Tax Implications for Shareholders
S-corporations can provide health insurance as a tax-free benefit to their non-owner employees and deduct the cost as a business expense. However, for shareholders who own more than 2% of the S-corporation’s shares, the corporation must report the insurance premiums paid on the shareholder’s behalf as wages on Form W-2. These premiums are subject to income tax but not other payroll taxes.
The insurance premiums paid for the shareholder must be deducted as a business expense on Form 1120S, and the shareholder can deduct the premium amount on Form 1040. This double deduction provides a tax benefit for both the S-corporation and its shareholders, although income tax must be paid on the premiums since they are considered additional compensation.
Compliance with ACA Requirements
For tax years after 2013, S-corporations must ensure their health plans comply with the Affordable Care Act (ACA) market reform provisions to avoid penalties. The ACA did not change the federal tax treatment of health and accident premiums paid for a 2-percent shareholder.
Deduction Requirements and Limitations
To claim an above-the-line deduction, health insurance premiums must be paid by the S corporation and reported as taxable compensation on the shareholder’s W-2. Shareholder-employees must pay income tax on these premiums, and they may also have to pay Medicare and Social Security taxes.
Strategies for S-Corp Owners
Owners can deduct 100% of their medical expenses, but they must first calculate related business deductions. S corporation owners may also be able to deduct their premiums on Form 1040 Schedule 1, with the S corporation deducting the amount as employee compensation on its return.
Tax Deduction Eligibility for Businesses and Individuals
Group health insurance costs provided by a company are deductible as a business expense. Individuals buying their own health insurance can take federal income tax deductions for those premiums, but only businesses can deduct health insurance as a business expense. Employers offering formal health benefits generally can write these off as business expenses.
Self-employed individuals or sole proprietors with an LLC can deduct their health insurance premiums on their federal income tax returns. Group life insurance premiums can also be claimed as a business expense, though life insurance benefits may be taxable to the beneficiary.
Can S-corp owners deduct health insurance?
Yes, but they must report premiums as taxable compensation and follow the specific IRS guidelines.
How do businesses and individuals write-off health insurance premiums?
Businesses can deduct the cost as a business expense. Individuals can take personal deductions for premiums paid out-of-pocket.
What are the limitations for deducting health insurance as a business expense?
The IRS limits deductions to amounts considered to benefit the business, and premiums must be used primarily for employee medical expenses.