Health Insurance Deduction Question

ubspromo · #1 (**permalink**) 10-03-2007, 01:22 PM

I am the sole owner/employee of an S-Corp.
I have an "Individual" health insurance policy for myself.
How do I properly take the health insurance deduction and other medical
expenses??
I am confused because the IRS says the insurance plan must be
"established under the business." However, it is my understanding that
only a "Group" policy can be established under a business. If that is the case,
how do I deduct the cost for my "Individual" policy.
Please help!
Thank you.

TaxGuru · #2 (**permalink**) 10-18-2007, 10:52 PM

In many solely owned businesses, that is Schedule C filers, the individual may claim an above-the-line deduction deduction on his Individual Tax Form 1040 for the insurance premiums paid. In other words, this deduction is taken his personal tax return.

In contrast, if the business is operating as an S corporation, there is a slightly different tax consequence if the individual who is the sole shareholder and sole employee, purchases the health insurance in his or her own name.

The IRS specifically states that, "the health insurance premiums paid by the S corporation would be deductible by the S corporation as compensation to the 2% shareholder. The health insurance premiums paid by the S corporation for the 2% shareholder should be included in the 2% shareholder’s W-2".

Thus, it would appear that for the premium to be deductible, the IRS wants this amount to be reported as W-2 wages to the receipient shareholder.

ubspromo · #3 (**permalink**) 10-19-2007, 03:49 PM

If the premiums paid by the S-Corp are reported as W-2 wages to the shareholder, does this mean the S-Corp will be liable for payroll taxes on the amount reported.

TaxGuru · #4 (**permalink**) 10-23-2007, 04:42 PM

Yes! The answer is the S corporation will pay the employer's share of the Social Security and Medicare taxes, (limit is $97,500 for Social Security taxes in 2007).

The employee in this case you, the shareholder, will also be required to withhold Social Security taxes and Medicare Taxes equal to 7.65% of the Wages withheld upto the specified limit.

ubspromo · #5 (**permalink**) 10-25-2007, 11:55 AM

Please click the following link to the IRS Headliner Volume 41.
http://www.irs.gov/business/small/ar...107451,00.html
It appears that the IRS is stating that the premiums paid by the corporation are only subject to income tax withholding, not social security or medicare as you stated in you last reply. Have I misunderstood the IRS article?

TaxGuru · #6 (**permalink**) 11-19-2007, 11:40 PM

No, you are right! This is the exception to the rule, I really meant to specifically exclude S/E and Medicare taxes but the W-2 withholding would include the normal taxes of Federal and State taxes. So, in short, you read correctly!