What Is 2% Shareholder Health Insurance? (2024)

Do you own an S corporation and offer health insurance to employees? If so, you need to know how 2% shareholder health insurance works for S corporations.

What is a 2% shareholder?

According to the IRS, a 2% S corporation shareholder is someone who owns more than 2% of the company’s stock at any time during the year. This also applies to individuals who own more than 2% of the company’s voting power.

S Corp shareholders include individuals, trusts, or estates. An S corporation cannot have more than 100 shareholders. Shareholders can be employees or they can be individuals who do not perform services for the company.

If you have employees who own more than 2% of your business’s stock, benefits like health insurance are treated differently. Below, learn how health insurance is treated for regular employees. Then, find out how to deal with shareholder-employee health insurance.

Is health insurance a fringe benefit?

Health insurance is a type of fringe benefit. Fringe benefits are benefits you can offer employees in addition to their regular wages.

Some fringe benefits are taxable, but there are others that are nontaxable. Nontaxable fringe benefits are not subject to income, FICA, and/or FUTA taxes. Examples of nontaxable fringe benefits include educational assistance programs, group-term life insurance coverage, and health insurance coverage.

As a nontaxable fringe benefit, health benefit contributions are exempt from income tax, Social Security and Medicare taxes, and federal unemployment tax withholding.

However, S Corp health insurance for 2% shareholder-employees is an exception to the nontaxable health benefit contribution rule.

2% shareholder health insurance

If you provide health insurance to employees who own more than 2% of stock in your S Corp, the premiums are tax deductible for your company. And, the premium amounts are taxable for your employees.

You must include the amount of the S Corp shareholder health insurance premium in the employee’s taxable wages.

S Corp health insurance W-2 box 14

Write the value of the shareholder-employee’s health insurance in box 14, “Other,” of their Form W-2.

You will also include the additional compensation in box 1, “Wages, tips, other compensation.” Because the contributions are not subject to Social Security and Medicare taxes, do not include the amount in box 3,“Social Security wages” or box 5, “Medicare wages and tips.” The health insurance benefit is only subject to income tax.

For more information on S corporation shareholder health insurance, contact the IRS.

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This article is updated from its original publication date of February 19, 2018.

This is not intended as legal advice; for more information, please click here.

Alright, buckle up because we're diving into the intricacies of S corporation shareholder health insurance, and trust me, I've got the goods.

First off, let's talk about the 2% shareholder. According to the IRS, they're not just any shareholder; they're the big shots, the ones owning more than 2% of the company's stock or voting power. These could be individuals, trusts, or estates, but the catch is, an S corporation can't have more than 100 of these heavy hitters.

Now, when it comes to health insurance for your S Corp employees, things get interesting. Health insurance falls under the category of fringe benefits, those sweet perks you offer on top of regular wages. Some fringe benefits are taxable, but others, like health insurance, get a pass. That means health benefit contributions are exempt from income tax, Social Security, Medicare taxes, and federal unemployment tax withholding—unless you're dealing with those 2% shareholder-employees.

Yep, you heard it right. S Corp health insurance for these high rollers is a bit of an exception. If you're footing the bill for health insurance premiums for employees who own more than 2% of your company, your company gets a tax deduction. But, and here's the kicker, the premium amounts become taxable for those employees. You'll have to include that premium amount in their taxable wages, subjecting it to state and federal income tax withholding.

But hold on, it's not all bad news. The silver lining is that these contributions don't have to dance with Social Security and Medicare (FICA) taxes or unemployment tax. Oh, and here's a pro tip for my Pennsylvania pals—there might be some special treatment for you, so be sure to check in with the state for the lowdown.

When it's W-2 time, remember to jot down the value of the shareholder-employee's health insurance in box 14, under "Other." Don't forget to slide that additional compensation into box 1, "Wages, tips, other compensation." Since Social Security and Medicare taxes are a no-show for these contributions, keep them out of box 3, "Social Security wages," and box 5, "Medicare wages and tips." This health insurance benefit is all about that income tax life.

For the nitty-gritty and the latest updates, the IRS is your go-to. And if you want to impress your friends with the payroll talk, maybe subscribe to that email list for the freshest news. That's your backstage pass to the S corporation shareholder health insurance saga—now go forth and impress your peers!