Reclassification of Health Ins. to Wages

[S&D Associates]

Can the reclassification of reimbursement of 2% shareholder health insurance to wages, be done at year end?

[TaxGuyBill]

I'm not quite sure what you are trying to do, but no. It is income to the taxpayer when the insurance is paid.

[Rapid Robert]

I'm guessing this has to do with Form 941 and W-2 reporting. If so, I will point out that since no FICA is due or withheld on 2%-shareholder health insurance, it would not normally be reported at all on Form 941. Normally it would just be used to increase the Box 1 amount on the Form W-2 at year end. (I'm told by reliable sources that the IRS does not routinely reconcile Box 1 on the W-2 to quarterly Forms 941). If this is the question, then yes, it can be done at year end. In fact, I have had a few S-corp clients where I issue a Form W-2c with only Box 1 changed to include the SEHI amount at the same time I prepare their tax returns. I also make a journal entry in their books at year end as well, so that the SEHI shows up as wage expense.

Since it is going to be a wash on the taxpayer's Form 1040, there is no concern over correct fed or state income tax withholding (W-2 Box 2 or Box 17)

[TaxGuyBill]

it would not normally be reported at all on Form 941.

???
It is part of income tax wages, which is on Line 2 of the 941.

While it may be easier to do it all at year end, that is not correct. It is taxable wages when it is received.

Also, from a corporation viewpoint, they have no idea if it will be a "wash" on the 1040 or not. I realize that most of these are one-person corporations, but technically the corporation doesn't know if they taxpayer will qualify for the Self Employed Health Insurance deduction or not (for example, the taxpayer may be eligible for employer-subsidized insurance through another job or through a spouse).

[Rapid Robert]

While it may be easier to do it all at year end, that is not correct. It is taxable wages when it is received..

Yes, there may be the oddball exception where actual gross wages in a given quarter matter (*), but in almost all cases, the Form 941 Line 1 and Line 2 amounts are informational only and really don't matter. After all, based on the Form 941 the IRS has no idea who your employees are, how many you had during the entire quarter, or how much each of them got paid or how much income tax each of them had withheld. And as I stated above, the actual form instructions indicate that Line 2 amounts are NOT reconciled to W-2 reporting. (see following).

I suggest the IRS would never bother auditing Line 1 or Line 2 amounts, and even if they did, there would be no penalty for minor inaccuracies. And if I encountered this after the end of the year, I certainly would not bother to amend all four 941 forms just to change Line 2 amounts. It would be a waste of both my time and the IRS' time. Would they even bother processing the amendments?

As to whether it will affect the shareholder's ultimate tax liability, that is why I offer withholding and estimated tax planning. As you acknowledge, it would be very rare that it would not be a wash on the taxpayer's Form 1040 (since if they already had group health insurance from another source, why would they set it up in their S-corp)

"The IRS matches amounts reported on your four quarterly Forms 941 with Form W-2 amounts totaled on your yearly Form W-3, Transmittal of Wage and Tax Statements. If the amounts don't agree, you may be contacted by the IRS or the Social Security Administration (SSA). The following amounts are reconciled.
• Federal income tax withholding.
• Social security wages.
• Social security tips.
• Medicare wages and tips."

(*) maybe it's important for these PPP loans? Except even there it isn't based on precise calendar quarters, is it?