If you are a more than 2 percent shareholder of an S corporation, you must take the correct measures to capture a health insurance deduction.
The first step is for the S-corporation to pay the insurance company directly for the cost of the health insurance. Next, the S-corporation includes the cost of the health insurance as additional compensation to the shareholder-employee on the employee’s W-2 which is subject to income tax withholding but exempt from Social Security, Medicare, and unemployment taxes. The W-2-reported health insurance is treated as a cost of self-employed health insurance. This amount is deducted on page 1 of Form 1040.
This is an area where tax planning is imperative. The S-corporation must reimburse you for all medical insurance that you pay for yourself and your family. This includes Medicare and accident and health premiums paid to schools and athletic programs to cover your children.
S-corporation owners can pay health insurance costs personally. In this case, the owner must have the S corporation reimburse the cost of the insurance to the owner-employer to qualify for the health insurance tax deduction.
Taxpayers may have to pay payroll taxes on the amount included in wages for your insurance premiums If the corporation does not provide health insurance to your non-owner employees, then you are exposed to payroll taxes. If the corporation does provide health insurance to your non-owner employees, you are not exposed to payroll taxes. If the corporation has no other employees, you are not exposed to payroll taxes.
If you are eligible to participate in an employer-subsidized health plan maintained by either you or your spouse’s employer, you may not claim the self-employed health insurance deductions for the months when you were eligible to participate in an employer plan.
If a taxpayer pays for the health insurance themselves and does not submit it to the corporation, the cost of health insurance becomes an itemized deduction suffering from both the 10 percent of adjusted gross income floor and the phaseout of itemized deductions, possibly completely eliminating the deduction.
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