S Corp Life Insurance: Spouse Coverage Options

S-corporations are a popular business structure due to their tax advantages. However, the tax implications of providing health and life insurance benefits to owners and their families can be complex and differ from those for employees. While S-corps can provide tax-free health insurance to non-owner employees, shareholders who own more than 2% of the company's stock are treated differently for tax purposes. This extends to their spouses, who are also considered S-corp owners in this case. This guide will outline the key considerations for providing health and life insurance benefits to S-corp owners and their spouses, including tax implications and strategies for maximising tax advantages.

S-corps can provide health insurance as a tax-free benefit to non-owner employees

S-corps can provide health insurance as a tax-free benefit to their non-owner employees. However, the same is not true for shareholders who own more than 2% of the company stock. For these individuals, S-corp health insurance deduction is more complicated.

Shareholders owning outstanding stock greater than 2% must include any health insurance costs paid through the company as income, according to Internal Revenue Code Section 707(c)1, making the amount subject to income tax. However, the amount is free from Medicare, unemployment, and social security taxes if the payments are made on behalf of the shareholder under a health plan that provides for all employees or a class of employees.

S-corps can provide health insurance coverage as a benefit to their employees. Companies that offer health insurance typically work with an insurer to set up a plan for their employees, which can also cover eligible family members and dependents. Employees can sign up for the plan, and the employer and the employee split the premiums.

If your S-corp provides health insurance benefits to non-owner employees, it works like any other company offering insurance. The rules change when an owner of the S-corp receives insurance through the company.

Under IRS rules, insurance premiums for health and accident insurance paid for someone who is at least a 2% shareholder in an S-corp are reportable as wages. The company can deduct the payment, but the employee, S-corporation shareholder or owner must report the income in Box 1 of their Form W-2 and pay income tax.

While these premium payments are treated as additional wages and are subject to income tax, they may not be subject to other FICA payroll taxes, including Social Security, Medicare, or unemployment (FUTA) taxes. S-corp shareholders and owners can avoid these employment taxes if they pay premiums through a system that offers insurance to all employees.

In short, you can ensure you don't incur the cost of those additional payroll taxes if you offer insurance to all employees. If your S-corp only provides insurance for owners, the premiums are subject to both income and payroll taxes.

Shareholders with >2% ownership must include health insurance costs paid through the company as income

S-corporations can provide health insurance as a tax-free benefit to their non-owner employees, but the same is not true for owners. Shareholders who own more than 2% of the company stock must include any health insurance costs paid through the company as income, according to Internal Revenue Code Section 707(c)1. This means that the amount is subject to income tax.

However, the amount is free from Medicare, unemployment, and social security taxes if the payments are made on behalf of the shareholder under a health plan that provides for all employees or a class of employees. In this case, the additional compensation is included in the shareholder-employee's Box 1 (Wages) of Form W-2, but is not included in Boxes 3 and 5 of Form W-2.

To qualify for the health insurance deduction, the company must establish the policy, not the individual S-corp owner. The company must pay the S-corp owner's insurance premium, including the premiums as gross wages in the S-corp owner's Form W-2. The company must either make the premium payments directly to the insurance company or reimburse the S-corp owner.

If the S-corp owner pays the policy premiums on their own, without reimbursement by the business, this doesn't qualify the owner for a tax deduction for health insurance. If the owner does qualify, they can make an S-corp deduction with Form 1040. Under this method, S-corp owners can deduct premiums for accident, dental, long-term care policies, and health insurance policies.

S-corp owners are not eligible for health reimbursement arrangements (HRAs) because they are taxed as shareholders, not employees. However, S-corps can offer HRAs as a benefit for employees who don't have a greater than 2% stake in the business.

The tax benefits of having an S-corp pay health insurance expenses include avoiding some payroll taxes and deducting the cost as a business expense at the end of the tax year. When the S-corp pays for insurance, it reports those payments as wages on Form 1120-S. These are business expenses that can help reduce any taxes owed. The S-corp owner then reports those wages on their income tax return, paying regular income tax on the amount paid for the insurance premiums. While treated as wages, premium payments are not subject to Social Security or Medicare taxes, which total 15.3%.

S-corp owners can't get around the rules by employing their spouse

S-corporation owners cannot get around the rules by employing their spouse to provide them with health insurance. For health insurance purposes, spouses and other family members of an S-corp owner are treated as S-corp owners themselves, even if the family members do not own any stock in the company.

S-corporations can provide health insurance as a tax-free benefit to their non-owner employees and deduct the cost as a business expense, paying no taxes on the insurance premiums. However, S-corp owners are not eligible for tax-free health insurance. Shareholders who own more than 2% of the company stock must include any health insurance costs paid through the company as income, making the amount subject to income tax.

S-corp owners can, however, still receive tax-advantaged premiums. They can do this by taking a personal income tax deduction on the health insurance premiums paid by the company. For S-corp owners to qualify for the health insurance deduction, the company must establish their policy—not the individual S-corp owner. To qualify, the company must pay the S-corp owner’s insurance premium, including the premiums as gross wages in the S-corp owner’s Form W-2. The company must either make the premium payments directly to the insurance company or reimburse the S-corp owner.

S-corp owners can still receive tax-advantaged premiums

S-corps can provide health insurance as a tax-free benefit to their non-owner employees and deduct the cost as a business expense, paying no taxes on the insurance premiums. However, S-corp owners are not eligible for tax-free health insurance. Shareholders owning outstanding stock greater than 2% must include any health insurance costs paid through the company as income, according to Internal Revenue Code Section 707(c)1, making the amount subject to income tax.

However, S-corp owners can still receive tax-advantaged premiums. They can do this by taking a personal income tax deduction on the health insurance premiums paid by the company. To qualify for the health insurance deduction, the company must establish their policy, not the individual S-corp owner.

The IRS considers who pays the policy premiums and how the health insurance premiums are reported for income tax purposes by both the company and the S-corp owner. To qualify, the company must pay the S-corp owner's insurance premium, including the premiums as gross wages in the S-corp owner's Form W-2. The company must either make the premium payments directly to the insurance company or reimburse the S-corp owner.

If the S-corp owner pays the policy premiums on their own, without reimbursement by the business, this doesn't qualify the owner for a tax deduction for health insurance. If the owner does qualify, they can make an S-corp deduction with Form 1040. Under this method, S-corp owners can deduct premiums for accident, dental, long-term care policies, and health insurance policies.

S-corp owners can also offer their employees a quality health insurance benefit with a traditional group policy, health stipend, or a Health Reimbursement Arrangement (HRA).

S-corp owners can also participate in their taxable health stipend benefit as long as they include it as additional income. Health stipends for S-corp shareholders are subject to FICA, FUTA, FITW, and SITW. Taxable fringe benefits may be deductible as additional wages and salaries on Form 1120S, but they must be reported as taxable income to do so.

S-corp owners can't participate in a health reimbursement arrangement (HRA)

S-corporation owners are considered self-employed and are taxed as shareholders, so they are not eligible to participate in a health reimbursement arrangement (HRA). HRAs are only available to W-2 employees, and S-corp owners are not considered employees for this purpose. This is because S-corps are set up to prevent businesses from being taxed by passing any profits and losses through shareholders' personal income tax returns. Therefore, S-corp owners are not eligible for the same tax-free health insurance benefits as their employees.

The IRS considers S-corp owners and their families to be owners themselves, even if family members do not hold any stock in the company. This means that S-corp owners cannot get around this rule by employing their spouse and obtaining health insurance coverage through their participation in the company's health insurance plan.

While S-corp owners cannot participate in an HRA, they can still receive tax advantages by writing off the health plan premiums paid by the company as a personal tax deduction. To qualify for this premium deduction, the company must establish the owner's health insurance policy, not the individual themselves. The company must pay the owner's premium by either paying the insurance company directly or reimbursing the owner, and the premium payments must be included as gross additional wages in the S-corp owner's Form W-2. Once this is done, S-corp owners can deduct health insurance premiums using Form 1040 during tax season.

Frequently asked questions