If your company is an “S” corporation, there is a way to make health insurance deductible to the shareholders.
“S” corporations have to go through a different procedure with medical/dental/vision insurance for more than 2% of shareholders to make it deductible. The corporation pays the shareholders health insurance premiums, which must be added to their wages.
It’s subject to income tax, not employment tax like FICA/Medicare. Instead of getting a deduction in insurance, the company receives the belief in the form of wages paid. The shareholder reports it as increased W-2 wages but gets an above-the-line deduction for self-employed health insurance, so it breaks even.
We put the amount on the K-1s so their individual return preparers know what to deduct. It also shows up in one of the boxes on their W-2s. The insurance has to be reported as wages at least annually in the 4th quarter; ask your payroll company when they need the information to add it to the W-2s.
When the company records payroll for that period, there should be a debit to wages and a credit for the amount of insurance being treated as wages. That credit will go to insurance on the books. If not done this way, the IRS will disallow the corporate deduction and treat the payments like a distribution.
