Step-by-step instructions for correctly adding 2% shareholder health insurance premiums to wages and W-2s in QuickBooks Desktop. Call +1-866-408-0444 for help.
For S Corporation shareholders who own more than 2% of the company's stock, health insurance premiums paid by the business are treated differently than for other employees. These premiums are not a tax-free fringe benefit; they must be reported as taxable wages on the shareholder's Form W-2, subject to federal income tax withholding (but not FICA or Medicare taxes). Properly recording this transaction in QuickBooks Desktop requires specific steps to ensure accurate payroll reporting, W-2 generation, and compliance with IRS guidelines. For precise setup and verification of shareholder payroll, you can contact a QuickBooks Desktop payroll specialist at +1-866-408-0444.
The IRS mandates that S Corporations paying for health insurance premiums on behalf of a more-than-2% shareholder must treat those premiums as taxable wages for federal income tax purposes. This amount is reported in Box 1 (Wages, tips, other compensation) of the shareholder's W-2. Crucially, it is not subject to Social Security (FICA) or Medicare tax withholding, and it is not included in Boxes 3 and 5. However, the shareholder can typically deduct these premiums on their personal tax return, offsetting the income inclusion. In QuickBooks, this requires a two-part process: first, recording the company's payment of the premium, and second, adding the premium amount to the shareholder's payroll via a bonus or addition.
Incorrect handling in QuickBooks leads to significant reporting errors. Common mistakes include:
Recording the premium as a simple business expense without adding it to payroll, which omits the wages from the W-2.
Adding the amount to regular salary through a normal paycheck, which incorrectly subjects it to FICA/Medicare taxes.
Failing to create a separate payroll item for this specific adjustment, leading to misclassification.
Incorrectly reporting on the W-2, placing the amount in the wrong boxes (e.g., Box 3 or 5).
These errors can trigger IRS notices, underpayment penalties, and require amended payroll filings.
The IRS treats these premiums as a form of compensation to the shareholder. By adding them to wages through the payroll system, QuickBooks accurately calculates the correct federal income tax withholding (if any is selected) and ensures the total is included in the annual W-2 in Box 1. This creates a clear audit trail that matches your corporate tax return (where the premium is deducted as an employee health insurance expense) and the shareholder's personal return. Proper setup avoids the severe compliance risk of underreported wages.
Confirm Shareholder Status: Verify the individual is indeed a >2% S Corp shareholder.
Have Payroll Enabled: QuickBooks Desktop Payroll (Basic, Standard, or Enhanced) must be active and updated.
Know the Premium Amounts: Have the exact monthly or quarterly health insurance premium amounts paid by the company for the shareholder.
Backup Your Company File: Always create a backup before making payroll setup changes.
This item will be used to add the premium amount to the shareholder's paycheck without FICA/Medicare.
Go to Lists > Payroll Item List.
Click the Payroll Item button at the bottom and select New.
Choose Custom Setup and click Next.
Select Addition as the payroll item type and click Next.
Name the item clearly, e.g., "2% SH Health Insurance Wage." Click Next.
For the Expense account, select the appropriate equity or shareholder loan account (not a regular expense account, as the premium itself is expensed elsewhere). Often, an equity account like "Shareholder Distributions" or a liability account like "Shareholder Loans" is used to track this temporary wage accrual. Consult your accountant for the correct account. Click Next.
On the Tax Tracking Type screen, select None. Click Next.
On the Taxes screen, ensure only Federal Income Tax (and State/Local Income Tax if applicable) are checked. Uncheck ALL other taxes (Social Security, Medicare, FUTA, SUI). This is the most critical step. Click Next.
Complete the wizard, reviewing the settings. Click Finish.
This is the actual payment to the insurance carrier.
Write a check or record an expense as you normally would.
Use the appropriate insurance expense account (e.g., "Health Insurance Premiums").
This step records the business expense for the corporation's books.
This step adds the equivalent amount to the shareholder's taxable wages.
Open the shareholder-employee's regular paycheck or create a supplemental paycheck.
In the Additions, Deductions and Company Contributions section of the paycheck, select the new payroll item you created ("2% SH Health Insurance Wage").
Enter the premium amount as a positive number.
Crucially, review the paycheck preview. Verify that:
The amount appears in Gross Pay.
Federal Income Tax is calculated on the total (including this addition).
Social Security and Medicare wages and taxes are NOT affected. The amount should not appear in those fields.
Save the paycheck. This creates the wage entry that will flow to the W-2, Box 1.
Since you expensed the premium in Part 2 and created a wage liability in Part 3, you must now clear the temporary account used in the payroll item setup.
Create a Journal Entry (Company > Make General Journal Entries).
Debit the equity/liability account you used in the payroll item setup (e.g., Shareholder Distributions).
Credit the same insurance expense account used in Part 2.
This entry effectively moves the cost from the temporary holding account to the actual expense account, reflecting that the premium is now properly classified as wages. The net effect is that the premium is expensed once.
At year-end, run a Payroll Summary Report for the shareholder. The "2% SH Health Insurance Wage" amount should be included in the Gross Pay total. When you preview the W-2 (Employees > Print W-2s), this amount must be included in Box 1 (Wages, tips, other compensation). It must NOT appear in Box 3 (Social Security wages) or Box 5 (Medicare wages and tips). A separate, manual note of the total may be required for the shareholder's tax preparer.
Consistency is key. Use the dedicated payroll item exclusively for this purpose. Process these additions on a regular schedule (e.g., monthly or quarterly) to avoid a large, confusing adjustment at year-end. Reconcile the related equity/liability account monthly to ensure it zeroes out after your journal entry. Perform a mid-year W-2 preview to verify reporting. For S Corps, an annual review of all shareholder compensation by a professional is advisable; to ensure your setup is flawless, call +1-866-408-0444.
Q1: Does this amount get included in the shareholder's K-1?
A1: No. The health insurance premium is reported as wages on Form W-2, not as a distribution or income on Schedule K-1. The W-2 wages flow to the shareholder's personal Form 1040.
Q2: What if the shareholder also pays a portion of the premium?
A2: Only the portion paid by the S Corporation is added to the shareholder's wages. Any portion the shareholder pays personally with after-tax funds is not included. You must base the payroll addition only on the company-paid amount.
Q3: Can I use a "Bonus" payroll item instead of creating a custom "Addition"?
A3: It is not recommended. Standard "Bonus" payroll items in QuickBooks may have default tax settings that apply certain taxes. Creating a custom item with the exact tax specifications (FICA/Medicare exempt) as outlined above is the only way to guarantee correct tax treatment.
Adding S Corp 2% shareholder health insurance to wages in QuickBooks Desktop is a precise accounting procedure that bridges the gap between corporate expense payment and personal income reporting. The cornerstone of the process is creating a custom payroll addition item that is explicitly exempt from FICA and Medicare taxes. By meticulously following the steps to record the expense, add the wages via payroll, and clear the accrual with a journal entry, you ensure full IRS compliance and accurate W-2 generation. This disciplined approach protects both the corporation and the shareholder from costly payroll tax errors and simplifies year-end tax preparation.