A common issue that comes up with S-corporations is how to account for medical insurance premiums paid by the company. Sometimes, a company will record the health insurance premium paid to its shareholder as a direct business expense. However, the premiums should actually be reported by the S-corporation as wages for income tax purposes. For any greater than 2 percent S-corporation shareholder-employees, health insurance premiums should be included in box 1 of the W-2. This compensation is not subject to Social Security, Medicare, or Unemployment taxes, and should not be included in boxes 3 or 5 of the W-2.
For more information about medical insurance premiums and S-corporations, please visit the following IRS article: IRS.gov.