HEALTH INSURANCE PREMIUMS PAID BY AN S COPORATION ON BEHALF OF THE 2% SHAREHOLDER

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1 W-2 reporting and tax treatment of health insurance premiums paid by an S Corporation on behalf of the 2% shareholder-employee (and his or her spouse or dependents under age 27) and employer provided automobiles-tax Year 2015 This letter provides guidance regarding Form W-2 reporting and tax treatment of a 2% shareholder-employee s health insurance premiums paid or reimbursed by the S corporation under a medical care coverage plan established by the S corporation and employer provided vehicles. A 2% shareholder is any person who owns (or is considered owning), on any day during the taxable year of the S corporation, more than 2% of the outstanding stock of the corporation or stock possessing more than 2% of the total combined voting power of all stock of such corporation. HEALTH INSURANCE PREMIUMS PAID BY AN S COPORATION ON BEHALF OF THE 2% SHAREHOLDER A plan providing for the medical care coverage for the 2% shareholder employee in an S corporation is considered established by the S corporation if: 1. The S corporation makes the premium payments for the health insurance policy covering the 2% shareholder-employee (and his/her spouse or dependents), if applicable); or 2. The 2% shareholder makes the premium payments and furnishes proof of premium payment to the S corporation and then the S corporation reimburses the 2% shareholder-employee for the premium payments. The value of health insurance premiums to its 2% shareholder-employee is a fringe benefit. The cost of health insurance premiums paid or furnished by an S corporation on behalf of its 2% shareholder in consideration for services is considered income for income tax purposes. The S corporation is required to report the cost of health insurance premium payments in wages for income tax withholding purposes on the 2% shareholderemployee s Form W-2 (Box 1), Wage and Tax Statement. The health insurance premiums are not subject to Social Security and Medicare taxes if the S Corporation s health insurance plan benefits all employees. The S corporation also must report the cost of health insurance premiums on the shareholder-employee s Form W-2 in Box 14 and label it as health insurance premiums 1

2 The 2% shareholder-employee is required to include the cost of health insurance premiums paid by the S corporation in gross income on his/her personal income tax return. When the S corporation makes the payment, the 2% S shareholder will qualify for a tax favored, self-employed health insurance deduction on his/her personal income tax return, Form 1040, Page 1 for 100% of the health insurance premiums included in wages. Without the S corporation payment or reimbursement to the 2% shareholder, the 2% shareholder s health insurance deduction gets reported on Schedule A of the shareholder s personal income tax return as an itemized deduction, where it and other medical expenses are reduced by 10% of the shareholder s adjusted gross income. If you or your spouse is 65 years or older or turned 65 during the tax year, the threshold remains at 7.5% of AGI for those taxpayers until December 31, An S corporation is entitled to deduct the cost of health insurance premiums as a valid business deduction. The Internal Revenue Service has made it clear that if the health insurance premiums are not reported on Form W-2, you will lose the 100% deductible tax treatment. If you are using a payroll company for the preparation of W-2s, the payroll company must be informed of the health insurance premiums prior to December 31, EMPLOYER PROVIDED AUTOS Generally, the value of an employer provided vehicle is a fringe benefit that a 2% shareholder-employee must include in income as compensation. However, if the use of the vehicle qualifies as a non-personal use vehicle, the value is excluded from a 2% shareholder-employee s income under working condition fringe benefits. Thus, only the value of the non-business use of a vehicle is taxable compensation to the shareholder-employee under either general rule (FMV of the personal use) or special valuation methods (Annual Lease Value Method, Commuting Value Method and Cents per mile Method). The S corporation is required to report the value of vehicle s personal use in wages for income tax withholding, Social Security and Medicare tax purposes on the 2% shareholder-employee s Form W-2 (Box 1), Wage and Tax Statement, calculated under one of the above-referenced methods. The S corporation also must report the value of the vehicle personal use on the shareholder-employee s Form W-2 in Box 14 and label it as auto fringe benefits 2

3 We have enclosed a blank 2015 Personal Use of Automobile Information Worksheet to help you gather the information for the preparation of your 2015 income tax return. Please provide the information requested on the information worksheet and forward the completed worksheet to our office to the following address: Baratz & Associates, P.A. 7 Eves Drive, Suite 100 Marlton, NJ You also have the option of ing the completed worksheet to: info@baratzcpa.com or fax to: (856) It is extremely important that you keep adequate records such as an auto log to substantiate the business expense deduction for the business use of the auto. If you would like to discuss with us how these complex rules apply to your business, please do not hesitate to call our office. Very truly yours, Baratz & Associates, P.A. 3

4 2015 PERSONAL USE OF AUTO INFORMATION WORKSHEET 1. Auto description 2. Date placed in service 3. Cost/fair market value of auto as of date placed in service 4. Total business miles driven during the year? 5. Total commuting miles driven during the year? 6. Total other personal (non-commuting miles) driven? 7. Was the vehicle available for personal use during off-duty hours? Yes No 8. Is another vehicle available for personal use? Yes No 9. Do you have evidence to support the business use percentage claimed? Yes No 10. Is the evidence written? Yes No 11. Did the employer pay for the employees gasoline? Yes No 12. Are you an officer or a 2% shareholder? 2% Shareholder Officer 13. Is the auto leased? Yes No If yes, please provide the amount of lease payment NAME: COMPANY: 4

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