Tax Facts

S Corporation Compensation and Healthcare Insurance Deductions

Health and accident insurance premiums that are paid for the greater than 2% shareholder-employees of S Corporations are deductible by the S Corp but they are also reportable as wages on the shareholder-employees' W-2s.  So, they are reported in Box 1 of the W-2 and are therefore subject to federal income tax withholding for the shareholder-employee.  However, they are not subject to the FICA taxes or FUTA tax and therefore should not be included in Boxes 3 and 5 of the shareholder-employee's W-2.

 There are some key issues that your tax advisor should be looking out for:

 1.  The shareholder-employee is eligible for an above-the-line deduction for those premiums, if the coverage is established by the S-Corporation (there are specific rules for meeting this requirement) and

 2.  If the shareholder-employee meets the other self-employed medical insurance deduction requirements, such as whether or not a shareholder's spouse is eligible for any subsidized health care plans.

Has your tax preparer asked you about your healthcare premiums lately?

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