Alyssa Lane
S-Corps have different rules for providing health insurance to their employees and shareholders. While S-Corps can provide health insurance as a tax-free benefit to their non-owner employees, they cannot do the same for their shareholders. Shareholders who own more than 2% of the company's stock must include health insurance costs paid through the company as income. However, they can still access tax-advantaged health insurance through the company. To claim an above-the-line deduction, the health insurance premiums must be paid by the S-Corp and reported as taxable compensation on the shareholder's W-2 form.
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What You'll Learn
- Shareholders owning >2% of stock must include health insurance costs as income
- Shareholders can deduct 100% of premiums paid by the company
- S corps can provide health insurance as a tax-free benefit to non-owner employees
- S corp owners can't get tax-free health insurance coverage like their employees
- S corp owners can access tax-advantaged premiums
Shareholders owning >2% of stock must include health insurance costs as income
Shareholders who own more than 2% of the stock in an S corporation are considered shareholder-employees. This means that they are taxed differently from other employees when it comes to health insurance benefits.
While S corporations can provide health insurance as a tax-free benefit to their non-owner employees, the same does not apply to owners. Shareholders who own more than 2% of the 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, it is important to note that this only applies if the health insurance policy is purchased in the name of the shareholder. If the S corporation purchases the health insurance directly, it can be considered a business expense and is tax-deductible.
The health insurance premiums paid on behalf of 2% shareholder-employees are deductible by the S corporation and reportable as wages on the shareholder-employee's Form W-2. This is subject to income tax withholding but is exempt from Social Security, Medicare (FICA), and Unemployment (FUTA) taxes. The premiums should be included in Box 1 (Wages) of Form W-2 and not included in Boxes 3 and 5.
It is important to note that the Affordable Care Act (ACA) imposes penalties on S corporations that offer health plans that do not comply with certain market reform provisions. This includes plans where the S corporation reimburses employees for the cost of individual health insurance premiums.
Additionally, 2% shareholder-employees may be eligible for an above-the-line deduction in arriving at their Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if certain conditions are met. This includes situations where the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements. However, if the shareholder or their spouse was eligible to participate in any subsidized health care plan, they would not be entitled to this deduction.
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Shareholders can deduct 100% of premiums paid by the company
Shareholders of an S-corporation are taxed differently from regular employees. While S-corps can provide health insurance as a tax-free benefit to their non-owner employees, they cannot do the same for their owners. Shareholders who own more than 2% of the company's outstanding stock must include any health insurance costs paid through the company as income, 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. This is known as an "above-the-line" deduction, which is a deduction that the IRS allows individuals to subtract from their annual gross income to arrive at their "adjusted gross income".
To be eligible for the above-the-line deduction, the health insurance premiums must be paid by the S corporation and reported as taxable compensation in the shareholder's W-2. In other words, the company must obtain and pay for health insurance in its name, cover the shareholder under the policy, and report the premiums as W-2 wages to the shareholder. The shareholder must also meet the other self-employed medical insurance deduction requirements. For example, the shareholder or their spouse must not be eligible to participate in any subsidized health care plan.
It is important to note that S-corp owners and their families are not considered employees and, therefore, are not allowed to participate in a Health Reimbursement Arrangement (HRA). HRAs are only eligible for W-2 employees, and when insurance policy premiums are reimbursed through an HRA, they are not considered "established by the business". As a result, S-corp owners and their families cannot deduct those medical expenses even if they participate in the HRA for tracking purposes.
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S corps can provide health insurance as a tax-free benefit to non-owner employees
S-corps are permitted to provide health insurance as a tax-free benefit to their non-owner employees. They can also deduct the cost as a business expense, paying no taxes on the insurance premiums. However, this is not the case for S-corp owners, who are taxed differently from C-corp owners. S-corp owners are taxed as shareholders, so they are not considered employees and are therefore not eligible for health reimbursement arrangements (HRAs).
S-corp owners can still access tax-advantaged health insurance through the company. They can do this by taking a personal income tax deduction on the health insurance premiums paid by the company. This is known as an "above-the-line" deduction, which is a deduction the IRS allows individuals to subtract from their annual gross income to arrive at their "adjusted gross income" (AGI). A 2% shareholder-employee is eligible for this deduction if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements. However, if the shareholder or their spouse was eligible to participate in any subsidized health care plan, they are not entitled to the above-the-line deduction.
Additionally, health and accident insurance premiums paid on behalf of a greater than 2% S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee's Form W-2, subject to income tax withholding. This means that while S-corp owners can deduct health insurance premiums as a business expense, they must also include them as taxable income. This is because, under IRS rules, insurance premiums for health and accident insurance paid for someone who owns at least 2% of the company are considered wages.
S-corps can offer their non-owner employees a quality health insurance benefit with a traditional group policy, health stipend, or an HRA. They can also provide health savings accounts (HSAs) as a way for employees to save tax-free dollars for future medical expenses. However, owners do not share in these tax-free benefits, and if the company contributes to an HSA on behalf of a more than 2% shareholder-employee, the contribution is considered a taxable benefit.
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S corp owners can't get tax-free health insurance coverage like their employees
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 taxed as shareholders, so they are not considered employees and are therefore not eligible for health reimbursement arrangements (HRAs). This means that S-corp owners cannot deduct medical expenses, even if they participate in an HRA for tracking purposes.
S-corp owners can, however, participate in a 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 1120S3, but they must be reported as taxable income to do so.
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.
The Patient Protection and Affordable Care Act (ACA) imposes penalties on an S corporation that offers a health plan failing to comply with certain market reform provisions, which may include plans under which the S corporation reimburses employees for the cost of individual health insurance premiums. The potential excise tax under IRC § 4980D is $100 per day, per employee, per violation.
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S corp owners can access 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 taxed differently and are not eligible for tax-free health insurance.
S-corp owners can still access tax-advantaged health insurance through the company. They can do this by taking a personal income tax deduction on the health insurance premiums paid by the company. This is known as an "above-the-line deduction", which is a deduction the IRS allows individuals to subtract from their annual gross income to arrive at their "adjusted gross income".
For S-corp owners to be eligible for an above-the-line deduction, the health insurance premiums must be paid by the S-corp and reported as taxable compensation on the shareholder's W-2. If the shareholder purchased the insurance with their own funds, they are not eligible for the deduction.
It is important to note that if the S-corp reimburses employees for the cost of individual health insurance premiums, it may be subject to excise tax under IRC § 4980D.
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Frequently asked questions
An S corp deducts medical insurance paid for a shareholder by treating it as a special personal deduction on the first page of the shareholder's Form 1040. The premiums are considered additional taxable compensation and must be reported in Box 1 of the shareholder's W-2.
To be eligible for an above-the-line deduction, the shareholder must be a 2-percent shareholder-employee of the S corp and meet the other self-employed medical insurance deduction requirements. The S corp must establish the medical care coverage and pay the premiums, which are then reported as W-2 wages to the shareholder.
S corps can provide health insurance to their shareholders as a taxable fringe benefit. The premiums are considered taxable income to the shareholder and are subject to income tax. S corps can deduct the premium payments on their Form 1120S income tax return, reducing the net income that passes through to shareholders.
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