YEAR END REPORTING

Accident and Health Insurance Premiums

Your employees’ pay must include the value of fringe benefits you provide, unless the benefits are specifically excluded from income by law or are paid for by the employees. The value of these includable fringe benefits is generally subject to Social Security and Medicare Tax (FICA), Federal and state unemployment taxes (FUTA and SUTA), and income tax withholdings.

Accident and Health Insurance Premiums Paid by
S Corporations for More Than 2% Shareholders

These premiums should be added to the shareholders’ salary and deducted from your company’s ordinary income. Since the payments are treated as additional compensation, they should be reported as wages on the shareholders’ Form W-2 and should be included in the fourth-quarter payroll returns of the S corporation. These premiums are not subject to Social Security or Medicare (FICA) or Unemployment taxes. Your company should report the premiums as exempt wages for unemployment tax purposes. Income tax withholding is required on the amount included in shareholder income. Although the premiums are included in the income of the shareholder-employee, they may be deductible from adjusted gross income on the employee’s individual income tax return.

For your company’s W-2s, the insurance premiums paid on behalf of the shareholder for 2011 should be included in Boxes 1 and 16. In Box 14, you should indicate the amount of health insurance premiums.
Shareholders who own greater than 2% of the corporation may not participate in cafeteria and other employee benefit plans (other than pension plans) on a tax-preferred basis. Participation will result in taxable benefits as outlined above.

Fringe Benefits for Partners or LLC members

The treatment above does not apply to partners or LLC members. Fringe benefits provided to partners and members are treated for tax purposes as guaranteed payments.

Because partners and LLC members are not employees, they should not have any FICA or Federal and state taxes withheld from their draw, nor should any payments to them be reported on a Form W-2.