As a tax professional and someone that represents clients before the IRS, I have noticed that single shareholders who set themselves up as S corporations wind up in the most trouble with the IRS. From my experience, the reason this is true is people elect to be taxed as an S corporation through the IRS or set their businesses up as an S corporation through the secretary of state without understanding the compliance requirements or the general tax consequences of owning an S Corp.
S Corporation Blog Series
For the next few weeks, I will be writing a series of posts that focus on S Corporations and the tax treatment or the compliance requirement for a particular transaction. Feel free to comment in the box below if there is a specific transaction or S Corporation topic you have a question about.
This week’s topic focuses on the deduction of healthcare costs.
The New Mandatory Healthcare Law
Because of the Affordable Care Act, individuals and businesses are required to provide health insurance for themselves and/or their employees. As a result, some single employee-shareholders or small S Corporations with a few employee-shareholders purchase insurance for themselves through the business or individually without an understanding of how to correctly deduct the expense on their businesses tax return or their own personal tax return.
Health Insurance – Tax-Free Fringe Benefit For Corporations
If you form a Corporation to operate your business, you are required to set yourself up as an employee even if you are the only worker. If your business is set up as a C corporation, the corporation can provide you with health care and deduct the premium costs on its corporate tax return. The employee does not have to pay tax on the insurance premiums paid on their behalf by the corporation. Health care premiums paid for employees by their employer is a tax-free fringe benefit to the employee.
Two Percent Or More S Corporation owner
If you elect to be taxed as an S corporation rather than a C corporation, special tax rules apply. Under these rules, all health insurance paid by an S corporation for an employee-shareholder who owns 2% or more of the business must be included in the employee-shareholders taxable wages. This means income tax must be paid on the amount of the premium paid by the S Corporation.
How To Get A Tax Deduction For Health Care Premiums On Your Personal Return If You Own 2% Or More Of The S Corporation
Self-employed individuals can take a tax deduction for health premiums paid on behalf of themselves, their spouse, and their dependents. S corporation owners who own more than 2% of the company’s stock are treated the same as self-employed individuals when it comes to deducting health insurance premiums. The S corporation deducts the cost as part of employee compensation on its business return.
The deduction taken by the employee-shareholder on his or her personal return is not considered a business deduction. Instead, it is taken on the first page of the 1040 as self-employed health insurance. This deduction is available whether you purchase your policy as an individual or whether the S corporation purchases it for you. The only catch is no matter who purchases the insurance; it MUST be paid for by the corporation in order for you to deduct it on your personal return.
Have a great week!!!
Desarie Anderson, CPA, EA
Anderson Accounting, LLC