Let's say your 30 year old child works for your S-Corporation. They own no stock, but the S-Corporation covers their health insurance with a group health policy.
Did your S-Corporation claim an insurance deduction for the cost of the premiums attributable to your child? 

Deducting the premiums as an insurance expense would be a mistake. Let's discuss why that is the case and how you can fix it.

The Mistake

The child's health insurance is not deductible by your S-Corporation as health insurance. The S-Corporation must treat the cost of your child's health insurance as W-2 wages.

The Details

According to tax code Section 318, family members that work for your S-Corporation are deemed to own the same percentage of stock as you own.

This means that the rules you face to deduct your health insurance also apply to certain family members. The following family members own the stock you own, and you also own the stock they own:

How To Fix It

If you own more than 2 percent of an S corporation, you have to do three things to claim a deduction for your health insurance:

1. You must record the cost of the insurance in the S-Corporation's books.

2. Your S-Corporation must include the health insurance premiums on the employee's W-2 form.

3. You must (if eligible) claim the health insurance deduction as an above-the-line deduction on Form 1040. 

The three-step procedure also applies to your spouse, children, grandchildren, parents, and grandparents if they work for your S-Corporation and get health insurance coverage, even if they don't directly own a single share of stock. 

Note that your spouse and your child under age 27 could be included in a family plan, and thus the premium cost for them would be added to your W-2.
You need to get this right. Without the W-2 treatment, the S-Corporation does not get a tax deduction.

With the correct W-2 treatment, your family member from the list above who finds the health insurance premiums on his or her W-2 can claim the self-employed health insurance deduction on Schedule 1 of Form 1040. Note that the self-employed health insurance deduction is only allowed if they are not eligible for employer-subsidized health insurance through another job or a spouse's job.

If you don't want to miss out on this, and other deductions, click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.

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