How Health Insurance is Treated for S Corp Business Owners

As an S Corp business owner, health insurance is one of the best benefits you can provide for your employees as it is can be a major worry for many people. When you pay for the insurance for the employees it is treated as a business expense, but when it it comes to getting insurance for yourself as the business owner it becomes a little but more tricky.

For S Corps the term "greater than 2 percent shareholder" is used when taking about certain benefits, health insurance being likely the most major. A 2-percent shareholder is someone who owns more than 2 percent of the outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all stock of the corporation. When a business pays for health insurance for a grater than 2 percent shareholder, that full amount paid becomes taxable to that owner.

Health and accident insurance premiums paid on behalf of a greater than 2-percent S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee's Form W-2, subject to income tax withholding.

However, these additional wages are not subject to Social Security, or Medicare (FICA), or Unemployment (FUTA) taxes if the payments of premiums are made to or on behalf of an employee under a plan or system that makes provision for all or a class of employees (or employees and their dependents). Therefore, the additional compensation is included in the shareholder-employee's Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2.

A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements. If, however, the shareholder or the shareholder's spouse was eligible to participate in any subsidized health care plan, then the shareholder is not entitled to the above-the-line deduction. IRC § 162(l). (An above-the-line deduction is a deduction the IRS allows you to subtract from your annual gross income in order to arrive at your "adjusted gross income".)

If you are interested in learning more about these benefits or other ways to lower your tax liability please feel free to reach out today!