Business owners must meet certain stipulations to form an S-corporation. Once they complete these stipulations, there are many advantages of forming an S-corporation. One of the most popular benefits is that an owner doesn’t have to pay corporate income tax and will only need to declare their share of profits as a personal return on investments.
At first glance, S-corporation health insurance may seem like the perfect solution for business owners. However, there are a few caveats that most people don’t know about until they hit their tax return. Upon filing their income tax returns, they find out it doesn’t work as they thought.
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Claiming employee benefits is impossible for those who own more than 2% of stocks in an S-corporation (i.e., shareholders). The reason for this is that S-corp owners must unreimburse such benefits from the prior year’s income. Alternatively, from other sources to qualify for exclusion from gross income on Form W4P under Code section 106(a).
In this post, we’ll cover all the ways through which S-corp owners can avail of company-provided health care benefits. In addition, how S-corp owners can properly file their tax returns.
S-corp owners can deduct from health insurance premiums.
Most people assume all businesses provide health insurance to their employees and owners on a tax-free basis. For an S-corporation, though, this is not always the case.
S-corporations can provide their non-owner employees with group health insurance as a fringe benefit, exempt from federal income tax.
Independent contractors using an S-corporation to pay for their health insurance would require to treat that reimbursement as income according to Section 707(c) of the Internal Revenue Code. This requirement means greater than 2 percent shareholders will have an additional tax burden. Still, there is one silver lining: employees covered under the plan who are not owners won’t see this attributed to them. Moreover, they’ll enjoy benefits such as Social Security, Medicare, and unemployment taxes not being assessed on these costs.
S-corp owners are not exempt from getting health insurance coverage through their employer. They must either enroll in the plan themselves or employ a family member to place them on the plan. This is true even if they don’t have any stock issued in their name.
S Corporation Compensation and Medical Insurance Issues
U.S. Income Tax Return for an S-Corporation Owners
Self-employed individuals can deduct health insurance premiums on their personal income tax returns
This can be advantageous for S-corporation owners because, unlike employees of an S-corp, they may not have access to tax-free health insurance.
Two factors that IRS considers helps to identify if an employee can avail of health insurance benefits:
- Who pays the premiums for the policy?
- How S-corp owner and business reports premiums for income tax purposes
The S-corporation business must ultimately pay the S-corporate owner’s health insurance premium. The S-corp owner should include premium as gross wage in W2 Form.
If the owner pays for their own health insurance premiums without reimbursement, they cannot use that expense to claim a tax deduction.
Employees whose company is an S-corp can deduct their health insurance expenses from their income on Form 1040.
What does this mean for S-corp owners and HRAs?
Owners of S-corp are seeking more information on how the new tax rules will affect eligibility to participate in an HRA.
S-corp owners and their families are ineligible for health assistance programs, unlike the W-2 employees.
S-corp owners who want to participate in a health reimbursement account solely for tracking expense purposes will be very disappointed to hear that their premiums are not reimbursed on the basis of an established business. This will result in S-corp owners and their families not being able to deduct these expenses even if they could participate in the HRA.
S-corps can still offer HRAs to non-owners, providing a similar plan for employees with the same benefits as an HRA but with more self-determination.
S-Corporation owners can’t get health insurance benefits like C-Corporation owners i-e Tax-Free. However, they can have other tax advantages because of owning an S-Corporation.
When S-Corporation owners make sure that their policies are made through their business, they can deduct any payments which have been made in the form of premiums through Form 1041 during the time of filing their taxes.