I am finding contradictory information (shocking!) on treatment of health insurance premiums for a >2% shareholder in an S corporation. There appear to be 3 schools of thought (assumption in all cases that the health plan is properly set up in accordance with IRS requirements)
Sorry to be so long-winded! Thanks for helping to clarify.
(2) is correct. Premiums should be in box 1 W2 wages, but not boxes 3 and 5. Ideally they should also be shown in box 14. They can be taken as an adjustment povided the taxpayer qualifies.
answered 16 Jun '10, 11:58
Your option 2 is correct, for several reasons -
1 - it is reportable income and belongs on Form W-2. What I've read in the regs supports this, but don't ask for a cite right now as I don't have one handy. This has been the IRS's position for as long as I can remember;
2 - while picking it up as other income and then backing it off as an adjustment for self employed health insurance does get it taxed, it skews the AMT calculations since most software isn't sure how to handle it;
3 - putting it on the W-2 increases Earned Income which can impact the amount of any retirement plan contributions, since the calculation for this is always based on earned income. Picking it up as OTHER income doesn't make it EARNED income;
One of the reasons many of us use (or used to use) option 1 - picking it up as other income - is because we frequently don't even know about it until AFTER the W-2s have been filed. Many of my small business clients don't get their stuff to be before 01/31 (the due date for sending W-2s to employees) so I don't usually get to check the W-2s until much later.
Even when they aren't properly reported on the W-2s they should still be added to Line 7 as additional wages. There are several ways to accomplish this, which I won't go into here - too many variations on a theme. Just keep in mind that if your small business client wants to make a retirement plan contribution - IRA, Roth, SEP, Simple, 401K, whatever - he needs earned income and that means Line 7.
Once the health insurance is picked up as earned income, it can then be adjusted off as self employed health insurance. But there is NO double dipping as Susan K noted. The company gets the deduction AS COMPENSATION, the employee gets the income on their W-2 and then they get an adjustment for SE health insurance - again assuming they otherwise qualify and everything else is done correctly.
answered 16 Jun '10, 19:11