Officer Life Insurance: K-1 Reporting And You

Life insurance premiums for a more than 2% shareholder of an S-Corporation are reported in Box 14 of the individual's Form W-2 Wage and Tax Statement. This information is then transferred to Line 16 of the individual's Schedule 1 (Form 1040) Additional Income and Adjustments to Income. This process is relevant for individuals who have received a Schedule K-1 (Form 1120-S) Shareholder’s Share of Income, Deductions, Credits, etc.

Health Insurance Premiums for S-Corporation shareholders are reported in Box 14 of the individual's Form W-2

When it comes to health insurance premiums for S-Corporation shareholders, there are specific reporting requirements that need to be followed. These premiums are considered a form of compensation and are therefore reported on the individual's Form W-2, which is used for wage and tax statements.

For S-Corporation shareholders, the health insurance premiums are reported in Box 14 of their Form W-2. This box is labelled "Other" and is used to report any additional information that does not fit in the other boxes. It's important to note that these premiums are also included in Box 1 of the Form W-2, which represents wages subject to federal withholding.

The process of reporting health insurance premiums for S-Corporation shareholders involves several steps. Firstly, the policy can be in the name of the S-Corporation or the shareholder, especially if they are the sole employee. The premiums must then be paid by the corporation and included as wages on the Form W-2. If the shareholder is the one paying the premiums, the corporation is required to reimburse them. This reimbursement is also reported on the Form W-2.

It's worth mentioning that if the shareholder's family members are also employees, they should be covered under a family plan that complies with the Affordable Care Act. Additionally, arrangements for reimbursements to both shareholder-employees and non-shareholder employees are considered a group plan and may trigger an excise tax if not properly set up.

Overall, understanding the correct reporting procedure for health insurance premiums is crucial for S-Corporation shareholders to ensure compliance with tax regulations and to take advantage of any applicable deductions.

To transfer the amount in Box 14 to Line 16 of the individual's Schedule 1, complete the Self-Employed Health Insurance Deduction Worksheet

From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.

Click Business Income in the Federal Quick Q&A Topics menu to expand, then click S Corporation income (Form 1120S Schedule K-1).

Click + Add S Corporation Schedule K-1 to create a new copy of the form or click Edit to review a form that has already been created.

Continue with the interview process to enter all of the appropriate information.

On the screen titled S-Corporation - Schedule K-1 Information, check Box 12 - Other deductions, then click Continue.

On the screen titled S-Corporation - Other Deductions, click Yes.

On the screen titled S-Corporation - Self Employed Health Insurance, click Yes.

On the screen titled S-Corporation - Health Insurance, enter the Non-Marketplace health insurance premiums amount from Box 14 (health insurance premiums) and enter the Form W-2, Box 5 amount (if any) as Medicare wages from this S-Corporation as the deduction will be limited to this amount, then click Continue.

On the screen titled SE Health Insurance - Qualified Long-Term Care, click Yes if you need to also enter information for a qualified long-term care insurance plan. Otherwise, click No. This will reflect the amount of your self-employed health insurance deduction that will appear on Schedule 1 (Form 1040), Line 16.

If you did not receive a Schedule K-1, see Form W-2 - Entering in Program.

S-Corporations must pay reasonable compensation to a shareholder-employee for services rendered

The IRS has the authority to reclassify payments made to shareholders as wages, which are subject to employment taxes. The determination of reasonable compensation is made by looking at the source of the S-Corporation's gross receipts. If the gross receipts are generated by the shareholder's personal services, then payments should be classified as wages.

There are several factors to consider when determining reasonable compensation:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• Comparable business pay for similar services
• Compensation agreements
• Use of a formula to determine compensation

The reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

The IRS has the authority to reclassify payments made to shareholders as wages

The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation. The three major sources of gross receipts are: services of the shareholder, services of non-shareholder employees, and capital and equipment. If gross receipts are generated by the shareholder's personal services, payments to the shareholder-employee should be classified as wages subject to employment taxes.

In addition to gross receipts generated directly by the shareholder-employee, they should also be compensated for administrative work performed for other income-producing employees or assets. For example, a manager may not directly produce gross receipts, but they assist other employees or assets that produce day-to-day gross receipts.

The IRS examines numerous factors to determine if reasonable compensation has been paid, including:

• The employee's qualifications
• Training and experience
• The nature, extent, and scope of the employee's work
• The amount of time and effort devoted to the S corporation's business activities
• The size and complexities of the business
• A comparison of salaries paid
• The prevailing general economic conditions
• Comparison of salaries with distributions to shareholders
• The prevailing rates of compensation in similar businesses
• Whether payments are made to non-shareholder employees
• The timing and manner of paying bonuses to key people in the S corporation
• The presence of any compensation agreements
• The taxpayer's salary policy for all employees (including any formulas used for determining compensation)
• The amount paid out as salary compared to amounts distributed as profit
• In the case of small corporations with a limited number of officers, the amount of compensation paid to the particular employee in previous years

It is important to note that the definition of an employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act), and federal income tax withholding includes corporate officers. When corporate officers perform a service for the corporation and receive or are entitled to payments, those payments are considered wages. This is true even if the officer is also a shareholder.

Courts have consistently held that S corporation officers/shareholders who provide more than minor services to their corporation and receive, or are entitled to receive, compensation are subject to federal employment taxes. In the case of Veterinary Surgical Consultants, P.C. vs. Commissioner, the Tax Court ruled that an employer could not avoid federal taxes by characterizing compensation paid to its sole director and shareholder as distributions of the corporation's net income rather than wages.

Therefore, it is essential for S corporations to properly compensate shareholder-employees and classify payments as wages or non-wage distributions to ensure compliance with IRS regulations and avoid penalties.

Health and accident insurance premiums paid on behalf of a greater than 2% S-Corporation shareholder-employee are deductible by the S-Corporation

When it comes to health insurance expenses for certain categories of employees, the tax rules can get complicated. In the US, the Internal Revenue Service (IRS) treats a shareholder who owns more than 2% of a company's stock or voting power like a partner in a partnership for tax purposes. This means that 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. This is subject to income tax withholding but not Social Security, Medicare (FICA), or Unemployment (FUTA) taxes.

For S-Corp owners to qualify for the health insurance deduction, the company must establish their 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 health insurance premium payments are not reported correctly, the IRS can deny the S-Corporation the deduction for the payments, impacting both the company and the shareholders' tax situation. To avoid this, the S-Corporation must report the premiums as wages on the respective shareholder's W-2. This is considered a non-wage compensation or fringe benefit expense. The shareholder's W-2 wages, including the health insurance premiums, are then reportable on the shareholder's individual return. As a result of the insurance premiums' inclusion in the shareholder's taxable wages, the shareholder will be entitled to a self-employed health insurance deduction on Schedule 1, Part II.

It is important to note that deductions cannot be taken when they exceed the shareholder's earned income from the business providing the plan, or during a month in which the shareholder is eligible to participate in any subsidized health plan maintained by another employer or their spouse.

Frequently asked questions