If your S corporation pays for your health insurance premiums or you pay them personally, this tax alert contains important information for you.
The IRS has outlined procedures that must be followed to permit S corporation shareholders to deduct health insurance premiums. This applies to any shareholder that owns 2% or more of the company. Health insurance premiums include long-term care insurance.
In order to deduct the premiums on the shareholder’s personal tax return:
- The corporation must properly report the payment of these premiums as income to the shareholder and include the income in the shareholder’s W-2 and on certain payroll tax reporting forms.
- The corporation must have paid for the premiums or, if you have paid the premiums personally, the corporation must reimburse you for them. Without such reimbursement, the premiums are deducted as an itemized deduction, which is far less advantageous to you and may result in your not getting any tax benefit at all.
The health insurance premiums are not subject to Social Security and Medicare taxes or federal and state unemployment taxes. The premiums should be added to these forms as follows:
- Form W-2 – boxes 1 and 16, and also box 18 if you are otherwise reporting local wages
- Form 941 – line 2 (wages, tips, and other compensation)
- Form 940 – line 3 (total payments to all employees) and line 4 (payments exempt from FUTA). Also check box 4a.
If you are using an outside payroll preparation company you should contact them before the end of the year with the amount of the health insurance premiums to be included on the shareholder’s W-2. The payroll company will know the proper reporting requirements.
If you made the premium payments personally, the corporation should write you a check to reimburse you for the premiums you paid. This should be done before year-end.
Please feel free to call the Aronson & Company Tax Services Group at 301.231.6200 if you have any questions or need assistance with this compliance matter.