This guide covers who the 2% S-corp shareholder rules apply to, how Payrollix taxes and reports the amounts, and the exact steps to turn it on and run it.
Who this is for
This treatment applies only to a more-than-2% shareholder of an S-corporation — the owners — and, by IRS family-attribution rules, their spouse, children, parents, and grandparents who also work for the company. It does not apply to regular employees.
Why the special handling exists: a normal employee's employer-paid health insurance is already tax-free — it's left out of Box 1 wages and exempt from all payroll taxes. A >2% shareholder is barred from that tax-free exclusion (IRS Notice 2008-1 and §1372), so their premiums have to be handled differently.
How Payrollix taxes and reports it
For a flagged shareholder, the health premium and HSA contribution are:
- Added to W-2 Box 1 (federal taxable wages), and
- Exempt from Social Security, Medicare, FUTA, and SUTA — always.
- Reported on separate W-2 Box 14 lines — "2% SH HEALTH" and "2% SH HSA".
Income-tax withholding is optional. By default Payrollix does not withhold federal or state income tax on these amounts — the shareholder recovers the deduction on their personal return (the self-employed health-insurance / HSA deduction), and withholding a full year's premium on one check can wipe out the net pay. You can turn withholding on per client if you prefer to withhold as it accrues. Either way, the amount still lands in Box 1.
Step 1 — Activate it in Client Settings
Go to the client's Settings page and find the payroll settings section (near Pay Frequency / Same-Day ACH):
- Turn on "Track S-Corp >2% shareholder health / HSA." This surfaces the feature for this client — the per-employee flag and the SH Ins / SH HSA columns on Run Payroll.
- A sub-option appears underneath: "Withhold income tax on these amounts." Leave it off (the default) to add the amounts to Box 1 without withholding income tax on them; turn it on only if this client wants income tax withheld as the premium accrues.
- Save.
Open the shareholder's employee page → the Employment Information section (right under the salary field) → check "2% S-Corp shareholder-employee." Two fields appear:
- Default health premium / pay period — the recurring premium to pre-fill each payroll.
- Default HSA / pay period — the recurring HSA contribution to pre-fill each payroll.
Enter whatever recurring amounts apply (leave a field at 0 if it doesn't apply), then save. Do this for each owner who is a >2% shareholder. Leave every non-shareholder employee unflagged.
Step 3 — Run payroll
On Run Payroll, once the client has the feature enabled you'll see two extra columns: SH Ins and SH HSA.
- For flagged shareholders, the fields are editable and pre-filled with the defaults you set. Adjust them for this run if needed.
- For everyone else, the fields are greyed out (a dash) — the treatment doesn't apply to them.
Calculate the run as usual. In the preview you'll see the shareholder's federal taxable wages rise by the entered amounts while Social Security, Medicare, FUTA, and SUTA are unaffected (and income tax is withheld only if you enabled that in Step 1).
Some firms don't run the premium every period — they add the whole year's amount on the last pay run instead. To do that, leave the per-period default at 0 (or clear the SH Ins / SH HSA field on earlier runs) and enter the full annual figure in the SH Ins / SH HSA column on the final run of the year. With income-tax withholding off (the default), the large amount raises Box 1 without generating withholding that would exceed the paycheck.
Where it shows up at year-end
The totals flow automatically to the W-2: into Box 1, and onto Box 14 as "2% SH HEALTH" and "2% SH HSA". Confirm the amounts before your final pay run of the year — see the Year-end checklist.