Health Insurance Premiums
Health insurance premiums paid on behalf of greater than 2% shareholders in S-corporations must be reported as wages on the shareholder’s W-2.
The premiums are not subject to Social Security, Medicare or unemployment taxes if the health insurance is provided under a non-discriminatory plan provided to employees.
If health insurance premiums are properly reported on the shareholder’s W-2, they should be deducted in full on Form 1040, Line 29: Self-employed health insurance deduction.
According to the IRS, the deduction is only allowable if the premiums are reported on the shareholder’s W-2. (They are not deductible if they are simply added back on the shareholder K-1.)
According to the IRS, if the shareholder pays for their health insurance premiums outside of the S-corporation, they only way that they can be deducted by the shareholder is if the shareholder submits the premiums to the company for reimbursement before year end. The reimbursement can then be included on the employees W-2.
These rules apply even if the policy is in the name of the shareholder’s children or spouse, or if the premiums are paid by the shareholder’s children or spouse.
From IRS Fact Sheet-2008-25: Wage Compensation for S Corporation Officers
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Medical Insurance Premiums treated as wages.
The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2.
A 2-percent shareholder-employee is eligible for an AGI deduction for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation. Previously, “established by the S corporation” meant that the medical care coverage had to be in the name of the S corporation.
In Notice 2008-1, the IRS stated that if the medical coverage plan is in the name of the 2 percent shareholder and not in the name of the S corporation, a medical care plan can be considered to be established by the S corporation if: the S corporation either paid or reimbursed the 2 percent shareholder for the premiums and reported the premium payment or reimbursement as wages on the 2 percent shareholder’s Form W-2.
Payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2.
Schedule K-1 (Form 1120S) and Form 1099 should NOT be used as an alternative to the Form W-2 to report this additional compensation.
The premiums are not subject to Social Security, Medicare or unemployment taxes if the health insurance is provided under a non-discriminatory plan provided to employees.
If health insurance premiums are properly reported on the shareholder’s W-2, they should be deducted in full on Form 1040, Line 29: Self-employed health insurance deduction.
According to the IRS, the deduction is only allowable if the premiums are reported on the shareholder’s W-2. (They are not deductible if they are simply added back on the shareholder K-1.)
According to the IRS, if the shareholder pays for their health insurance premiums outside of the S-corporation, they only way that they can be deducted by the shareholder is if the shareholder submits the premiums to the company for reimbursement before year end. The reimbursement can then be included on the employees W-2.
These rules apply even if the policy is in the name of the shareholder’s children or spouse, or if the premiums are paid by the shareholder’s children or spouse.
From IRS Fact Sheet-2008-25: Wage Compensation for S Corporation Officers
————————————————————————————————--
Medical Insurance Premiums treated as wages.
The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2.
A 2-percent shareholder-employee is eligible for an AGI deduction for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation. Previously, “established by the S corporation” meant that the medical care coverage had to be in the name of the S corporation.
In Notice 2008-1, the IRS stated that if the medical coverage plan is in the name of the 2 percent shareholder and not in the name of the S corporation, a medical care plan can be considered to be established by the S corporation if: the S corporation either paid or reimbursed the 2 percent shareholder for the premiums and reported the premium payment or reimbursement as wages on the 2 percent shareholder’s Form W-2.
Payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2.
Schedule K-1 (Form 1120S) and Form 1099 should NOT be used as an alternative to the Form W-2 to report this additional compensation.