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ANOTHER QUESTION ON S CORPORATION HEALTH INSURANCE

January 08, 2008

A reader comments on our recent discussion of Notice 2008-1 on S corporation owner-employee health insurance:

My concern is with the definition of earned income for this purpose. All the examples in Notice 2008-1 assume the S corp shareholder has earned income from the S corp, which is defined in section 401(c)(2) as self-employment income. But S corps don't generate self employment income. Do the wages count as earned income for this purpose? (So as long as the wages exceed the premiums the shareholder can get the line 29 deduction?) The Notice doesn't say so.

What if the S corp has a loss? if the wages exceed the premiums and both the wages and the premiums create a loss, does the shareholder still get the line 29 deduction?

Fortunately, the tax law gets us around the problem that the reader raises. Sec. 162(l)(5) says that you substitute "wages" for "earned income" for purposes of the health insurance deduction:

5) Treatment of certain S corporation shareholders

This subsection shall apply in the case of any individual treated as a partner under section 1372
(a), except that—

(A) for purposes of this subsection, such individual’s wages (as defined in section 3121) from the S corporation shall be treated as such individual’s earned income (within the meaning of section 401(c)(1)).

That means that an S corporation loss doesn't reduce "earned income" for purposes of computing the shareholder's deduction for health insurance included on his W-2, because S corporation K-1 losses aren't part of W-2 wages.

Related:

MORE ON S CORPORATION HEALTH INSURANCE

IF IT'S NOT ON THE W-2, S CORP SHAREHOLDERS CAN'T DEDUCT HEALTH INSURANCE

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Comments

The instructions for the Worksheet for Line 29 says that for 2% S Corp employees, "earned income" is Medicare Wages (Box 5).

Now if I got $2400 as wages and $5000 as Health insurance then box 1 on my W2 would be $7400 and box 5 would be $2400. In this case would my deduction be limited to $2400?

If the corporation paid the premiums for the shareholders and included the premium amount on the W2s, does the corporation get to deduct the premium amount as expense? I think in the past this has been not deducted by the corporation and then deducted by the shareholder as insurance, but it seems like nobody is getting a deduction if it is included in income and then deducted as insurance on the 1040 - that has a net zero effect. So, does the corporation get the deduction for the insurance?

Michele, I address the question in a 1/6/2010 post.

With an Scorp, what all taxes do you need to pay? To whom and how often?

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