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Reporting HSA contributions for S Corp owner/shareholders on form W2

Posted by CJ Spady Posted on Feb 22 2012

With all the changes with reporting on W2's and 1099's this year, its not a surprise that what I'm about to describe is becoming a common error that we are seeing as we prepare taxes this year.  Wanting to avoid the same issue next year, we're bloggin in the moment......

Who does this issue impact:  Shareholder/employees of S Corporations where the corporation contributes to HSA's for their shareholder employee. If this might apply to you, your boss, your client (if you are keeping the books)  or someone you know, then keep reading......otherwise, there are much better things to be reading about, trust me!

Background:  When an S Corp pays health insurance premiums and HSA contributions on behalf of their shareholder/employee, then we all know we need to include wages, health insurance premiums and the HSA contributions paid during the year in box 1 of the W2.  Its that annoying year end adjustment we have to make that sometimes kicks up withholdings (when it really shouldn't).

The issue:  Many W2's this year are coming across to us as we prepare tax returns with the HSA contribution amount reported on the Form W2, box 12 code W.  Do not use box 12 code W to report the HSA contributions made to these shareholder/employees.  Please!  That's not what that box is for. For shareholder/employess, the amount of HSA contributions should be shown in box 14, just like the shareholder health insurance premiums, with a description along side.  Using box 12 code W really makes a mess of things on this side.

Why is this an issue:  S Corp shareholder/employees are treated like partners in a partnership when it comes to this type of benefit.  So there are unique rules that apply. Think of them as quasi employees (no, that's not crazy employees--quasi employees.)

What about the other employees of the S Corp that the company contributes to the HSA, do we use box 12 code W?  If you read the instructions for Form W2 on the IRS website, it can be confusing.  The IRS instructions read that you should use box 12 code W if you don't have a reasonable basis to believe at the time of payment that the HSA contribution made to the non-shareholder employee is not treatable as a tax exempt frindge benefit of employment.

When in doubt, do call a CPA or your payroll company to confirm as your specific facts and circumstances may play a vital part in determing what you should do.  This is a common Marin issue because Marin has so many small businesses, many of which are S Corporations.

Hope this helps! Call us if you want to know more. 

This blog is generated to communicate topics in a general nature. Each person and business is unique in its situation, facts and circumstances. So nothing in this blog should be taken to be advice that you can specifically rely on without further research into how it applies to you. In otherwords, we'll be giving you ideas--not specific tax advice.