Question: The cost of health insurance premiums paid by an employer on behalf of 2% S corp shareholders is reported in Box 1 of their W-2s. Must we withhold federal income taxes on this amount, or can we report it without withholding taxes? If the premiums are subject to income tax withholding, may we treat them as noncash fringes?
Answer: Income tax withholding is required from these payments. And no, you can’t treat health care premium payments as noncash fringes. You must withhold taxes from the amounts paid to the insurer.