S Corporation Health Insurance Premiums

Published on Wednesday, December 21, 2011

As the year comes to a close, we want to remind our S corporation clients to take the necessary steps to be eligible for the health insurance premiums paid deduction. This deduction for 2% or greater shareholder/employees is an important deduction but there are some rules that must be followed to insure its availability. Hopefully, these thoughts will assist you in preparing your year-end payroll returns.

S corporations are subject to special rules regarding employee fringe benefits. Under these rules, any shareholder-employee with a 2% or greater ownership is taxed on certain fringe benefits received. Health insurance premiums paid by the corporation is one of these types of benefits.

Health insurance premiums paid for the benefit of a shareholder-employee must be added to the shareholder-employee’s W-2 included as wages. The premiums are then taken as a deduction on the employee’s individual tax return. The S corporation is allowed a business deduction on the corporate tax return for the premiums paid but only if properly reported on the W-2. If you have an outside service preparing your W-2's, remember to provide these amounts to them.

Please note that in order to qualify for the Self Employed Health Insurance Deduction, the payments of your health insurance premiums are subject to the following requirements:

1. Your health insurance plan must be established by the S corporation and the coverage must be in the name of the >2% Shareholder-employee. The plan is established if the S corporation makes the premium payments for the policy covering the Shareholder-employee in the current taxable year OR if the S corporation reimburses the premiums paid directly by the employee and the employee furnishes proof of premium payment to the S corporation in the current taxable year.
2. The health insurance premium payments MUST be included in gross taxable income reported on the Shareholder-employee’s W-2 (Box 1 and Box 16). These amounts are not subject to FICA or FUTA taxable wages.
3. The Shareholder-employee must not be eligible to be covered under a spouse’s employer’s plan.

Health insurance premiums paid under any other method for a Shareholder-employee may only be deductible as itemized deductions subject to the 7.5% adjusted gross income limitation, which for most taxpayers is rare.

Although these rules may seem silly (deducted by S Corporation, added to W-2 as taxable income but deducted from 1040 taxable income as an adjustment???) this is the law. Simple? No, but if you have any questions concerning these rules, please give us a call and we will be happy to explain.