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.
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.
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.
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.
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.
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.
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.
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.
About the Author (Author Profile)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.
Sites That Link to this Post
- QUICKBOOKS BASICS | COPIERNETEYE | January 2, 2012
- S Corporation Shareholder Health Insurance – 2013 Update | PDXCPA - Portland Small Businesses Tax Blog | December 3, 2013