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S corporation health insurance and relatives

November 25, 2008

We recently discussed the treatment of company health insurance for S corporation owners, which has prompted some reader questions:

If a sub-s corp. has a health ins. plan for all employees which the owner is a part of, do you still have to include the owners share of ins. premiums on a w-2?

Yes. The special S corporation shareholder rules apply to add the premiums to shareholder W-2 income even if all employees are covered by the plan.

The S-corp pays health insurance premiums for all employees. Now, if the wife is an employee of the >2% shareholder, and the policy is in her name, and the >2% shareholder is on her policy, does her premium need to go on her W2 as wages? Or,can her premiums be deducted on the S-corp as an employee fringe benefit the same way the other employees are?

The rules on health insurance for fringe benefits for 2% S corporation shareholders also apply to "relatives" of shareholders, as defined by Sec. 318. This includes spouse, parents and children, for example, but not siblings. So you can't avoid the rules by running the health insurance through a spouse. In this case, the premiums would go on her W-2.

Keep the cards and letters coming!

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Comments

Hi Joe,
What's nice about your blog is that other "serious" professionals also read your blog and, therefore, if we do something stupid we at least get different views.

Here's my question/comment about S corp shareholder's health insurance. Some of my clients do not want the payroll program to take withholding on the additional compensation (remember it's in Box 1) even though I tell them it's neutral on their tax return because the additional FIT/SIT taken out will be used to either satisfy their overall tax liability or they'll get a refund. Anyway, to keep them happy, I propose to override the payroll by adding the health insurance to the w-2 without withholding FIT. What do you folks think about that?

Robert, I believe technically you are supposed to withhold on the health insurance, and if asked I would advise clients either to withhold on the additional "income" or amend the W-4 to get the withholding where they want it to be.

I would also ask the client if they really want to spend time and money to screw around with the timing of a payment that won't be more than a few thousand dollars - one that they likely can just subtract from their fourth quarter estimate, or at worst get back next April.

Still, it's a no-harm no-foul kind of issue. As long as the taxpayer is protected from estimated tax penalties, it's hard to see why the IRS would care.

Question on the children of owner and health insurance. If the child is not a dependent, are they still treated as an owner? (They have to pay income tax & FICA on health insurance?)

Jim, employee-children of 2% S corporation owners are treated the same as the owners. There is no FICA on the health insurance; it should be included as income and deducted as SEHI on page 1 of the 1040.

I have an s corporation for which I am a shareholder. My wife is an employee .

The company pays for medical insurance for both my wife and me.

She has an individual plan because I am on medicare. Question 1 : In this case where would I add the health benefits to my W2 or hers.

Question 2. Does she need to be on salary? Can I pick up what the company pays for her INDIVIDUAL health benefits because according to 2001-8 " If the S corporation makes the premium payments for accident and health care covering the 2 % shareholder employee, and HIS SPOUSE,OR DEPENDANTS" Thank-you.

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