How does the Section §106 or Self Employed Deduction

work for S Corp Owners?

Medical Insurance Premiums count as Wages

 

Health and accident insurance premiums paid on behalf of a greater than 2-percent S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee’s Form W-2, subject to income tax withholding.

However, these additional wages are not subject to Social Security, or Medicare (FICA), or Unemployment (FUTA) taxes if the payments of premiums are made to or on behalf of an employee under a plan or system that makes provision for all or a class of employees (or employees and their dependents). Therefore, the additional compensation is included in the shareholder-employee’s Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2.

A 2-percent shareholder-employee is eligible for an above-the-line deduction # 29 1040 in arriving at Adjusted Gross Income (AGI)

for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements.  If, however, the shareholder or the shareholder’s spouse was eligible to participate in any subsidized health care plan, then the shareholder is not entitled to the above-the-line deduction.  IRC § 162(l). Self Employed

If an S corporation pays accident and health insurance premiums for its more­ than­ 2% shareholder­ employ­ees, it generally can deduct them, but must also include them in the share­holder’s wages subject to federal in­come tax withholding.    Learn more in Publication 15­B.
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The insurance plan must be established, or considered to be established, under the  business.
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For more­ than­ 2% shareholders, a policy can be either in the name of the S corpora­tion or in the name of the shareholder.  You can either pay the premiums yourself or the S corporation can pay them and report the premium amounts on Form W­2 as wa­ges to be included in your gross income.  However, if the policy is in your name and you pay the premiums yourself, the S cor­poration must reimburse you and report the premium amounts on Form W­2 in box 1 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be estab­lished under your business  Learn More IRS Publication 535
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Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, Publication 15b
 
 
Email us, if you would like the relevant pages from  Tax Facts on Individuals & Small Biz.
 
Employees premium would still be deductible as a business expense under Section 106.
Tax Return for S Corp # 1120 S - Health Insurance Deduction
Tax Return for S Corp # 1120 S – Health Insurance Deduction

Tax Return – Line 29 – Health Insurance Tax Deduction

self.employed.deduction

Instructions 2018 Form 1040Schedule 1, Line 29  

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2 comments on “S Corp Owners?

  1. When a corporation pays long term care insurance premiums on behalf of a more than 2%
    shareholder of an S Corp, and includes that amount as Federal wages on the W-2 Form, should
    those premium amounts also be reported as State wages on the W-2 Form of an Illinois employee?

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