If you operate your business as an S corporation, you continue to enjoy good news in 2023 when it comes to your health insurance.
Today, we're giving you the ins and outs of how to ensure your health insurance deductions and also avoid the $100-a-day penalties for violating the rules of the Affordable Care Act. Did we get your attention with that one? I thought so.
Get the cost of health insurance on the S corporation’s books. You can do this in one of two ways:
The S corporation can make the premium payments directly to the insurance company for the accident and health insurance policy that covers the owner-employee who has more than 2 percent ownership (and his or her spouse and dependents, if applicable).
The owner-employee who has more than 2 percent ownership can make the premium payments to the insurance company and furnish proof of the premium payments to the S corporation, which in turn reimburses the owner-employee for the premium payments.
The S corporation includes the health insurance premiums on the owner-employee’s W-2 form. The income is not subject to payroll taxes (Social Security and Medicare). In other words, the S corporation includes the additional compensation in box 1 of the W-2 but not in boxes 3 or 5.2
You (the owner-employee with ownership of more than 2 percent of your S corporation) claim the health insurance deduction as “self-employed health insurance” on line 17 of schedule 1 of your Form 1040, providing you qualify as we explain below.
Two Hurdles to the 1040 Deduction
To claim the self-employed health insurance deduction on line 17 of your Form 1040, Schedule 1, you need to meet the following two rules:
1. You and your spouse must not have access to employer-subsidized health insurance
You cannot take the self-employed insurance deduction if you or your spouse is eligible for employer-subsidized health insurance. Thus, if your spouse can get family health insurance as a taxadvantaged fringe benefit through his or her employer, you lose your eligibility for this deduction— even if your spouse does not actually accept the employer-sponsored insurance.
2. You must have adequate salary
Your deduction for the insurance premiums cannot exceed the amount of your salary from the S corporation. The good news is that you cannot have this problem if the S
corporation puts the health insurance on your W-2 as it is supposed to do.
The $100-A-Day Penalty
As a small employer, your S corporation does not have to provide any health insurance benefits to its employees. “Small employer” for this purpose means a business with fewer than 50 full-time employees or full-time equivalents.
But when you do offer medical benefits to employees who are not S corporation owners, you face the $100-a-day penalty for doing things wrong.
The big no-no is reimbursing employees for individually purchased health
insurance. But you can reimburse your employees for at least some of their individually purchased health insurance when you use either the qualified small employer health reimbursement arrangement (QSEHRA) or the individual coverage
Should the S corporation reimburse rank-and-file employees for individually purchased insurance without use of the QSEHRA or ICHRA, it faces the $100-a-day penalty for each employee ($36,500 a year per employee).
If you want to provide health benefits to employees through the S corporation, there are many tax-advantaged ways to do so. Your S corporation treats the benefits to non-owner employees just as any other business would.
Suppose your S corporation provides group health insurance to all employees, including you, a more-than-2-percent shareholder-employee. The S corporation must treat you differently from the way it treats non-owner employees. Here’s how this works:
- Non owner employees
The S corporation deducts its contributions to the insurance plan, and non-owner employees receive the health benefits tax-free.
- More than 2 percent owner-employees
You and the S corporation follow the three-step deduction process described above. The S corporation completes Step 1 when it purchases the group insurance. The S corporation treats your group insurance benefit as W-2 compensation to you (Step 2), which you then deduct on your personal tax return using the self-employed health insurance deduction (Step 3).
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