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Year-end planning: S corporation health insurance

December 29, 2009

S corporation health insurance is one of the most popular items on the internet, if the searches that get people to the Tax Update are a fair measure.* It seems folks are looking for guidance on how to report S corporation fringe benefits on year-end paychecks and W-2s, so let's do a quick review of how shareholders of 2% or more of an S corporation should report their health insurance and other fringes. All references to "S corporation shareholders" are to those shareholders who own 2% or more of the company's stock.

Health Insurance for S corporation shareholders is supposed to be on the shareholders' W-2. It should be subject to federal withholding, but it should not be subject to FICA or Medicare tax. It is also subject to state tax and withholding in most states (including Iowa), but not all of them (for example, Pennsylvania).

If the health insurance is properly reported on the shareholder's W-2, it should be deducted in full "above the line" on Line 29, page 1, form 1040.

The IRS takes the position that W-2 reporting is the only way to report S corporation shareholder health insurance. They say that it is improper to add it back on the shareholder K-1, and that the shareholder deduction is available only if it is reported on the W-2.

If an S corporation shareholder pays for his own health insurance, he should submit it to his company for reimbursement before year end. The reimbursement should then be included on the shareholder W-2. The IRS says this is the only way for an S corporation shareholder to deduct personally-paid health insurance expense -- again on Form 1040, line 29.

If the child, grandchild, parent, or spouse of an S corporation shareholder works for the S corporation and is covered by the corporation's insurance plan, she is considered an S corporation shareholder and is subject to the same rules as a direct stockholder.

What about Medicare premiums? Voluntary medicare premiums reimbursed or paid by the S corporation and included in the shareholder's W-2 qualify as health insurance.

If the S corporation contributes to a shareholder's health savings account, it is included on the shareholder's W-2 (but not for FICA or Medicare) and is deducted on Line 25 of Form 1040, assuming the shareholder otherwise qualifies for an HSA.

The IRS position on S corporation shareholder health insurance is spelled out in Notice 2008-1.

Link: Tax Update coverage of S corproation health insurance issues.

*I know, they aren't.

This is another installment in the Tax Update's 2009 year-end tax tips series. Collect them all!

Tags: Health savings account.Notice 2008-1.S corporations.year-end tax planning.