Purpose
If your company is an S corporation, health and accident insurance premiums and HSA contributions paid on behalf of a more-than-2% shareholder-employee get special tax treatment. They are deductible by the S corporation and reportable as wages on the shareholder's W-2, subject to income tax withholding. This article explains the rules in brief and shows the two ways to set this up in UZIO so the amounts are taxed and reported correctly.
Warning: UZIO is a payroll technology vendor and cannot give tax advice. Confirm your shareholders' status and the treatment of their premiums with your accountant or tax specialist.
Who can do this: Any user whose role includes the Payroll permission. This is usually the Employer Admin, but other admin roles can be granted the same access.
The tax rules in brief
- A 2-percent shareholder is anyone who owns more than 2% of the S corporation's outstanding stock, or more than 2% of the combined voting power of all its stock.
- Health and accident insurance premiums and HSA contributions the company pays for a 2% shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder's W-2. They are subject to income tax withholding.
- These wages are not subject to Social Security, Medicare (FICA), or FUTA taxes, provided the payments are made under a plan that covers all employees or a class of employees. They appear in W-2 Box 1 (and Box 16 where applicable) but not in Boxes 3 and 5.
Prerequisites
- Your Company Type on the Federal Taxation screen is set to S-Corporation (or LLC). See Adding Federal Tax Information.
- At least one payroll remaining in the calendar year (see the warning at the end).
Which situation applies to you?
| Situation | Use |
|---|---|
| The S-Corp owners also contribute toward the premiums or HSA themselves | Mark them as S-Corp owners in Owner Details (Situation 1) |
| The company alone pays the premiums or HSA contributions | Add an S-Corp-flagged company contribution (Situation 2) |
Situation 1: Owners also contribute to the premiums or HSA
Set the affected employees as S-Corp owners in the Owner Details section of the Federal Taxation screen. This setting is on the company Federal Taxation screen, not on the employee profile.
- Go to Payroll > Payroll Setup > Federal Taxation and click Edit on the Tax Setup tab.
- In the Owner Details section, answer "Do you have employees who are 2% shareholders of an S-corporation?" with Yes, then select the shareholder employees from the list.
[Screenshot: Federal Taxation Owner Details section with the S-Corp owner selection; use demo data]
- Save.
Note: The S-Corp owner setting appears only when Company Type is S-Corp or LLC. If you do not see it, check your Company Type selection on the same screen.
Do not confuse it with: The Owner Details section also has a separate, general "Do you have employees who are owners/corporate officers/executive members?" question. That one exists for Wyoming Workers' Compensation tax calculation on salaried employees and has nothing to do with S-Corp tax treatment. Answering it does not set anyone up for the SEHI/HSA treatment described in this article. Use the 2%-shareholder question instead.
UZIO handles the rest of the taxation automatically for employees marked as S-Corp owners.
Situation 2: Company-only contributions
Set up a dedicated company contribution flagged for 2% shareholders:
- Open Company Contributions and click Add Contribution.
- Name the contribution, for example
S Corp Owner Health. - Do not link the contribution to a company deduction.
- Set the Method to Fixed $ and enter the per-pay-period amount.
- The question "Is this contribution applicable for 2% shareholders of an S corporation?" appears. Select Yes.
- The W-2 Box 14 label prefills as SEHI. You can edit the label if needed.
- When asked whether to assign the contribution to all employees, select No and assign it to the specific shareholder employees only.
- Click Save and Exit.
[Screenshot: Add Contribution form with the 2% S-Corp shareholder question set to Yes and Box 14 label SEHI; use demo data]
Common mistake: Assigning the contribution to all employees. This treatment applies only to your 2% shareholder-employees. Assign it to those specific people.
Expected outcome
- The contribution is processed with each payroll for the assigned shareholders.
- The amount is taxable for all taxes except Social Security, Medicare, FUTA, and SUTA.
- Because it is an employer contribution, there is no change to the employee's net pay, but it increases the taxable wages reported on their W-2 and the income tax withheld from their other wages.
- At year end, the total amount appears in W-2 Box 14, labeled SEHI (or your edited label). See Year-End W-2s and Tax Documents.
Warning: Both approaches need at least one payroll remaining in the calendar year to process the amounts through payroll. If no payrolls are left, contact UZIO Support for a year-end adjustment (see below).
Note: If you gross up net pay for a shareholder, do not apply deductions or contributions in the gross-up special payroll for 2% S-Corp shareholders. See Grossing Up Net Pay.
Still stuck?
If the year has closed with no payroll left to carry the shareholder amounts, or the SEHI amount is not appearing on the W-2 preview, please reach out to us at support@uzio.com or call +1-571-601-1752. Include the shareholder's name and employee ID, the annual premium or HSA amount, and the tax year.
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