S Corp health insurance deduction rules are important to know, as you will need to deduct both accident and health insurance premiums for all shareholders and employees of the business. Under Section 1372(a) of the Internal Revenue Code, there are certain provisions identifying employee fringe benefits and how the S Corp will be taxed on such benefits.

Rules for Deduction

There are several rules for what deductions an S Corp can take for health insurance. The company itself must first establish such a plan, meaning that it cannot be established by the shareholder or employee. If you own more than 2 percent in the business, then you can only deduct health insurance premiums if the plan itself was established by the business. If this is the case, then you will input the deductions directly on Form 1040 (Line 29) as a self-employed health insurance deduction.

Before you can do this, you must determine if the business itself established the health insurance plan. The following two elements are taken into account: who pays the premium on the plan and how the premiums are reported on the tax forms. Therefore, the business must not only pay the premium but also include the premium on Form W-2 for those owning more than 2 percent of the business.

If the employee or shareholder pays the premium him or herself and puts the policy in his or her own name without getting reimbursed from the company, then the plan is considered to have been established by the shareholder/employee.

Health Insurance Policy in Company’s Name

If the health insurance or accident plan is in the business’s name, then any one of the additional elements must be met in order for the plan to be deemed established by the business itself:

  • The plan also covers spouses or dependents.
  • The business makes all premium payments.
  • The business reports the premiums on the W-2 for tax purposes

If the health insurance or accident plan is in the employee/shareholder’s name, then any one of the additional elements must be met in order for the plan to be deemed established by the business:

  • The business makes the premium payments.
  • The business reports the payments on its W-2 for tax purposes.

If the shareholder/employee obtains a policy in his or her own name to cover the entire family, and the individual pays all premium payments, then the policy might still be deemed to be established by the business if the company reimburses all premium payments to the employee/shareholder. Furthermore, the business must include the premium payments on the W-2 as opposed to the shareholder/employee including the information on his or her personal tax return.

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