The S-Corp Shareholder Health Insurance Conundrum
If you’re are a S corporation shareholder and your corporation pays for your health insurance, it’s time for you to listen up. While the rules on reporting health insurance have not changed, small business owners often misunderstand them. Kaiser Tax is here to help you make sense of the health insurance reporting rules so Uncle Sam doesn’t’ come calling.
How do health insurance benefits work for S-corp shareholders?
S corporations often offer a range of health insurance benefits, including medical, dental, and long-term care insurance. The corporation usually pays for the insurance premiums for the shareholders’ benefit. The corporation can deduct what it pays in premium as an ordinary business expense. That’s the good news.
The bad news is that the premium the corporation pays for is a taxable fringe benefit for the shareholder and family members. It is added to their wages on form W-2. To be clear, this only includes the company-paid portion of premiums paid for the shareholder, spouse, and dependents. These additional wages are not subject to FICA or unemployment taxes, but should be included in box 1 of shareholders’ W-2s.
Does that mean S corporation shareholders do not get a deduction for health insurance?
Do not panic, you’re actually still eligible for an above-the-line, self-employed health insurance deduction on your individual tax return. You need to follow the three steps to ultimately get a deduction for health insurance premiums.
Step 1: The corporation takes a deduction for the premiums as an ordinary business expense, which lowers your corporate profits.
Step 2: The corporation adds the premium amount to the shareholder’s wages, which increases their W-2 amount.
Step 3: The shareholder takes the Self Employed Health Insurance deduction on their individual returns.
This is the only way an S corporation shareholder can deduction health insurance premiums. The IRS has made it very clear: Follow the three-step process or lose the deduction.
So, what employees does all this apply to?
Employees who own more than 2 percent of corporate stock are subject to these rules. A common pothole for a company is when to apply the family attribution rules. Family attribution rules consider an individual the owner of the stock of their spouse, children, grandchildren, and parents. So if Dad owns 100 percent of an S corporation and Junior is simply an employee, the health insurance premiums paid on Junior’s behalf should still be included in Junior’s wages reported on his W-2 through the family attribution rules.
What do you need to do?
If you’re working with a payroll processing company, it’s important that you let them know the amount of the company-paid health insurance for the shareholder(s) before year-end. They don’t know what they don’t know. We have seen this missed dozens of times, and your payroll processing company will charge a big fee to fix this mistake if you failed to share your company-paid premium with them. Even worse, if not done properly, you will lose a large deduction, which hurts even more. With the cost of health insurance these days, you do not want to miss out on this deduction.
Let’s walk through an example. Let’s say Bob Lee owns 100 percent of Lee Consulting Inc., a S corporation. During 2017, Lee Consulting Inc. paid $5,000 in health insurance premiums to cover Bob’s health insurance. Bob’s $70,000 salary is included in boxes 1, 3, and 5 on his W-2, per usual. Since Bob Lee owns more than 2 percent of the S corporation as a shareholder, his $5,000 in health insurance premiums should also be included in box 1 of his W-2. This would bring the total in box 1 to $75,000. Bob Lee will then take the Self Employed Health Insurance deduction on his individual tax returns in the amount of $5,000.00. See below for a snapshot of Bob Lee’s W-2.
Health insurance rules for S corporations is complex, which is why it’s always a good idea to ask a CPA for expert advice. If you have questions about the health insurance deduction you may be entitled to, contact Kaiser Tax today.