder, then took it back. Typically, it's added to show it as a taxable benefit. Not as part of pay and then a deduction. Same difference, as long as it was handled properly and reported properly. Just convoluted. QuickBooks payroll would handle it a bit like this, in fact.