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

December 29, 2011 | By | 36 Replies More

When S-Corporation shareholders (those who own more than 2% of the company shares) are covered by the company health insurance plan (or a long-term care plan), the IRS specifies that the benefit is reported in box 14 on their W-2. Let’s take a look at how to handle this using QuickBooks payroll.

Note that this applies only to QuickBooks Basic, Enhanced, and Assisted Payroll, but not QuickBooks Online Payroll, and it only applies to S-Corporations.

BackgroundQuickBooks Enhanced Payroll

When an S-Corporation pays health insurance premiums for shareholders, those premiums increase taxable wages (Federal and State) for the shareholders and they 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, we prefer doing a single adjustment (zero-dollar paycheck) at the end of each year, before the W-2s are prepared. You have to trick QuickBooks into making this adjustment.

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 on the W-2.

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.

Custom Setup

Company Contribution

Add New Payroll Item

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 Account

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.

Payroll Taxes

Payroll Calculate

Payroll Rate & Limit

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. Our 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.
Addition Payroll Item

Payroll Clearing Item

Clearing Item Expense Account

Clearing Item tax type

Clearing Item taxes

Clearing Item Calculate

Clearing item gross pay

Clearing item 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.

Company Summary

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.

Checking the W-2
Note: If you use Assisted Payroll or ViewmyPaycheck, you must send the paycheck to the payroll service or to ViewmyPaycheck. See the help screens if you need help sending paychecks to the service.

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Category: Technical QuickBooks, Working with QuickBooks

About the Author ()

Doug Sleeter 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, Doug has 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. Doug is best known for his expertise in QuickBooks as well as driving the adoption of online accounting and small business process solutions. 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. CPA Practice Advisor has recognized Doug as one of the "Top 25 Thought Leaders" in the accounting profession for the past several years and he has been named to Accounting Today's "Top 100 Most Influential People in Accounting" each year since 2008. Highly sought for his ability to engage and educate accounting professionals, Doug presents at various accounting events throughout the year, including those held by the AICPA and numerous state CPA societies. Doug also hosts the annual Accounting Solutions Conference, attended by hundreds of accounting professionals, industry leaders, and technology developers.

Comments (36)

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  1. Sara Laidlaw says:

    Very timely article, Charlie. Thank you.
    Since the health insurance is not deductible as ins and is deducted as wages, we have the item code debit Salaries or maybe an account called Taxable S-Corp Health, which is in the wages area and then credit the insurance account. Isolating S-Corp >2% expenses in its own account during the year speeds up the process too. The movement from Ins to Wages in the G/L shows a clear audit trail to the W2. It shows the transaction type as a paycheck. The wage accounts can be reconciled to the W2s.

    I love the trick for the -0- net check. We simply pull up the last paycheck, write down the Fed/State taxes withheld, add the ins and then correct the taxes back to the actual making sure not to disturb the net, but I’ve been uncomfortable with this. We have found that if you use the adjust liability feature and add it that way, the figures do not always feed to the state boxes on the W2 correctly and have to be corrected manually.

    Since most S-Corps must deal with this at year end, I am surprised that Intuit has yet to make this an easy process.

  2. Doug Sleeter says:

    Hi Sara,

    You are correct. If you use the “Adjust Liabilities” instead of a zero-dollar paycheck, it doesn’t feed the State Wages properly on the W-2. So definitely do NOT use Adjust Liabilities for this adjustment.

    Also, I like the idea of putting shareholder health insurance under the payroll account so you can tie all wages to the W-2, but it’s a tradeoff between having all insurance together for budgeting vs. keeping all payroll together. Either way, you’ll have a simple calculation to do at the end of the period.

    RE: editing the last paycheck, that would work, but you’re right, it seems messy and error prone. Also, having one single “adjustment” paycheck transaction holds it separate so it’s easy to look at in reports.

    Anyway, I hope this saves some people the hassle of figuring out how to get the W-2s right. It is certainly NOT an obvious solution.

    • Sara Laidlaw says:

      Oops. I clicked on one of Charlie’s links and didn’t notice that it was you that wrote this article. Thank you for confirming the state problem when using the Adjust Liabilities feature.

      Good point on budgeted expense accounts. If this is an issue for companies, one solution would be to use a contra account in the insurance area to hold the credit and not disturb the budgeted insurance account. We use this idea when dealing with capitalized purchases when a client wants to see them on the P&L Budget. We budget the expense account and use a contra account beneath it to show movement to the fixed asset account.

      Next article… When Management Accountants and Tax Accountants collide!

    • Marcy Z says:

      Thank you for this step by step instruction. This was a great help to me – a novice Quickbooks payroll user. I found all kinds of information on how to create the S-Corp insurance payroll item but not how to get it to show up on the W-2 correctly. Still, I wish that Quickbooks would find a way to simplify this and many other tasks that are so convulted.

  3. Diane Gilson says:

    Hi Doug,

    Just went through this today with Assisted Payroll for my own health insurance for the year. (BTW, a note re: Assisted Payroll… Today was pretty much the last day to send this info in. Our deadline almost slipped by – so next year this process is going on my calendar early in December!)

    One additional note. If you have Assisted Payroll, you can’t touch or modify the SUI amounts before or after the fact. So, if the shareholder has NOT been taking a standard salary (i.e., has not previously hit the SUI maximum for the year), you’ll need to remove the checkmark from the State Unemployment tax when you set up the S-Corp Insurance Payroll Item; otherwise QB will compute it and create employer expense and a liability. We had to create a brand new Payroll Item without this box checked in order to avoid the SUI calculation and liability.

    Resolving this used up about 30 minutes of my time w/Assisted Payroll Support today (they were very nice, but time is money), so this may save someone a similar experience :-).

    Diane Gilson

    • Doug Sleeter says:

      Diane,

      For the case you cite (i.e. the shareholder has not yet reached the SUI limit for the year), I think it would work best to create two transactions. One for their paycheck (that does not zero out) which takes them to or over the SUI limit, and a separate Zero-dollar paycheck just like in my example.

      Would that fix it without creating the separate item? Or maybe you’re talking about when the don’t go over the limit for the whole year?

  4. Crystal says:

    Wow super timely article. I just took on a new client who is an S-corp and I am having to go back and redo books from 2010 forward. They have been paying their medicare premiums from the business account and the tax accountants who prepared their W-2 for 2010 did not include anything in box 14. This should help me take over the payroll for this client as well. Thanks for the great info.

  5. Hi Doug,

    Thanks for posting this valuable piece of info. Intuit Payroll support had me use a PR adjustment but as you noted it did not adjust the state wages.

    In my client’s case, the medical payments have been made throughout the year so I am just doing a year end adjustment.

    I went through your steps but I am left with a PR liability equal to the medical insurance plus it increased officer wages on the P&L for the same amount.

    Am I missing a step in the process? There should not be a PR liability or an increase to the wages.

    • Doug Sleeter says:

      Laura,

      The problem is most likely the setup of your Medical Insurance Payroll Item. Look carefully at the 4th screenshot in the article above. Notice that we use the same expense account on both the “Liability Account” and “Expense Account” fields on that screenshot. That is what makes the adjustment wash in and out of the same expense account.

      The idea is that you already have other transactions in the books that record the actual health insurance expenses. You probably have bills from the health insurance company that were coded to health insurance expense, or a similar account. So this adjustment is JUST about getting the total of those benefits added to Box 15 on the S-Corp officer’s W-2. This adjustment should NOT have any net affect on the G/L.

      • Thanks Doug. That was the problem. I had originally setup the S-corp PR item per Intuit support and never thought to check its setup. Now the wages/insurance amounts are correct with no PR liability.

  6. George Sam says:

    I must be the only one confused.

    When I do the above steps.. I end up with liabilities in the Federal Withholding and State Withholding categories… and a check amount of negative $2270.95.

    Do I just zero out the liabilities?

  7. George Sam says:

    Question… I just did this in December, 2011.

    Since I pay myself once a year in July… my 4th quarter 941 instead of showing no income is now showing the SCorp MP amount on line 2 (wages, tips and other compensations).

    Is this correct?

    Thanks,

    George

    • Liz Alexander CPA says:

      Hi, George. Yes, this is correct. In the end, the total of wages of all 4 quarters 941 should equal the wages on box 1 of the w3. If it doesn’t, the IRS sends a nice little letter.

      • George Sam says:

        Thanks for the reply!

      • Doug Sleeter says:

        Thanks Liz,

        I agree with Liz… This adjustment to the w-2 does increase box 1 wages, so it also affects the 941, 940, and state quarterlies…

        Also, note that it increases taxable wages and by design we over-ride the taxes on the zero paycheck… But in most cases the resulting underwithheld tax is small enough to not cause penalties… But you should at least be aware of the tax issue… Warn the clients as necessary, or add some wages to the transaction so that you can add back some withholding to zero it out…

  8. Yvonne Bryan says:

    I was so excited – had article in hand while working with an S-Corp client using QBO….then I saw “but not QuickBooks Online Payroll” in the second paragraph of the article….what do I do now to help client get medical premium payments properly recorded on W-2 next year?

    • Doug Sleeter says:

      Yvonne, The post was discussing the specifics of how the INTERNAL QuickBooks payroll works, so that’s why I said it doesn’t apply to QuickBooks Online Payroll.

      There are a few questions/answers on this topic at: http://community.intuit.com/category/intuit-online-payroll – Search for Shareholder Health and look at the question and answer provided by Karl Irvin (www.q2q.us).

      He uses essentially the same method as suggested here, but instead of a zero-check, he voided the last check of the year and replaced it with a new check that added an S-Corp Health Insurance Item.

      Here is his Quote:
      On about January 12, I went back and voided the original payroll check for December and created a new check with a December 31, 2009 date.

      There is a payroll item that you can set up for 2% insurance that adds the amount to wages and automatically deducts it from the check. The insurance premiums paid were correctly excluded from Social Security and Medicare and added to gross wages. I had to manually override the federal withholding to make it agree with the original check.

  9. Stephanie Metts says:

    I followed the instructions but the insurance premiums are not showing in box 1 only box 16. What did I do wrong?

    • Doug Sleeter says:

      Stephanie,
      Check the Tax Tracking Type in the Company Contribution Payroll Tax Item – Screenshot above. It must say “SCorp Comp Pd Med Premium” – Verify and try again.

  10. Art Goudey Jr says:

    Doug,

    Instead of clearing out or overriding the withholdings to make it a zero dollar paycheck, just uncheck the Federal & State Withholdings in the Taxes screen (Company Contribution)…

    • Doug Sleeter says:

      Art,
      This transaction is an “adjustment” using a paycheck, so that’s why we override the taxes.

      However, the compensation for S-Corp insurance IS in fact subject to Federal and State taxes, so the company contribution item needs to stay as we show it above. The 941 needs to include this S-Corp insurance in total compensation, and the checkmarks in the company contribution item is what controls that. So definitely do NOT uncheck Federal and State in the company contribution item.

  11. judy says:

    I had several employees that paid health insurance while on leave. I added the premuim to their payroll liability account which reduced their taxable income on their W2 but did not reduce their Social security wages and medicare wages. It is a section 125 plan and my payroll item reduces all three when there is a deduction on their paycheck. How do I get quickbooks to reduce their social security wages and medicare wages so my W2, W3 and 941’s all agree?

    • Kelly Reed says:

      Judy- I have a similar problem. We had an employee take Leave Without Pay last year, but they set aside money to contribute to their Section125 account. I issued paychecks with no earnings but I still made the contributions to their Sec125 account. Quickbooks failed to deduct those contributions from their earnings figures so the W2, 941, and SUI reports for that quarter all overreported that employee’s taxable earnings. Now Quickbooks has to reissue all those reports and my employee has to wait for his corrected W-2.

      I have another employee in the same situation this year. I’m not sure what to do to keep this from happening again. Suggestions?

      PS: I am so GRATEFUL to have found this site and this article. Thanks, Sleeter Group!!

  12. Janis says:

    Thank you for the help on this issue…but I still have a problem. I have QB Pro with Basic Payroll (2010) and I created the zero paycheck and then QB gave me an error not letting me record it so it reflects on the W-2 since this is January 2013 and I am trying to add it to 2012. Suggestions?

  13. Michelle says:

    Why do you zero out the fed & state taxes when they really are owed? They won’t show up in the liabilities if you do that will they? Our company usually makes a deposit for these. Would it work to just make the adjustment so that these taxes remain on the check, but the check becomes 0 after the adjustment?

  14. Jennifer Cooper says:

    Hi,
    I did this last year at it worked like a charm but this year, QB is not letting me do a negative -.01 in the addition item. Have you noticed this? It keeps changing it to a positive which totally screws this up!! Any advice?????

    Thanks!!

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