| S-corp paying for Health Insurance
My wife and I are co-owners (50/50) of our small medical practice...we are and S-corp. I have 10 employees, but I don't offer any health insurance for any of my employees d/t high costs so my wife buys our family health insurance....my CPA has never said anything about us being able to deduct the premiums we pay on the 1040 form under "self-employed medical expenses" but I recently had a conversation with a CFP and he said I should be deducting this so I researched online and I come up with that, since we are at least 2% shareholders in the company that if I had the company
reimburse us then we can claim it as income, the company claims it as a business expense and everyone is happy.....but when I asked my CPA about that he thinks that since I don't offer health insurance to ANY of my other employees, I cant do that scenario.....here is the info on the web I found: but it really is not clear about the fact I don't offer ins. to any other employee and that is what might make the big difference...any ideas?
Personal Deduction for Health Insurance Premiums
The fact that you’re not entitled to claim employee health insurance as a tax-free fringe benefit when you have an S corporation is not good. But things aren’t all bad for S corporation shareholders. You may still be able to take a personal income tax deduction for the health insurance premiums paid by your corporation.
Self-employed people are allowed to deduct health insurance premiums (including dental and long-term care coverage) for themselves, their spouses, and their dependents. When you’re an S corporation owner with more than 2% of the company stock, you’re treated the same as a self-employed person when it comes to deducting health insurance premiums.
This is not a business deduction. It is a special personal deduction you take on the first page of your Form 1040 as self-employed health insurance. If you have Medicare coverage, you may deduct your Medicare premiums as part of this deduction—this includes all Medicare parts (not just Part B). Your insurance can also cover your children up to age 27 (26 or younger as of the end of a tax year), whether or not they are your dependents.
Your deduction is limited to the amount of wages you are paid each year by your S corporation. You get the deduction whether you purchase your health insurance policy as an individual or have your S corporation obtain it. However, your S corporation must pay the premiums for you to get the deduction. Thus, if your purchase your policy yourself, you must have your S corporation reimburse you for the cost. The amount of the premiums must be included in your employee wages on your annual Form W-2, and you must include the amount as wages on your Form 1040. Your S corporation deducts the amount as employee compensation on its own return.
You must pay income tax on the health insurance premium payments made by your S corporation. However, such payments are not subject to Social Security and Medicare taxes if (1) you’re the only employee of your S corporation, or (2) your corporation has other non-owner employees and provides them with health insurance. However, these taxes must be paid on the payments if your S corporation has non-owner employees, but does not provide them with health insurance
Deducting S corporation Health Insurance Premiums
Notice 2008-1
Notice 2008-1 contains the rules (and examples) for deducting accident and health insurance premiums by a more-than-2% shareholder/employee of an S corporation.
Section 1372(a) provides that, for purposes of applying the income tax provisions of the Code relating to employee fringe benefits, an S corporation shall be treated as a partnership, and any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership.
Definition of a 2% Shareholder
The following is from IRS Notice 2008-1:
For purposes of § 1372, the term "2-percent shareholder" is any person who owns (or is considered as owning within the meaning of § 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation.
How an S corporation Deducts Health Insurance Premiums
An S corporation deducts the premiums it pays for accident and health insurance to cover a 2% shareholder/employee (and his/her spouse and dependents) as compensation paid to the shareholder/employee. In other words, the premiums are included in the shareholder/employee's salary and reported on the individual's W-2 form.
Notice 2008-1 states that health insurance premiums paid or furnished by an S corporation on behalf of its 2 percent shareholders in consideration for services rendered "are treated for income tax purposes like partnership guaranteed payments under § 707(c) of the Code. Rev. Rul. 91-26, 1991-1 C.B. 184."
Health Insurance Premium Deduction Rules
The rules that apply to S corporations also apply to:
• Partnerships and
• Multi-member LLCs (but not to a single-member LLC)
Plan Must be Established By the Business:
If you're a more-than-2% shareholder/employee in an S corporation, a partner in a partnership, or a member in a multi-member LLC, you may only deduct health insurance premiums directly on Form 1040, line 29 if the health insurance plan is considered to have been established by the business and not by you personally.
Whether you or the business are considered to have established the plan depends on two things:
1. Who actually pays the premiums
2. How the premiums are reported for income tax purposes by both you and the business
In other words, it's not whose name the policy is in that determines who established the plan. It may be in your name or the business's name. Instead, it is who actually pays the premiums and how the premiums are reported for tax purposes that determines who established the plan.
Any One of Three Scenarios Must Be Satisfied
For an accident and health insurance plan to be considered established by the business, any one of the following three scenarios must apply:
Scenario 1:
The business obtains an accident and health insurance policy in the business's name to cover its more-than 2% shareholder/employees (in the case of an S corporation), partners (in the case of a partnership), and members (in the case of a multi-member LLC). The plan also covers their spouses and dependents:
• The business makes all the premium payments.
• The business reports the amount of the premiums as:
• Part of gross wages on Form W-2, in the case of a more-than-2% shareholder/employee of an S corporation.
• Guaranteed income in each partner's Schedule K-1, in the case of a partnership..
• Guaranteed income in each LLC member's Schedule K-1, in the case of an LLC.
• The tax treatment of a multi-member LLC is that of a partnership, which is the default tax treatment if no election is made to treat the LLC an S corp. or a C corp..
• If an election was made on Form 2553 to treat the LLC as an S corporation, then the LLC members would be treated as employees of the business instead of partners (the default tax treatment) and the premiums would be reported in each member's W-2 as part of their gross wages.
Scenario 1 Result:
• In this scenario, the plan is established by the S corporation.
• Each 2% shareholder/employee, partner, and LLC member may take the deduction on Form 1040, line 29.
• If you were a more-than-2% shareholder/employee of an S corporation, the $1,000 in health insurance premiums paid on your behalf would be included in your W-2 as part of your gross wages.
• If you were a partner in a partnership or member of a multi-member LLC, the $1,000 would be included in your Schedule K-1 as guaranteed income.
Scenario 2:
A more-than-2% shareholder/employee, partner, or member of a multi-member LLC obtains an accident and health insurance policy in his/her own name:
• The business makes all the premium payments.
• The business reports the amount of the premiums as:
• Part of gross wages on Form W-2, in the case of a more-than-2% shareholder/employee of an S corporation.
• Guaranteed income in each partner's Schedule K-1, in the case of a partnership.
• Guaranteed income in each LLC member's Schedule K-1, in the case of an LLC.
• A multi-member LLC is treated as a partnership, which is the default tax treatment if no election was to treat the LLC as an S corp. or C corp.
• If an election was made to treat the LLC as an S corporation, then the members would be treated as employees of the business and the premiums would be reported in each member's W-2 as part of their gross wages.
Results of Scenario 2:
• In this scenario, the plan is established by the business even though the policy is not in the business's name.
• The premiums paid by the business may be deducted on Form 1040, line 29.
Scenario 3:
A more-than-2% shareholder/employee, partner, or member of a multi-member LLC obtains a policy in his/her name to cover himself his spouse and two children
• The shareholder/employee, partner, or LLC member pays all the premiums
• Proof of payment is provided to the business
• The business reimburses the 2% shareholder/employee, partner, or LLC member for the premiums paid.
• The business includes the amount of the premiums reimbursed to the 2% shareholder/employee in his/her W-2 gross wages.
• The business reports the amount of the premiums reimbursed to the partner or LLC member as guaranteed income on Schedule K-1
Results of Scenario 3:
• In this case, the health insurance plan is considered established by the business even though the plan is not in the business's name because the business reimbursed the premiums to the 2% shareholder/employee, partner, or LLC member,
• The 2% shareholder/employee, partner, and LLC member may deduct the premiums paid on Form 1040, line 29.
• The more-than-2% shareholder/employee, partner, and LLC member report the reimbursed premiums in their gross income on Form 1040 as explained in Scenario 1.
When a 2% S corporation Shareholder, Partner, or LLC Member May Not Claim the Deduction on Form 1040, Line 29:
Here's a situation where health insurance premiums may not be deducted directly on Form 1040, line 29:
• A more-than-2% shareholder/employee, partner, or member of a multi-member LLC pays the premiums for a health insurance policy.
• The business does not make any premium payments and does not reimburse the premium payments made by the 2% shareholder/employee, partner, or LLC member
In this case, the plan was not established by the business because the business did not pay any of the premiums nor did the business reimburse the premiums to the 2% shareholder/employee, partner, or LLC member..
The premiums may not be deducted on Form 1040, line 29. Instead, the deduction may only be claimed on Schedule A as an itemized deduction as a medical expense.
Starting in 2013, to get a tax benefit, total medical expenses must exceed either 10% of adjusted gross income (AGI) if the taxpayer is under 65 years old or 7 1/2% of AGI if the taxpayer is 65 or older.
Caution!
Do not include amounts for any month you were eligible to participate in an employer-sponsored health plan (Section 162(l)(2)(B)) or amounts paid from retirement plan distributions that were nontaxable because you were a retired public safety officer.
You cannot claim the health insurance premium deduction if you file Form 1040A or Form 1040EZ.
Earned Income From Trade or Business Limitation
The deduction for health insurance premiums is not allowed to the extent that the amount of the deduction exceeds the earned income derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.
Amended Returns
Taxpayers who did not claim the health insurance deduction on a prior year's return may file an amended return on Form 1040X. It must be filed timely (3 years from the due date of the original return, plus extensions, or 2 years from the date the tax was paid, whichever is later).
You need to write the following at the top of the amended return:
• Filed Pursuant to Notice 2008-1
Notice 2008-1 contains the rules (and examples) for deducting accident and health insurance premiums by a 2% shareholder/employee of an S corporation.
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