In Pennsylvania, S corp shareholder insurance is not subject to state income tax, provided the insurance plan is non-discriminatory, meaning it's available to all company employees equally.
However, if the health plan is an enhanced plan that is not offered to all company employees (known as a discriminatory plan), then the insurance premiums paid on behalf of the shareholder must be included in taxable wages for the purposes of Pennsylvania state income tax.
Note: This is a State Income Tax exemption, and does not apply to Federal Income Tax laws.
Does this apply to greater-than-2% shareholders?
While insurance premiums paid on behalf of a shareholder who owns more than 2% of the company are still subject to Federal Income Tax, Pennsylvania does not recognize the percentage of a shareholder in regards to state income tax on shareholder insurance. State tax only applies premiums paid to shareholders on a discriminatory plan.
How does OnPay handle shareholder insurance in Pennsylvania?
By default, OnPay assumes all health plans are non-discriminatory. When paying shareholders in the state of Pennsylvania, OnPay will not include employer-paid premiums when calculating subject wages Pennsylvania state income tax. Federal tax laws still apply.
I have shareholders on a discriminatory plan. What should I do?
If you pay premiums to a discriminatory health plan on behalf of company shareholders in Pennsylvania, contact OnPay to ensure this benefit is being taxed correctly with the state.
More about when S Corp Shareholder Insurance is taxed in Pennsylvania→
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