Calling all S Corp Solo-Entrepreneurs! Have you deducted your Company-Paid Health Insurance Premiums correctly?
Did you recently transition from Sole Proprietor to S Corporation?
Were you explained the importance of proper documentation of your health insurance premiums if YOUR company (now a completely separate entity from yourself) pays for your premiums?
If your answer to both these questions is YES, then you are SAFE! If you are not aware of how to deduct your S Corporation health insurance premiums correctly but you definitely want to take advantage of the IRS’s Health Insurance Tax Break for the Self-Employed, then keep reading. I got you covered in this blog article on Recording S-Corp Shareholder Health Insurance premiums Not Subject to FICA Taxes.
Step 1: Familiarize yourself with IRS Notice 2008-1: Special Rules for Health Insurance Costs of 2-Percent Shareholder-Employees
In plain English, IRS Notice 2008-1 states that an S corporation is entitled to deduct the cost of employee fringe benefits of a 2% Shareholder-employee and the premium payments are included in wages for income tax withholding purposes on the shareholder-employee’s Form W-2, Wage and Tax Statement, but are not wages subject to Social Security and Medicare taxes. In addition, the 2% shareholder-employee can take an above-the-line deduction on his personal federal tax return Form 1040 Line 29 (refer to the link above for complete reference).
Step 2: Read the Examples in IRS Notice 2008-1 to understand who qualifies for this tax break
In plain English, you must fall under one of the following situations to qualify:
Be one of the following individuals:
A self-employed individual with a net profit reported on Schedule C
A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065)
A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.
The insurance plan must be established under your business and either premiums paid directly from the company and/or the company must reimburse you for the premiums and report the premium amounts on Form W-2 as wages to be included in your gross income.
Step 3: Adjust for the Company-Paid Health Insurance premiums correctly in your payroll solution
With all the great competition in the payroll provider arena, several of these companies provide awesome resources to make sure you are setting up this tax benefit correctly in your payroll service. Below are a few articles and videos I have found that assist on the proper payroll setup:
Gusto’s videos & articles:
Intuit’s videos & related articles:
A CPAs detailed article on how to setup and process this payroll adjustment in QuickBooks (do your homework because a few of these steps may be outdated)
Doug Sleeter’s article on How to Adjust W-2s to Report S/H Health Insurance in QuickBooks (do your homework because a few of these steps may be outdated)