S Corporations Finally Get Medical Insurance Break!


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One of the biggest beefs I’ve had with S Corporations is the fact that they have kinda sucked as far as medical insurance premiums were concerned. The business can deduct the premium cost, but it gets passed along to all of the owner-shareholders holding 2% or more of the S Corp’s shares by way of a taxable benefit and isn’t fully deductible on your personal return. C Corps and sole proprietorship owners can fully deduct their healthcare costs – so why not S Corp owners? But S Corp owners can finally rejoice, as the rules have now changed!

As with most other things, there are some rules to follow to take this new deduction.

  1. Your S Corporation has to establish the plan.
  2. Your S Corporation can pay the premiums directly, or you can pay your own premium, but if you do, you’ve got to be reimbursed by your S Corporation and show proof of payment.
  3. All reimbursements must be paid in the current tax year.
  4. The S Corporation must report the premiums paid on your behalf (or reimbursed to you) on your W-2 as part of your gross wages.

Here are some examples:

  1. Your S Corporation establishes a health plan and pays the premiums. All premium amounts are reported on owners W-2 forms for the year along with their gross income, and all owners declare the amounts as gross income on their personal returns. In this case the S Corporation has properly established a plan, the owners have properly reported the premiums, and are entitled to deduct the full amounts on their personal returns.
  2. You establish a health plan in your own name, but your S Corporation makes all the premium payments and reports the premium payment amounts on your W-2, along with your other gross income. You report the income on your personal return. In this case, the S Corporation has properly established a plan, the owners have properly reported the premiums, and are entitled to deduct the full amounts on their personal returns.
  3. You establish a health plan in your own name, and make all the premium payments directly to the insurance company. You provide proof of payment to your S Corporation, which reimburses you for these amounts. Your S Corporation reports the premium payment amounts on your W-2, along with your other gross income. You report the income on your personal return. In this case, your and your S Corporation have met all the requirements and you can deduct the full amount of the healthcare premiums on your personal return.


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