Indiana business must withhold on shareholder-employee premiums

The Indiana Department of Revenue found that a corporate income taxpayer (S corporation) was required to withhold taxes on health insurance premiums it paid for its shareholder-employees. The taxpayer paid the premiums on behalf of its four shareholder-employees owning more than 2% of its shares. The taxpayer asserted that as per Information Bulletin 32, General Information on County Income Taxes, the shareholder-employees can exclude these premium payments from “principal work activity income,” and therefore W-2 income related to shareholder health insurance premiums should not be subject to withholding. However, the Department noted that while individuals who reside and/or work in Indiana may claim certain deductions on their individual income tax returns pursuant to Information Bulletin 32, no exceptions are allowed with respect to an employer’s withholding responsibility. Thus, Information Bulletin 32 was beyond the scope of the taxpayer’s protest. Further, it was noted that under Indiana Administrative Code title 45, r. 3.1-1-97, the taxpayer was required to withhold taxes on the W-2 payments. Additionally, the taxpayer was required to include the premiums in the shareholders’ W-2s as well. Accordingly, the taxpayer’s protest was denied. (Letter of Findings No. 03-20170093, Indiana Department of Revenue, January 31, 2018.)

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