S Corporation Health Insurance Deduction How Does It Work
If you are a greater than 2% shareholder in an S corporation, you can receive a tax deduction for the health insurance premiums paid on your behalf by the S corporation. Taking the deduction is simple, but the reporting obligation is quite tricky.
Lets assume you are an LLC that filed to elect S corporation status and you own 100 percent of the stock. You also work full-time on the company payroll, so how do you report the health insurance deduction?
Lets look at the requirements.
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S Corporations Health Insurance And Obamacare
January 13, 2014 By Stephen Nelson CPA
The Affordable Care Act makes a number of changes to the way that small businesses account for and treat health insurance expenses.
Accordingly, Im going to quickly review how the rules apply to Subchapter S corporations and then point out one of the largely ignored issuesthe anti-discrimination requirementthat will affect many small S corporations.
To keep all of this information practical and actionable, though, Im not going to talk about concepts or regulations. And no politics here either. This blog is supposed to be practical and provide how-to information.
So, Im just going to describe how you handle the three common situations a small business is likely to encounter.
Can I Deduct Health Insurance Premiums As An S Corporation Shareholder
You may be able to use the Self-Employed Health Insurance deduction if you’re at least a 2% shareholder in an S Corporation. To claim this deduction, the health insurance premiums must be paid or reimbursed by the S corporation and reported as taxable compensation in box 1 of your W-2.
The S Corporation can either purchase the policy in your name or reimburse you for the premiums you paid. The policy can also cover your spouse, dependents, and any nondependent children under the age of 27.
The SEHI deduction is generally more advantageous than claiming it as a “regular” itemized deduction. The SEHI deduction will appear on line 17 of Schedule 1 and may not exceed your W-2, box 5 amount.
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How Do Health Insurance Benefits Work For S Corporations
Just like other business structures, S corporations can offer health insurance premium coverage for their non-owner employees as a tax-free fringe benefit. The employee doesnt get taxed for it, and the company can deduct the contributions on its business tax return.
S corp owners who participate in management are considered employees, but theyre treated more like the self-employed for insurance benefits. Unlike non-owner employees, shareholders with more than a 2% stake cant receive accident or health insurance as a tax-free fringe benefit.
When an S corporation offers a shareholder-employee health insurance, the costs are included in gross wages, are subject to federal and state income taxes, and appear on the shareholder-employees Form W-2.
If you follow our guide, you can avoid paying FICA taxes, which comprise Social Security and Medicare taxes, on the S corporations contribution. You can also get a personal tax deduction for your health insurance premiums.
Before we start, dont try to get smart with the IRS. You cant employ your non-owner spouse to get insurance for you and the rest of your family: Your S corporation ownership extends to your spouse and family members in this case.
You also cant take the personal tax deduction for health insurance premiums if you or your spouse were eligible for another subsidized health insurance plan. The deduction only applies to S corp shareholders who cannot get health insurance any other way.
S Corporation Owners How To Treat Medical Insurance Premiums
posted on August 20, 2012by Gary M. Kaplan, C.P.A., P.A.| Comments Off on S Corporation Owners How To Treat Medical Insurance Premiums
Corporations owned by less than 100 non-corporate shareholders can elect to be treated as a Subchapter S Corporation for tax purposes. Weve previously talked about reasonable compensation for business owners . Well now focus on an important change in reporting that many businesses are not handling correctly!
Health insurance premiums paid by an S Corp for more than 2% shareholders must be treated as wages to that owner. In other words, the only way an S Corp can deduct the amount paid for shareholder health insurance is to include it as part of the shareholders salary the owners health insurance can no longer be called an insurance expense or employee benefit expense on the 1120S federal tax return.
The net income effect for the corporation is the same, but shareholder-employees W-2 wages will increase by the amount of the health insurance premiums paid by the S Corp. Thankfully, no Social Security and Medicare tax is withheld for wages attributed to the insurance premium. The shareholder-employee may be eligible to deduct the medical insurance premiums from their Adjusted Gross Income on their 1040 income tax return.
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What Is An Llc
A limited liability company, commonly abbreviated as LLC, is a business structure with both pass-through taxation and legal liability separate from its owner.
- Like a sole proprietorship, an LLC has pass-through taxation, which means that the income and loss of the business is reported on the personal income tax form of the business owner. This means that an LLC does not constitute a separate entity for tax purposes, according to the IRS.
- According to LegalZoom, unlike a sole proprietorship, an LLC has separate legal liability . If a suit was filed against your LLC, then the LLC itself would be sued, not you as the individual. As a result, in most cases the plaintiff would only be entitled to recover the LLCs business assets, not your personal property or assets.
The owners of an LLC are called members. Single-member LLCs are taxed as sole proprietorships, while multiple-member LLCs are taxed as partnerships.
An LLC can also decide to be taxed as a corporation or S corporation, and its members would then pay taxes like shareholders of a corporation or S corporation owners.
Can You Get Health Insurance Through Your Llc
You usually cannot get small business health insurance or a group plan through your LLC if you have no employees, although you can still get individual health insurance as an LLC owner or member.
If your LLC does not have employees besides yourself, you would most likely be a sole proprietor and could only enroll in individual health insurance, not small business health insurance.
However, sole proprietorships with one employee besides the business owner can usually qualify for group health coverage.
In other words, single-member LLCs would likely only qualify for individual health insurance instead of group health insurance.
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How To Claim The Sehi Deduction In Turbotax
You’ll need the K-1 that the S Corporation sent you. Here’s how to enter it and claim the deduction:
Interaction With Hsa Requirements
Under IRC § 223, certain individuals are eligible to take a deduction for amounts paid in cash by or on behalf of such individual to a health savings account , which is subject to rules similar to individual retirement arrangements. Individuals who have high deductible health plan coverage and no other disqualifying health coverage may contribute to an HSA. Individuals who are covered by permitted insurance ) or certain disregarded coverage ), in addition to HDHP coverage, may remain eligible to contribute to an HSA. For 2021, the HSA contribution is limited to $3, 600 for single employees and $7,200 for employees with a family. An employee 55 years or older may contribute an additional $1,000 per year.
An individual who is provided a QSEHRA that, by its terms, is eligible to reimburse any medical expense, including cost sharing, is not eligible for an HSA under IRC § 223.
On the other hand, if the QSEHRA is properly limited, the employee would still be eligible to have an HSA along with a QSEHRA. In the year an employee makes a contribution to an HSA, the QSEHRA can only reimburse the employee for the following:
- High deductible health insurance premiums
- Wellness or preventive care
- Dental expenses
- Vision expenses and
- Long-term care premiums
These QSEHRA limits are only necessary for employees who make or receive contributions to their or their spouse’s HSA during the year. Other employees can be reimbursed for all qualified medical expenses.
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Premiums Must Be Included On The Shareholders W
As mentioned, for income tax withholding purposes, accident and health insurance premiums need to be treated as shareholder compensationâwhich means that premiums for the shareholderâs health benefits need to be included as wages on the shareholderâs form W-2.
Now, an important thing to note is that premiums are included on the shareholderâs W-2 strictly for income tax withholding tax purposes those additional wages are not subject to FICA taxes or Federal Unemployment Tax Act .
Bottom line? If health insurance premiums are excluded from the shareholderâs taxable income and are not included as additional compensation/wages on form W-2, the shareholderâs premiums will not be considered deductible for that tax year.
Tax Deduction For Premiums
IRS Notice 2008-01 made it possible for a less than 2 percent S corporation shareholder to deduct insurance premiums from a personal tax return . It does not matter whether the insurance policy is in the S corporations name or not. This means you can deduct premiums for a group insurance policy even if your company has only 2 employees.
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Can I Participate In A Health Reimbursement Arrangement
If youve heard about HRAs, where employees are reimbursed tax-free for medical expenses, youre probably hoping you can get in on that, right? The short answer is: No. If you own an S Corporation, you and your family members are not eligible for HRAs.
You can, however, offer an HRA to any of your non-owner and non-family employees. This might be a good option for you if you want to allow your employees flexibility in choosing how they spend their health care money.
What Is An S Corp
An S corporation, also known as an S subchapter, is a way for shareholders to avoid double taxation on corporate income. In addition to tax benefits, it also provides limited liability protection and asset protection for S corporation shareholders.
S corps are treated the same as a regular C corporation in terms of business structure, the main difference is how they pay business taxes. With a C corp, the business pays taxes on income, plus the shareholders also pay taxes on any profits they receive from the business.
With S corps, instead of the corporation and shareholders each paying taxes, shareholders are allowed to pass the corporate income, losses, deductions, and credits through to their own personal income taxes, paid at each shareholders income tax rate. S corporations are still responsible for paying taxes on certain gains and income.
S corporation status also provides liability protection for their investors. Ordinarily, an investor or partner in a small business could be responsible for any debts or liabilities it accrues, putting their personal assets at risk. As a business entity, an S corp generally protects shareholders from such obligations.
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Example #: Covered And Uncovered Employees
Now a more common situation: What happens if the S corporation employs both a shareholder and then also a non-shareholder-employee, or even several employees, but only pays health insurance for the shareholder-employee?
Okay, this is where the Affordable Care Act makes things messy.
While only businesses with 50 or more employees are required to provide employees with health insurance under the Affordable Care Act, the Act also prohibits discrimination with regard to health care benefitsand this prohibition applies to both small and large businesses.
As a practical matter, what this means is that a small business cant provide piecemeal coverage, insuring some employees and not insuring others.
When the business adds a second employee, therefore, the firm has only two practical responses.
One response is for the employer to begin providing Affordable Care Act compliant insurance for everybody.
The other response is for the employer to stop providing insurance to anybody, including the shareholder-employees.
And the penalty for discriminating could be substantial. For a two-employee business which provides health insurance to the shareholder-employee but does not provide health insurance to the non-shareholder-employee, the S corporation could be tagged with a $36,500 penalty.
How The Aca Affects Coverage
How the Affordable Care Act can affect your business’s cost of premiums will largely depend on what type of business entity you have. In a c corporation, the shareholders are treated the same way another employee is treated which means that they can take advantage of the company-sponsored health plan. This allows them to participate on a tax-preferred basis. Though there are no guidelines that will allow an employee to purchase tax-preferred coverage without a company-sponsored plan.
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Personal Income Tax Deduction For Health Insurance Premiums
S-corp owners may not have the same access to tax-free health insurance as non-owner employees, but they can still ensure their premiums are tax-advantaged. Specifically, S-corp owners can take a personal income tax deduction on the health insurance premiums paid by the business.
For S-corp owners to qualify for the deduction, their health insurance policy must be established by the business and not by the S-corp owner personally.
To determine whether the policy is established by the business, the IRS considers:
- Who pays the premiums for the policy, and
- How the premiums are reported for income tax purposes by both the business and the S-corp owner.
The business must pay the S-corp owners premiums directly. It must also include the premiums as gross wages in the S-corp owners Form W-2. If the S-corp owner pays the policy premiums on their own and then gets reimbursed by the business, this does not qualify the owner for a tax deduction.
If the S-corp owner does qualify, they can deduct their premiums on Form 1040, line 29. S-corp owners can use this method to deduct premiums for accident, dental, and long-term care policies as well as for health insurance policies.
S Corporation Shareholders: Deducting Self
May 29, 2013
In this era of ever-increasing medical insurance premiums, S corporation shareholders should be mindful of the limitations with respect to these expenditures. By ignoring these limitations, shareholders risk the deductibility and the deduction for this expense could be denied.
A 2% employee-shareholder may be eligible for an above-the-line deduction under IRC Sec. 162 for the cost of accident and health insurance premiums paid by the corporation . The deduction is equal to 100% of the amount paid for medical insurance for the shareholder, his spouse, and dependents and is reported as an adjustment to income on the shareholder’s Form 1040.
This deduction has two limitations imposed by IRC Sec. 162:
Answer: Yes, the taxpayer can claim a $4,000 deduction for the health insurance premiums paid by the S corporation. His pass-through loss of $75,000 will have no effect on his deduction. The deduction is based solely on his W-2 wages from the S corporation. IRC Sec. 162.
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