As the 2013 year-end closes in, it’s a good time to revisit the proper treatment of health insurance premiums and S corporation “2 percent shareholders.”
If you own more than 2 percent of the outstanding stock of an S corporation (or stock giving you more than 2 percent of the total voting power), a good chance may exist that your health insurance premiums are not being handled properly at the corporate level. As a result, you could be at risk from a personal tax standpoint.
Health insurance premiums paid by an S corporation on behalf of its 2 percent shareholders should be reported as wages on shareholder W-2 forms. Too often, these payments are not included in wages because the premiums are paid along with those for rank-and-file employees.
From the corporation’s perspective, premiums are different than payroll. Unfortunately, in the eyes of the IRS, they belong on the W-2.
Excluding these amounts from wages jeopardizes the 2 percent shareholders’ ability to deduct these premiums on their personal tax return as self-employed health insurance in arriving at adjusted gross income (AGI). Based on the cost of health insurance, the value of this tax deduction is not something to take lightly.
If there are family members employed by the corporation and covered under the health plan, premium payments made on their behalf may also be required to be included in their wages. Generally, this applies to a spouse, sons, daughters, parents and other direct relatives of 2 percent shareholders.
As wages, these amounts are subject to withholding. But what about Social Security and Medicare tax?
If the 2 percent shareholders are participating in a corporate plan established for the benefit of employees and their dependents, these amounts are not subject to Social Security and Medicare. But they are subject if there is no such plan for the employees.
As far as premium payments and the personal deduction for AGI, it’s important that the corporation make the premium payment or reimburse the 2 percent shareholder making the payment. The 2 percent shareholder cannot make the payment personally and claim the deduction unless the corporation provides reimbursement.
If you are an employee/2 percent shareholder in an S corporation, and you think your company-paid health insurance hasn’t been handled appropriately, you may want to make a correction for 2013 year-end payroll reporting and get on track for the future.
This article was originally posted on October 28, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at firstname.lastname@example.org.