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)

  1. Health insurance payments pass through the S corp and are reported on Line 10 of Schedule K/K1 as other income. The s/h takes a deduction for 100% of the health insurance premium (assuming sufficient earned income). This is the way I was taught, and some sources say this is an option.

  2. Health insurance payments are included as W2 wages, but not subject to FICA. As wages, they are deductible by the corporation. The s/h can also deduct the premiums on the front of the 1040. See IRS 2008-1. It seems clear in 2008-1 that the premiums should be included as wages, but there is no mention of FICA or deducting the premium on the 1040. According to Announcement 92-16, they are not subject to FICA. I believe this is correct.

  3. Health insurance payments are included as W2 wages, subject to FICA and deductible on the 1040. Based on everything I can find, this is not correct.

Sorry to be so long-winded! Thanks for helping to clarify.

asked 15 Jun '10, 22:30

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Susan K
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edited 16 Jun '10, 18:41

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TaxQueries ♦♦
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(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.

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answered 16 Jun '10, 11:58

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Tom
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Thanks Tom. This seems like IRS sanctioned double dipping - the S corp gets to deduct the payments as wages, the s/h again deducts payments as self employed health insurance. Not bad!

(16 Jun '10, 16:59) Susan K

Or am I misunderstanding? Is the cost of health insurance added to wages on the W-2, but not deducted as wages by the corporation? Seems strange if the W-2/941 and wages deducted on the 1120S don't tie.

(16 Jun '10, 17:54) Susan K

You're not misunderstanding - and it's not double-dipping. The S Corp's deduction for wages just moves more of the income to the taxpayer's return as wages. If the S Corp was not paying the insurance, their would be correspondingly more business profit to flow to the taxpayer on the K-1.

(17 Jun '10, 15:09) Tom

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.

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answered 16 Jun '10, 19:11

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EAgent
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Asked: 15 Jun '10, 22:30

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Last updated: 16 Jun '10, 19:11