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Form 1120-S CPA explains Shareholder Health Insurance Premium Deduction in S Corps | Form 1120-S Health Insurance

CPA Wilmington NC discusses Health Care Insurance for S Corporation Shareholders

Gary Bode, CPA: deducting your health insurance premiums on IRS Form 1120-S circumvents the 7.5% threshold for medical expense on Schedule A, Form 1040. For a free initial phone consult call 399-2705.

Hi, I’m Gary Bode, a Form 1120-S CPA with a virtual office. Recent IRS regulations now allow S Corporation Shareholders to deduct their health insurance premiums as a company expense on IRS Form 1120-S, even if the policy isn’t in the Corporate name. Basically the Shareholder pays the premium out of their own pocket and the S Corporation reimburses the cost to the Shareholder via a payroll check (please read below).

Back Ground on S Corporations S Corporations, as an entity, have some advantages for small business.  There are two basic types of Corporations: C Corporations and S Corporations.  Both corporations, by default, start as C Corporations by filing Articles of Incorporation with their resident State. The CPA then files Form 2553 and you’re an S Corporation. Here’s some S Corporation basics.

  • S Corporations can only have people as shareholders IE no partnership, corporate or non-resident alien shareholders. Note that certain types of Trusts and estates do qualify as share holders.
  • S Corporations must have less than 100 shareholders.
  • S Corporations can only have one class of stock.
  • LLCs can elect to be taxed as S Corporations and file Form 1120-S.
  • S Corps pay no tax on the federal level.
  • A separate tax return, Form 1120-S is filed annually.
  • States have various taxes on S Corporations too. S Corporations make more sense tax wise in some States than others.
  • The profit from S Corporation flows into the shareholder’s personal Form 1040 via Schedule K-1 and Schedule E.

“> 2% S Corporation shareholders can now run their health insurance through the company if they receive wages. Even if the health insurance policy is in their personal name.”  – Gary Bode, Form 1120-S CPA

Finally, the Health Insurance! The basics: S Corporation shareholders can deduct their health insurance through the company if they receive wages, even if the insurance policy is under their personal name. From the IRS site: Heath and accident insurance premiums paid on behalf of the greater than two percent S corporation shareholder-employee are deductible and reportable by the S corporation as wages for income tax withholding purposes on the shareholder-employee’s Form W-2.  So the shareholder has to receive at least one paycheck annually. Sometimes this is a $0 net payroll check. Note this saves paying federal income tax on the health care premiums, From the IRS site: These health care benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes.  The additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but would not be included in Boxes 3 and 5 of Form W-2. A non employee spouse isn’t eligible for this technique, so some sort of real job must be established, with wages being at least equal to the cost of the health care insurance premiums. And don’t forget about the 2012 Health Insurance Credit that’s available through Form 8941.

S Corporation Shareholder Wages vs. Distributions

Lets look at when two 2% shareholders are husband and wife, a common scenario.  The amount of wages paid to close relatives is a gray area that the IRS and S Corporation CPAs constantly explore.  Distributions are not subject to self employment taxes in S Corps and represent an excellent, legal self employment tax avoidance strategy.  This is a cat and mouse scenario which S Corporation shareholder employees should explore carefully. In 2013 the rewards are tax savings of 15.3% on non payroll distributions. So health insurance for Shareholders is just part of the bigger tax positioning picture. I’m an S Corporation CPA whose firm functions as an S Corporation, so I keep up with emerging trends on Form 1120-S. I offer a free phone consult at (910) 399-2705. Find me on Google+

2 comments to Form 1120-S CPA explains Shareholder Health Insurance Premium Deduction in S Corps | Form 1120-S Health Insurance

  • Gary,

    It may be time to update the information as you have described above. Under the ACA and IRS Notice 2013-54 employers may no longer reimburse employees for their health insurance premiums or directly pay the cost of the individual health insurance premiums by the s corporation and exclude such amounts from the employee’s gross income.

    With this IRS interpretation effective 1/01/2014 these “employer payment plans” must be paid with after tax dollars. Basically, the big change is that the premiums are now subject to FICA and Medicare taxes.

    I would like to here your comment/comments.

    • Well you’re right Rick it did change. Now the >2% shareholder health insurance premiums incur income tax but escape Social Security and Medicare taxes. Is this your understanding as well? Thanks for bringing that to my attention.

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