July 3, 2022
  • July 3, 2022

A Beginner’s Guide to S Corp Health Insurance

By on May 18, 2022 0

Image source: Getty Images

Owners of S corporations may receive hybrid treatment as employees and shareholders. But their path to tax benefits gets bumpy when it comes to health insurance.

When deciding on your business structure, you likely consider the legal and financial protections of each type. You are unlikely to think about the tax implications of your healthcare costs. This is where the tax structure of S corporations may surprise many business owners.

Business owners set up corporations to protect themselves from the debts of their business. Some corporations may elect S corporation taxation to avoid the double taxation that accompanies traditional C corporations.

S corporations further benefit the owners involved in management as they can pay themselves dividends after a reasonable salary. Dividends are subject to federal and state income taxes, but not payroll taxes.

But Corporation S is muddy when it comes to providing homeowners with health insurance benefits. Follow our guide to getting the most tax benefits for S corporation owner health insurance.

How do health insurance benefits for S corporations work?

Just like other business structures, S corporations can offer health insurance premium coverage to their non-owner employees as non-taxable employee benefits. The employee is not taxed for this and the company can deduct the contributions on their tax return.

S corp owners who participate in management are considered employees, but they are treated more as self-employed for insurance benefits. Unlike non-owner employees, shareholders with a stake of more than 2% cannot benefit from accident or health insurance as a non-taxable benefit in kind.

When an S corporation offers shareholder-employee health insurance, the costs are included in gross pay, are subject to federal and state income taxes, and appear on the shareholder-employee’s Form W-2.

If you follow our guide, you can avoid paying FICA taxes, which include Social Security and Medicare taxes, on the S corporation contribution. You can also get a personal tax deduction for your premiums. Health Insurance.

Before you start, don’t try to be smart with the IRS. You cannot employ your non-owner spouse to obtain insurance for you and the rest of your family: your S corporation ownership extends to your spouse and family members in this case.

You also cannot claim the personal tax deduction for health insurance premiums if you or your spouse were eligible for another subsidized health insurance scheme. The deduction only applies to S corp shareholders who cannot otherwise obtain health insurance.

How to Deduct Shareholder Health Insurance for S Corporations

Follow this guide to tax-efficient health insurance benefits for S corporations.

1. Provide health insurance for you and your employees

You get the best tax savings when you offer your employees the same health insurance plan that you offer yourself. If you are the only employee of your S corporation, skip this step.

It’s not a legal requirement for businesses with fewer than 50 full-time employees to offer health insurance, but it’s how you avoid paying FICA and Federal Unemployment (FUTA) taxes on your health benefits. personal health insurance.

The IRS waives FICA and FUTA payroll taxes when all or a class of employees can obtain health insurance coverage. For example, you can avoid payroll taxes by offering health insurance to all full-time employees.

You may also qualify for a small business tax credit when you cover at least half of your employees’ health insurance premiums.

If available to you, purchase a health insurance policy through your S corp. Some states do not allow companies to purchase health insurance policies when there is only one employee. In any case, you can benefit from a tax deduction for self-employed health insurance.

2. Pay the insurance costs through your S corporation

Your S corp must pay your health insurance costs to get the personal tax deduction. When you pay your premiums with personal money, make sure your company reimburses you. Better yet, use company funds to pay your insurance company directly.

Use your accounting software to track your health insurance expenses. You need to know your health costs for the third stage.

3. Add health insurance costs to gross pay on your W-2

S corporation owners who participate in management are considered employees, meaning they receive a W-2 each January. In the first W-2 box, gross wages include health care costs that your S corp paid during the year.

If you followed the steps above correctly, medical expenses should not be included in boxes three and five, which list your wages subject to FICA taxes.

A screenshot of boxes one through eight on the IRS Form W-2.

S Corp shareholders of 2% or more include their company-paid health insurance premiums in Box 1 of Form W-2. Image source: author

4. Deduct employee insurance premiums on your business tax return

S corporations are flow-through entities, which means that they pay their small business taxes only on their shareholders’ personal tax returns.

Yet, S corporations file Form 1120-S, which details the company’s income to the IRS. It is on this form — line 19, to be precise — that you deduct insurance premiums paid to employees. It reduces your business’ taxable income, which reduces your tax liability when it appears on your personal tax return.

IRS Form 1120-S showing line 19, for “Other deductions,” boxed in red.

Report your S corporation’s contributions to non-shareholder health insurance premiums on line 19 of Form 1120-S. Image source: author

5. Deduct your insurance premiums on your personal tax return

With respect to health insurance, you are treated as self-employed as an S corporation owner. You can deduct the cost of health care premiums for you, your spouse, and dependents on the form 1040 annex 1.

Form 1040 Schedule 1 with line 16, for “Health insurance deduction for self-employed persons”, boxed in red.

Take your self-employed health insurance deduction on Form 1040, Schedule 1. Image source: Author

This is a special deduction. I’ll piss you off for a second, but I’ll come back to explain what I mean. Self-employed health insurance deductions are called “over the line” deductions, which reduce adjusted gross income (AGI).

This potentially means more tax savings. Most other tax deductions are “below the line”. This is important because the AGI – the “line” we are talking about – is the barometer that determines your eligibility for many deductions and tax credits. The lower your AGI, the more likely you are to receive more tax savings.

Your self-employment tax software can guide you in handling the self-employment health insurance deduction.

FAQs

  • For you, a shareholder of 2% or more of S corp, the Affordable Care Act (ACA) does not affect how you deduct your health insurance benefits provided by S corp. However, things get tricky for your employees.

    The ACA requires S corporations to establish group health insurance plans instead of reimbursing employees for their individual plan costs. Businesses that violate ACA rules are subject to a $100 daily excise tax for each employee and violation.

    S corps with less than 50 full-time and full-time equivalent employees can, however, obtain a pass. If they follow all the rules, small S bodies can reimburse their employees for medical expenses up to a maximum amount.

    See the IRS website for more information on Qualified Small Employer Health Reimbursement Arrangements (QSEHRA). Better yet, offer group health insurance to avoid this problem.

  • Your self-employed health insurance deduction cannot exceed your S corp income share. Suppose you own 25% of an S corporation, which earned $50,000 last year. Your and your family’s health insurance premiums totaled $15,000 last year.

    Since your share of S corp income is only $12,500 ($50,000 x 0.25 property), this is the maximum self-employment health insurance deduction you can take despite higher premiums.

  • Your payroll software automatically generates your W-2 forms at the beginning of each year, but your gross pay will be wrong if you don’t add your health care expenses on file.

    Your software probably has a feature that allows you to enter your shareholders’ healthcare costs for tax reporting purposes. You can probably find a guide specific to the software by doing a Google search for “Report S corp shareholder bonuses” along with the name of your payroll software.

One of the few downsides

The S corporation business structure has a lot to offer. Yes, the path to tax-advantaged health insurance can make the structure less worthy for your business, but many business owners gladly accept this list because of the longer list of benefits.