The amount of health insurance is includable in the shareholder's compensation (Box 1 of Form W-2)(Rev. Rul. 91-26, Situation 2), but not subject to FICA or FUTA (excluded from Boxes 3 and 5 of W-2) [Announcement 92-16].

On Form 941, the value of the insurance would be reported on Line 2, but not Line 5. On Form 940, report the value of health insurance on Lines 3 and 4; check box 4a.

The value of health insurance for greater than 2% shareholders is subject to federal income tax (FIT) withholding though. The insurance is treated as supplemental wages for withholding purposes.

The S corporation receives a deduction for health insurance of >2% shareholders as compensation/wages on Line 8 or 9 of Form 1120S, depending on whether the shareholder is an officer, not on Line 18. Line 18 is for insurance paid for nonshareholders or less than 2% shareholders.

The S corporation does not report the value of health insurance in Box 12 using code DD. The S corporation can however, report the value of insurance in Box 14 of Form W-2 so that the shareholder has enough information to determine any potential self-employed health insurance deduction. Note: If payroll is outsourced, it is important to inform them which employees are greater than 2% shareholders.