S Corp Health Insurance: Everything You Need to Know
S Corp health insurance is something that all S Corporations must consider after formation.3 min read
2. What is Notice 2008-1?
3. Health Insurance Deductions
S Corp health insurance is something that all S Corporations must consider after formation. A lot of small businesses that are incorporated choose to be taxed as an S Corp so that the owners (shareholders) can receive certain tax benefits. If you operate as an S Corp, which is also referred to as a small business corporation, you will need to determine how you want to set up your personal and employee health insurance coverage plan.
Depending on the state in which you operate, your S Corp might not be required to provide health insurance to employees, especially if you have very few employees. You might also be able to draft your own company policies regarding health insurance premiums, and whether or not the employees will be required to pay such premiums and be taxed on them.
S Corp Policy Choices
Specifically, there are two types of policies than an S Corp can follow:
- S Corp Discrimination, which means that the business doesn’t provide health insurance to all eligible employees. Therefore, the S Corp will pay all health insurance premiums. The business will also be responsible for paying Social Security and Medicare tax.
- S Corp Non-Discrimination, which means that the company provides health insurance to all employees. Such health insurance premiums are reported on the employee’s W-2 but they aren’t required to pay taxes on it.
What is Notice 2008-1?
This notice identifies rules and guidelines for deducting health insurance premiums for shareholders and employees that own more than 2 percent of the business. It also indicates that, when an S Corp pays for health insurance on behalf of its shareholders and employees that own at least 2 percent in the company, it is treated as a partnership for income tax purposes (Section 707(c) of the Internal Revenue Code).
Health Insurance Deductions
Ordinarily, if you operate as a corporation and offer health insurance to your employees, this is considered a fringe benefit. Therefore, it is deductible as a business expense. This means that you won’t be required to pay taxes on insurance premiums because they are considered tax-free employee fringe benefits.
However, if you elect to be taxed as an S Corp, then other rules will be followed when it comes to health insurance. Simply put, anyone who works for the S Corp and owns at least 2 percent or more of the company’s stock must include in his or her salary the cost of some employee fringe benefits that are provided by the business, including health insurance. Therefore, income taxes have to be paid on the premium amounts of the health insurance plan.
In addition, the employee must pay both Social Security and Medicare taxes. You can’t try getting around this by hiring your spouse even though he or she doesn’t actually own any stock in the company. Once you employ your spouse, he or she is considered a shareholder of the S Corp; this means that you will still need to pay health insurance premium taxes. If the employees of the S Corp pay the premium themselves, then it is reported on Schedule A of their personal tax return, and is submit to a 10 percent limitation before deductions.
This means that, even after adding up all other applicable health insurance expenses, if this number is less than 10 percent of your adjusted gross income, then you can’t deduct any additional health insurance expenses. If that number is greater than 10 percent, then you can deduct amounts that are greater than that percentage.
Alternatively, the S Corp can input the information on its W-2, which is generally a good choice to make for business owners when deducting such healthcare premiums, as it can further reduce tax liability for the owners of the business. If the S Corp chooses to do this, then it will identify the premium amounts that were paid on its W-2 form.
Thereafter, the owner of the business can deduct premium payments made on their personal tax return. This in turn reduces the owner’s tax liability, as it becomes profits earned by the S Corporation.
If you need help learning more about S Corp health insurance, or how you should deduct health insurance premiums through your business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.