When you own an S Corporation there are several important rules to follow. One of the biggest and most confusing concerns health insurance for owners. Here are some basic principles:
• Any individual who owns 2% or more of an S Corp’s stock must include their health insurance benefit as part of their salary. In other words, they must pay tax on their health insurance premiums.
• Most owners of S Corps are considered employees and hold more than 2% of the S Corp’s stock.
• The health insurance premiums aren’t subject to Social Security, Medicare, or Unemployment tax and need to be coded properly on payroll.
• These principles do not apply if an S Corp owner has health insurance coverage through a spouse or other employer.
As owner of an S Corp:
• You can allow the S Corp to pay your health insurance premiums. While you have to pay income tax on this premium amount, you are eligible to deduct your health insurance premium on your personal taxes. This is because the IRS considers you a self-employed person.
• You can pay your health insurance premium out-of-pocket yourself. (The caveat in doing this is that if the S Corp reimburses you for your health insurance premium, you must pay tax on this premium amount. If the S Corp does NOT reimburse you, then technically the S Corp did not make a medical plan for you and you do not qualify for the self-employed health insurance deduction.)
• If you are 2% or more owner and also have Medicare coverage, Medicare premiums paid out-of-pocket should be reimbursed by the S Corp. Those reimbursed premiums need to be included in your taxable income. This is a complicated area, if this applies to you contact us with questions.
• You cannot take this deduction if you or your spouse qualify for employer-subsidized health insurance. (In other words, if your spouse qualifies for health insurance at an unrelated place of employment, you may not deduct your S Corp premiums, even if your spouse turns down this employer-sponsored insurance.)
• When sending W-2s, an S Corp must include health insurance as wages not subject to FICA. This also applies to any payments to an employee’s Health Savings Account, as long as that employee is a 2% or more stock holder in the S Corp.
• Some S Corp owners may try to circumvent the health insurance tax law by employing a spouse and granting them health insurance that also covers you as the owner. Even if the spouse may not technically be a shareholder, the IRS sees them as such because they are your spouse.
Health insurance taxes can be complicated. If you’re uncertain of how to navigate the legalities according to the IRS and the Affordable Care Act, let us help guide you through the process.