S Corp Medical Insurance: Everything You Need to Know
S corp medical insurance is an interesting issue due to the way shareholders and corporation are taxed and pays for any shareholder/employee medical insurance.3 min read
2. Steps to Reporting S Corporation Premiums
3. C Corp vs. S Corp
4. Offset as a Self-Employed Health Insurance Deduction
5. S Corp and the IRS
S corp medical insurance is an important issue due to the way shareholders are taxed. The way a corporation pays for any shareholder/employee medical insurance is a complex and interesting issue.
Reporting of Health Insurance Premiums for S Corps
If a shareholder owns more than 2 percent of an S corporation and they receive medical benefits from the company, then it must be reported properly. You run the risk of limiting or eliminating the deduction on medical benefits if steps are missed. Medical benefits deduction is one of the few downsides of a S corp election. If someone is self-employed, then they enjoy the ability to deduct their health insurance premiums from their taxable income. S corporation shareholders are not technically self-employed. The IRS has a requirement that if a shareholder owns more than 2 percent of an S corp, then they are able to take the deduction. Otherwise, they are not.
Steps to Reporting S Corporation Premiums
There are specific steps to ensure that you receive the substantial tax savings for medical benefits.
- Shareholders who own more than 2 percent of an S corp should have their premiums tracked separately. These premiums (for health, dental and vision) cannot be deducted by the S corp.
- The corporation must pay the premiums for the shareholder even if that payment is made as a reimbursement.
- Prior to the final payroll processing for the year, the total for vision, dental, health and other medical insurance premiums paid by the corporation must be given to the shareholder for their W-2.
- There is a special tax treatment for this payment of premiums. Federal and State withholding applies even though they are not subject to Medicare tax or Social Security.
- Premiums are recorded on the W-2.
If a shareholder (who owns more than 2 percent of the S corp) premiums are not reported on the shareholder’s W-2, then the IRS will not allow the self-employment deduction.
C Corp vs. S Corp
There are different rules for the regular C corporation (the default form of tax election). A regular C corporation can provide shareholder/employees with health insurance as a benefit. Then they can deduct the cost as a business expense. The shareholder/employee does not have to pay any tax on the premiums paid by the corporation.
That is not the way an S corporation reports the premiums, as discussed above, a 2 percent shareholder must include in their wages the cost of employee health benefits. Spouse and family members of 2 percent shareholders are considered 2 percent shareholders for the purposes of this reporting to the IRS.
Offset as a Self-Employed Health Insurance Deduction
There is an offset available to an individual if the following apply:
The premium payments of a 2 percent shareholder is made by the S corporation or the payments are made by the 2 percent shareholder and the S corporation reimburses that shareholder
The W-2 of the shareholder reflects the premium payments as income. This is due to the fact that if you have more than 2 percent ownership in an S corporation, you are treated the same way as someone who is self employed in regards to health insurance premiums.
Medicare coverage premiums may also be deducted. The insurance may also cover your children up to the age of 27 even if they are not your dependents. Deductions are limited to the amount of wage you received from the S corp. Compliance with the rules as they relate to the 2 percent shareholders permit the deduction.
S Corp and the IRS
The Internal Revenue Service looks at two elements in determining who is eligible to receive the deduction:
- Who pays the premiums on a health insurance benefit
- How are premiums reported to the IRS
S corporations may deduct the amount of the premiums as compensation to the employee.
The shareholder must pay income tax on these premiums paid by the S corporation.
This kind of “income” is not subject to Medicare taxes or Social Security if you are the only employee of the S corp or if the corporation as other employees who are not shareholders and provides them with health insurance.
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