Fringe Benefits For More Than 2% Shareholders Of An S Corporation Benefit Minute
Generally, many fringe benefits provided to employees are excluded from taxable income.; However, this favorable tax treatment is not available to an S corp shareholder who owns more than 2% of the stock of the corporation on any day of the corporations tax year .; Section 1372 of the Internal Revenue Code requires that 2% shareholders be treated as partners in a partnership for this purpose, making them self-employed individuals instead of employees.; This Benefit Minute summarizes how certain fringe benefits offered to 2% shareholders are treated.
Section 125 Cafeteria Plans/Health Savings Accounts
A cafeteria plan is a written plan established under Section 125 of the Code that allows an employee to choose between non-taxable benefits and taxable benefits .; Employees can pay for qualified benefits on a pretax basis via salary reduction.; It also allows for salary reduction for flexible spending accounts and health savings accounts .; However, the tax benefit of salary reduction contributions is only available to employees.; Since 2% shareholders are treated as self-employed individuals and not employees, they may not participate in a Section 125 cafeteria plan.; This means they are ineligible to make pretax contributions for insurance, FSAs and/or HSAs.; However, a 2% shareholder is permitted to contribute to an HSA on a post-tax basis and may be entitled to an above-the-line deduction on the Form 1040.
Group Term Life Insurance
To Assign The Contribution To The Shareholder Employee
Payroll > Employees > ;Employee List > Select employee name
- Under the Contributions list click Add New.
- Select the contribution you added at the company level, called S Corp Owner Health .
- The Method of Fixed Dollar will prefill.
- For the Formula, enter the dollar amount of the health insurance premiums that should calculate every payroll.
Now, when you run payrolls for this shareholder employee, the S Corp Owner Health contribution amount will appear on the pay stub and in reports as a taxable fringe benefit, and will be taxable for federal and state income tax only. ;This amount will not be included in their net pay. Please note, Patriot will NOT be collecting the income taxes associated with the S Corp Health Insurance Contribution. This will only update the taxable income wages on the W-2.
Examples Of Tax Deductible Fringe Benefits
Fringe benefits are excellent ways that corporations can use to attract talent, provide security for its employees, and also enjoy the value that they receive by being able to deduct the costs of many of these benefits. Forms of tax-deductible fringe benefits that C corporations can offer their shareholders and employees include:
In many of these cases, the companys contribution to the plan is tax-deductible and is not included in the employees taxable income. However, in the case of Group Term Life Insurance only up to $50,000 can currently be deducted by the company and be considered non-taxable income for the employee. Payments received through disability insurance are treated as taxable income.
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Guide To Disability Insurance Taxation Are Your Ltd Benefits Taxable
As disability attorneys, we cannot emphasize enough the problems disability insurance taxation can cause if youre not prepared. Many claimants come to us who unfortunately have been caught by surprise when the IRS taxed their benefits.
If you receive disability insurance benefits, you need to know whether the IRS says those LTD benefits are taxable or not. The answer is based on who paid the premiums for the coverage, and the pre-tax or post-tax status of the premium payments.
Most people dont realize how different the laws are that govern group disability insurance and individual disability policies, in terms of costs, benefits, taxation, and claim disputes.
While tax advice always comes from your tax accountant, the team at Marc Whitehead & Associates can provide insights as to how different forms of long-term disability insurance are taxed under different circumstances.;
And, while IRS rules do not technically affect disability claim adjudication, disability insurance companies are keenly aware of disability insurance taxation issues, and may even resort to strategies that benefit their bottom line. We protect our clients by ensuring their claims are handled fairly.
So for a few minutes lets talk taxes. This post summarizes need-to-know facts about your LTD benefits and the taxes you may or may not have to pay once you draw those benefits.;
Corporations Ltd Benefits Are Usually Taxable
In a C corporation, owners who receive wages and receive W2s are technically employees. The corporation may pay premiums for disability coverage for employees and use this as a tax-deductible expense. When the corporation pays the entire premium, the LTD benefits are taxable to the employees, including the owners.
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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 ultimately pay the S-corp owners premium. It must also include the premiums as gross wages in the S-corp owners Form W-2.; The business must either pay for the premiums directly or by reimbursing the S-corp owner. If the S-corp owner pays the policy premiums on their own, without a reimbursement 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.
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.
Disability Insurance Through Your Employer
Many employers offer group disability insurance as part of your benefits package. In some cases, the premium for these plans can be paid with pre-tax dollars. This sounds like a good deal because you wonât owe taxes now on a work benefit. But if you ever need to collect your benefit, you will owe taxes on the money you receive. That means you wonât take home the entire face value of your benefit. Instead, a benefit that covers 60 percent of your income might leave you with only 40 to 50 percent of your income after taxes .
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There are also cases where you may be able to purchase additional disability coverage through your work with after-tax dollars. In that case, your benefit would be tax free.
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A Quick Review Of Long Term Disability Coverage
- Employer-sponsored group long-term disability plans. Group benefits cover all eligible employees and the employer typically pays all or part of the premiums as an employee benefit. This is the most common form of group LTD plan.
- Individual disability insurance policies. This is private coverage that a person purchases through an insurance agent. IDI is more efficient and costly because each policyholder is individually underwritten. The policyholder may buy additional coverage to ensure maximum coverage regarding his or her profession and income replacement goals.
- Professional associations may offer group disability insurance plans. Examples are AMA and ADA-sponsored policies available to physicians and dentists.;
- You may opt for combined coverage, such as supplementing a group disability plan with an IDI policy.
Fringe Benefits And Payroll Taxes For S Corporations
If you are an owner of more-than-2 percent of a small business that has elected to be taxed as an S corporation, then there are many details related to fringe benefits and payroll taxes that you should be aware of. Ensuring that you are compliant with the Federal tax laws can help save you a lot of time, headache, and money. The following is a list of concepts to keep in mind and areas where mistakes are common and often trip up business owners. This list can help you to keep track of the issues that require your attention when dealing with fringe benefits and payroll taxes, so that you can handle them properly.
A more-than-2 percent shareholder of an S corporation is someone who directly or indirectly owns more than 2% of the corporations stock. The following benefits provided by an S corporation as compensation to a more-than-2 percent shareholder for services rendered to the S corporation are generally treated as deductible expenses for the S corporation and wages subject to Federal income tax and Social Security and Medicare taxes for the recipient shareholder :
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Are Life Insurance Premiums Tax
Life insurance can help you provide a measure of family security for your loved ones if something should happen to you. You may be wondering whether life insurance premiums are deductible on your personal tax return, and the answer is generally no. But premiums are deductible as a business-related expense .
The death benefit is generally tax-free for individual policy owners and their beneficiaries.;
Although death benefits for business-related beneficiaries are often tax-free as well, there are certain situations in which the death benefit for corporate-owned life insurance can be taxable. However, employers offering group term life coverage to employees can deduct premiums that they pay on the first $50,000 of benefits per employee, and amounts up to this limit are not counted as income to the employees.;
Life insurance premiums can also often be deducted for most types of non-qualified plans, such as deferred compensation or executive bonuses. Usually, the premiums are considered compensation for key executives under the rules of these plans. However, in some cases, the deduction cannot be taken until the employee constructively receives the benefit.
What To Consider When Buying Disability Insurance
If you’re considering disability insurance, make sure you:
- check with your employer to see if you already have group disability coverage with your employer’s plan
- shop around, especially if you’re considering private disability insurance
Consider group insurance offered through a union, guild, or professional or alumni association. Premiums for this type of coverage usually increase as you get older. You’ll need to renew your insurance every few years.
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When It Comes To Deducting The Cost Of Health Insurance For You And Your Family An S Corporation Is Not Always So Great
By Stephen Fishman, J.D.
Forming an S corporation to run your business provides several tax advantages. Chief among these is the opportunity to lower your Social Security and Medicare taxes. However, when it comes to deducting the cost of health insurance for you and your family, an S corporation is not always so great.
Key Person Disability Plans Tax
A key-person policy is paid for and owned by the business. An employer takes out a disability policy for a preset period on behalf of one or several irreplaceable employeesindividuals who are considered to be key persons in the companys operations. The business figures that it would suffer significant setbacks if its most valuable individual cannot work due to a disabling condition.;
A company needs this compensation to cover staffing costs, project delays, profit loss, and maintain financial stability in the eyes of stakeholders. The employer pays the premium, which is not deductible, and benefits paid to the business are tax-free.
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Life Insurance And S Corporations: Unique Rules Present Opportunity And Peril
Editor: Mindy Tyson Weber, CPA, M.Tax.
Life insurance on key employees and owners can be a powerful tool. It can generate tax-exempt proceeds that companies can use to help protect themselves against the death of key personnel while providing critical liquidity to the company if it must buy back shares from a deceased owner’s estate. This can be especially important for S corporations, which often have a unique interest in controlling the makeup of their shareholders to ensure continued qualification under Subchapter S.
However, life insurance policies, regardless of the type, present special considerations for S corporations. Those considerations and some of the related issues are outlined below.
Term Life Insurance
S corporation issues:The more interesting issues with term insurance relate to how the above rules affect various S corporation accounts. Again, the rules are relatively clear, but because they can affect a shareholder’s ability to access cash on a tax-free basis, they are important to understand.
Therefore, as long as these premiums are considered to be expenses related to tax-exempt income, they will not affect AAA. This is precisely what Rev. Rul. 2008-42 concludesthat premiums paid on corporate-owned life insurance do not reduce AAA, presumably based on a conclusion that those premiums are expenses related to income that would be nontaxable under Sec. 101.
Cash-Value Life Insurance
Health Insurance Not A Tax
Ordinarily, when you form a corporation to own and operate your business, you’ll work as its employee. If you form a regular “C” corporation, your corporation can provide you with health insurance as an employee fringe benefit and deduct the cost as a business expense. And you don’t have to pay any tax on the amount of the insurance premiums because they qualify as a tax-free employee fringe benefit.
However, when you elect S corporation tax status for your corporation, special tax rules come into play. Under these rules, anyone who works for an S corporation and owns 2% or more of its stock, must include in his or her wages the cost of certain employee fringe benefits provided by the corporation, including health insurance. This means income taxes must be paid on the amount of the premiums. Social Security and Medicare taxes have to be paid as well unless the procedure described below is followed.
Moreover, you can’t get around this rule by employing your spouse and providing him or her with company health insurance that covers you and rest of your family. Your spouse and other family members are considered S corporation shareholders for these purposes, even if they don’t actually have any stock in their names. They are treated as if they own all the stock that you own.
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Are Disability Insurance Premiums Tax
You cant deduct your disability insurance premiums from your personal taxes. You can deduct certain medical, dental, and long-term care insurance from your taxes, but life insurance and disability dont qualify for a deduction.
According to the IRS, you cant deduct premiums for the following policies:
- Coverage for loss of life, limbs, sight, etc.
- Policies that pay you while youre hospitalized for sickness or injury.
- Life insurance policies
- Coverage for loss of earnings
Essntially, all money is taxed at some point, whether its coming in or going out but it can only be taxed once. This means money thats initially taxed wont be taxed later. This applies to your disability premiums. Since its taxable money up front, if you become disabled and use the policy then the money you receive will be tax-free.
Does it matter if I have a short-term or long-term disability policy?
No. The tax implications are the same regardless of how long you collect on a disability policy.
What Are Itemized Deductions
If you have certain types of expenses you can choose to itemize deductions instead of taking the standard deduction. Meanwhile, everyone who files a tax return can claim the standard deduction, which is a set amount based on your filing status.
The standard deduction is $12,400 for single tax filers in 2020 and married couples can take a standard deduction of $24,800. In 2021, the standard deduction will go up to $12,550 for single filers and $25,100 for joint filers.
Itemizing is only worth it if your itemized deductions are worth more than the standard deduction, which isnât the case for most people. After the Tax Cuts and Jobs Act of 2017 greatly increased the standard deduction, only about 11% of taxpayers itemize deductions.
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One Type Of Disability Insurance Premium That Is Tax
The closest you can come to deducting your disability insurance premiums is if you own a business.
For those who also have to be concerned with keeping their businesses running in the event of short-term or long-term disability, there is an option called business overhead expense insurance .
Whereas regular disability insurance covers individual income, a business overhead expense policy will help cover monthly business expenses such as employee salaries, rent, utilities, maintenance, taxes, etc.
Premiums for this type of insurance are considered a business expense and are therefore tax-deductible. Overhead expense policies are specifically listed in IRS Publication 535, Business Expenses. Under the heading of deductible premiums, the document states:
âOverhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness.â
Keep in mind, however, that deductibility does not apply to a business owner who gets disability insurance to cover lost personal income. It only applies to insurance that covers business expenses.
The Rule Of Thumb For Disability Insurance Taxation
Every plan or policy for disability insurance has premiums that someone must pay. Those payments will come from either pre-tax dollars or post-tax dollars.;
- Pre-tax dollars mean income where no deductions of federal, state, and withholding taxes have occurred.;
- Post-tax dollars signify income after federal, state, and withholding taxes have been deducted.
- If premiums are paid with pre-tax dollars, your disability insurance benefits are taxable to you. In this case, you would include the amount of benefits you receive on your tax return as part of your salary or wages.
- If disability insurance premiums are paid with post-tax dollars, your LTD benefits are not taxable. You would not pay taxes on the disability benefits you received.;
One way or another, the IRS gets its tax money either as taxes paid on money used to pay premiums or on taxes paid on disability benefits received.;
Lets take a look at several common scenarios.
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