There are two important issues related to health insurance deductions for S corporations.
First, if you own more than 2 percent of an S corporation, there are three steps you need to follow to claim a deduction for health insurance:
• Step 1. The cost of the insurance must be on the S corporation’s books.
• Step 2. The corporation must include the cost of the health insurance premiums on your W-2 form as taxable income (but not subject to payroll taxes).
• Step 3. If eligible, you must claim the health insurance deduction as an above-the-line deduction on Schedule 1 of Form 1040.
Second, this three-step procedure applies to your spouse, children, grandchildren, great-grandchildren, parents, grandparents, and great-grandparents if they work for your S corporation and the corporation covers them with health insurance.
The three rules apply to the relatives listed above who work in the S corporation, even if they don’t own any stock directly. For health insurance purposes, the tax code attributes your stock ownership to them and deems that they own what you own.
It’s crucial to get this right, as failing to do so could result in a lost health insurance deduction for your family members and zero deductions to the S corporation.
If you or your S corporation did not handle this correctly in the past, you need to amend the returns to ensure that you create and protect the proper tax deductions.
2023 Health Insurance for S Corporation Owners: An Update
Here’s an update on the latest developments in 2023 health insurance for S corporation owners. As a more-than-2-percent S corporation owner, you are entitled to some good news when it comes to your health insurance.
To ensure that your health insurance deductions are in order, and to avoid the $100-a-day penalties for violating the rules of the Affordable Care Act (ACA), you should take the following steps:
1. Get the cost of the health insurance on the S corporation’s books, either by making the premium payments directly or through reimbursement.
2. Ensure that the S corporation includes the health insurance premiums on the owner-employee’s W-2 form, including the additional compensation in box 1 but not in boxes 3 or 5.
3. If you are an owner-employee with more than 2 percent ownership, claim the health insurance deduction as “self-employed health insurance” on line 17 of Schedule 1 of Form 1040. You must meet the two rules of not having access to employer-subsidized health insurance and having adequate salary.
For rank-and-file employees, the S corporation does not have to provide health insurance benefits, but if it does, it must use an acceptable ACA plan, such as (among others) the qualified small employer health reimbursement arrangement (QSEHRA) or the individual coverage HRA (ICHRA).
The S corporation can reimburse more-than-2-percent owners for individually purchased insurance without any penalties, but if it reimburses rank-and-file employees without using the QSEHRA or ICHRA, it faces the $100-a-day penalty per employee.
If you are looking to provide health benefits to employees through the S corporation, there are many tax-advantaged options available. If the S corporation provides group health insurance to all employees, including the shareholder-employee, the same rules apply.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.