Your Health Insurance for S-corp Options: A to Z
webmanager • May 17th, 2023
Choosing an S-corporation to form your business comes with a number of impressive tax advantages. You don’t pay corporate income tax, and your Social Security and Medicare tax bills are lower—instead, profits are allocated to shareholders and taxed at that level.
However, when it comes to deducting the cost of health insurance for you and your family through an S corporation, things can get tricky.
In today’s blog, we hope to give you a base level familiarity with the options of carrying health insurance through an S corp, and our recommendations for where to start.
Let’s jump in.
Most people assume all businesses can provide health insurance to their employees and owners on a tax-free basis. While this is true for C-corporations, it isn’t the case with an S-corporation.
When forming a regular “C” corporation, the corporation can provide you with health insurance as an employee fringe benefit and deduct the cost as a business expense.
This means that as the owner of the business, you won’t have to pay personal tax on your health insurance premiums because they qualify as a tax-free employee fringe benefit.
However, when running as an S corporation, unique tax rules come into play.
While S-corporation employees can claim employee health insurance as a tax-free benefit, shareholders who own more than 2 percent of the company stock cannot.
This means, as the owner of your S-corporation, the IRS will see the premiums you pay through your business as additional income to yourself, personally.
What does this mean? In short, you are going to be taxed on your health insurance premiums if running your business as an S-corporation.
Don’t worry, it’s not all bad news.
The good news is that you don’t have to pay medicare, social security tax, or unemployment tax on the money you pay for your health insurance.
You only have to pay federal and state taxes.
Additionally, if your health insurance policy is established by the business and not you as an owner, personally, you can deduct your premiums above the live on your Form 1040 which will lower your adjusted gross income.
To determine whether the policy is established by the business, the IRS considers:
In short, the business must ultimately pay the S-corp owner’s premium. The business must either pay for the premiums directly or by reimbursing the S-corp owner.
Note: If the S-corp owner pays the policy premiums on their own, without reimbursement by the business, this does not qualify the owner for a tax deduction.
If the S-corp owner does qualify, they can deduct their premiums on Form 1040.
S-corp owners can use this method to deduct premiums for accident, dental, and long-term care policies as well as for health insurance policies.
As an S-corp owner, you can’t receive health insurance as a tax-free benefit the same way C-corp owners can.
However, if your policy is established through the business, you can deduct any payments made toward the premiums on your Form 1040 when you file taxes.
Additionally, you don’t have to pay medicare, social security tax, or unemployment tax on the money you pay for your health insurance.
It’s not all bad news!
If you have questions about how to maximize your tax benefits as an S-corporation, you can schedule a call with us anytime.
We’re always happy to help.
Until next time!
Samy Basta brings you more than 20 years experience in tax, financial, and business consulting to his role as founder of Basta & Company. His focus is primarily strategic business planning, empowering clients to set priorities, focus energy and resources, and strengthen operations. In addition, Samy and his firm provide strategic counsel, and technical insight, on a wide range of needs, including tax saving strategies, tax return compliance, as well as choice of entity.
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