W-2 Year-end Adjustments

published December, 2009

Personal use of a company car?

Medical Insurance paid by Corp?

These are two of the important “add backs” to W-2 income if you’re a more than 2% owner of an S Corporation.

Generally I recommend that employees own their own cars when practical, and submit expense reports for business mileage, even when you’re the only employee of an S Corporation. Mileage reimbursements are deductible as an expense to the corporation, but not taxable income to the employee. If the corporation owns a vehicle and someone uses it for either personal or commuting expenses, this personal use is a taxable benefit and should be included in income (and taxed at the personal level). This might be a reason to have a home office, if you qualify.

If you want to deduct health insurance premiums “above the line” on your personal return (that is to say, don’t bury them on Schedule A, subject to 7.5% AGI floor), the corporation should pay for the medical insurance. If you own more than 2% of a corporation, this is not an ‘employee benefit’ deductible to the corporation. You’re supposed to include it as income on the W-2, and then deduct on your personal 1040.

Both of these benefits are not subject to SDI, Social Security nor Medicare tax, so these amounts should not be included in those “wage base” boxes on the W-2. But the amounts should be included in boxes 1 ‘wages’ and box 16 ‘state wages.’

If you’re using a payroll service, tell them you need to do this and have them help you. If you need help, please call—before your 4th Quarter, W-2’s and other year end payroll tax forms are completed and filed.

What’s the amount to adjust?

How much was the health insurance?

How many miles were driven personally? [On this one, I think it’s easier to use the standard mileage rate ($0.55/mile for ’09 business miles) instead of actual, but ask me if you’re already using actual expenses or your business has more than 5 company owned vehicles.]