Health Insurance Business Tax Deduction
for employees, families and owners  under
IRC Section §106

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Partnerships

Self Employed &

S Corp

Schedule 1

 

Group Health Insurance under IRS Code Section §106 is  tax deduction for both employer and not income to the employee.  It’s  the biggest break there is in the Tax Code, even more so than Mortgage Interest.

Providing Health Insurance is a GREAT way for EmployER’s to attract and retain better, stable, dependable workers.  It’s also the law for large employers (over 50 lives) to meet the mandate and for the employees in CA to meet the individual mandate.

Internal Revenue Code Section §106

(a)General rule

Except as otherwise provided in this section, gross income of an employee does not include employer-provided coverage under an accident or health plan.

 

This allows Employers to deduct Group Health Insurance Premiums for their employees including the owners and officers, as long as it’s a qualifying Group Health Insurance plan as a business expense.

PLUS, Employees do not have to report employer paid premiums or the benefits in their gross income!

Scroll down or look to the right of your screen for more references to prove the deduction. Health Coverage Guide *

If your employees are contributing to the premiums, their portion can also be tax deductible by using a Section §125 POP (Premium Only Plan) or a cafeteria plan.

Employees whose employers do not currently provide Affordable Group Coverage, might qualify for Tax Credits Subsidies under Obamacare.

If the employees on their own want Medical Coverage – like going to Covered CA the premiums are not deductible unless they are more that 10 % of adjusted gross income.

Visit our webpage on writing off medical expenses. Line 40 Schedule A

 Partnerships 

You generally can deduct premiums you pay for the following kinds of insurance related to your trade or business.

  1. Insurance that covers fire, storm, theft, accident, or similar losses.
  2. Credit insurance that covers losses from business bad debts.
  3. Group hospitalization and medical insurance for employees, including long-term care insurance.
    1. If a partnership pays accident and health insurance premiums for its partners, it generally can deduct them as guaranteed payments to partners.  Publication 535  *  

     

The insurance plan must be established under your business.

For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.

For partners, a policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or the partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065)

 
as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business.

See self employed rules.  Ask us for a copy of Q & A # 8747 on Health Insurance for Partners & Sole Proprietors

 Section 106 for S Corp Owners?

 

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.
.
 
The insurance plan must be established, or considered to be established, under the  business.
.
 
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
.
 
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.
 

This includes the:

  1. the owner – taxpayer,
  2. the owner’s – taxpayer’s spouse,
  3. the owner’s – taxpayer’s dependents, and‘
  4. any child (152(f)(1)) of the taxpayer who as of the end of the taxable year has not attained age 27. (HR 4872 – Obama Care  §162(l)(1)§401(c)(1))

 

 
Employees premium would still be deductible as a business expense under Section 106.
 
Tax Return for S Corp # 1120 S – Health Insurance Deduction
 
 
 
Provided that:
 
You are not eligible to participate in any subsidized health plan maintained by any employer 26 USC 162 (I) (2) (b)  
The insurance plan must be established under your business per IRS  Publication 535 pdf page 18Take the deduction on line 29 of Form 1040.
For more clarification of what “under your business” means  – email us to discuss Tax Facts ONLINE – Subscription Question # 328
Obamacare Tax Subsidy?
If you receive Obamacare Tax Credits,
 

1040 Tax Return – Schedule 1 Line 29 – 16
Self Employed Health Insurance Tax Deduction

Schedule 1 additional income & adjustment

Self-employed health insurance deduction.

You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family.

How to figure the deduction.  Generally, you can use the worksheet in the Instructions for Forms 1040 and 1040-SR to figure your deduction. However, if  any of the following apply, you must use the worksheet in chapter 6 of Publication #535.

• You have more than one source of income subject to SE tax.
• You file Form 2555 (relating to foreign earned income).
• You are using amounts paid for qualified long-term care insurance to figure the deduction.

Use Publication #974 Premium Tax Credit instead of the worksheet in the Instructions for Forms 1040 and 1040-SR if the insurance plan established, or considered to be established, under your business was obtained through Covered CA - no extra charge to use an agent  and you are claiming the premium tax credit. Publication 334 *

 

Instructions  & Form 1040

Schedule 1, * Line 29 Instructions

United Health Care  -   Get a quote 

United Health Care - Get a Quote

References and Technical Links

IRS More Info on Health Care Arrangements to not have a group plan but pay for employee individual plans. IRS Notice 2013-54

IRS Publication — Business Expenses #535

Tax Guide to Fringe Benefits — Publication 15-B

 

Internal Revenue Code Title 26 USC

Cornell’s Site

GPO’s Site

Formilab’s Site

Rev. Rul. 82-196

Rev. Rul. 67-360

IRS Withholding Calculator

CA Franchise Tax Board

US Tax Court.gov Opinions Search

Tax Facts: Employer Deduction — Password-Protected Tax Facts on Insurance — Employee Benefits goes into very detailed explanations. It can be purchased for $99 or check their website for a trial subscription.

 IRS Publication 502(all Medical Expenses)  Insurance Premiums

irs.gov/1040
Paying into Social Security # 10022
IRS 8885 Health Coverage Tax Credit   A partner with net earnings from self-employment reported on line 15a of Schedule K–1 (Form 1065).
IRC Section 162 (l)
A shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W–2.
IRS Publication #535 Business Expenses
Schedule C Profit or Loss from Business 1040
Instructions Schedule C
 
Types of Business Organization

Learn more — No more salary discrimination §2716,

Email us for Tax Facts Self Employment Deduction Password Protected

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13 comments on “IRC §106 Health Insurance Deduction for Employers & Employees

  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?

    Reply

    We only practise in CA. Here’s where you should be able to find IL rules

    https://www2.illinois.gov/rev/Pages/default.aspx
    https://www2.illinois.gov/rev/research/publications/bulletins/Documents/1996/fy96-23.pdf

    See also our pages on Long Term Care benefits not being taxable as income

    Tax Qualified Long Term Care Policies

    Long Term Care for Employer Groups

    See also
    https://www.aaltci.org/long-term-care-insurance/learning-center/tax-for-business.php

    https://www.journalofaccountancy.com/issues/2005/mar/ltcinsuranceforownersandexecutives.html

    Our webpage on w 4 Withholding

    Every employer engaged in a trade or business who pays remuneration, including noncash payments of $600 or more for the year (all amounts if any income, social security, or Medicare tax was withheld) for services performed by an employee must file a Form W-2 for each employee (even if the employee is related to the employer) from whom:

    Income, social security, or Medicare tax was withheld.
    Income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate. https://www.irs.gov/forms-pubs/about-form-w-2

  2. If I take a client, prospect, my web designer or another member of my profession to pick their brain to lunch, how much is tax deductible?

    • INTERIM GUIDANCE FOR BUSINESS MEALS

      taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:

      1. The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
      2. The expense is not lavish or extravagant under the circumstances;
      3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
      4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
      5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages. https://www.irs.gov/irb/2018-42_IRB#NOT-2018-76

  3. Can a company offer HIGHLY compensated employees 70% paid health insurance and 50% Aflac insurance and then offer only $450 to the other employees and 0% towards Aflac? I always thought that you had to treat people the same regardless of what the person makes with the exception of Part Time employees. Please help me to clarify this.

    • Please use the menu above and review the pages on management carve outs, Section 2716 salary discrimination and if you are in CA the get a quote or send your census feature. If you still have questions – please post there.

  4. I elected to put $2400/yr into a dependent care FSA. At the end of June, I had a qualified life event (my husband got a new job and it paid much less than his old job) and my company’s HR dept allowed me to make changes to my benefit elections mid-year. With my husband’s income reduced, we would no longer be able to afford expensive daycare after school, but would need to move to a cheaper option (ASP program at the school instead of private day care), so I stopped contributions to the dependent care FSA. Unfortunately, I already signed the kids up for summer camps in April and May so there was no getting out of that expense. I had $1,200 in my dependent care FSA at the time of this change (1/2 the yr). When I submitted my claims for the summer day camps, they were denied because the camps didn’t take place until July/Aug and I no longer had dependent care FSA coverage. Since I contributed that money, and I’m still with my employer, don’t I have the whole year to use the funds I contributed at the beginning of the year before the qualified life change?

  5. I am employer that funds a HDHP and HSA’s for all employees.

    Have employee with an adult child who can no longer be considered a dependent. Adult child needs to open her own HSA but is still covered on HDHP for two more years.

    Can employer contribute to adult child’s HSA? If so, are there any tax advantages?
    Thank you.

  6. 1) I have an employee who has medical coverage through his wife’s employer and her coverage is a group plan not an individual plan.

    2) The employer requires her to pay for the premium difference between an individual policy and the couples plan they are on.

    3) When I hired him, he asked if I would cover / reimburse the premium amount that gets taken out of his wife’s paycheck.

    4) If I elect to pay / reimburse him the amount of premium her employer deducts, is that considered taxable income to him (my employee)?

    5) Should I add that amount to his salary through payroll or can I write him a separate non-taxable check directly out of my checking account?

    Note – numbering was done by the webmaster for more clarity when responding.

    • 1) That’s great as individual plans can’t be used under ObamaCare by Employer Group’s. See our FAQ page for more info.

      Since your employee is covered by a spousal group plan, that is a permitted waiver and won’t count as a negative in the minimum participation percentage required by your Insurance Company.

      2) So, you mean that he’s charging full price for dependents and by individual you mean the employee only rate.

      3) The wife might check into a Section 125 POP Premium Only Plan or Section 125 Cafeteria Plan (we will be updating that page), so that the portion she pays from her paycheck is tax deductible.

      4) Here’s a citation Private Letter Ruling 9406002 IRC Section 61 that clearly says you cannot do this, without it being taxable, unless you have a Section 125 Cafeteria plan.

      5) It would be taxable as salary, unless you have a Section 125 cafeteria plan.

      3,4 & 5) Does your firm have a group plan that he is eligible for? How many employees do you have? Are you willing to make this plan available to all employees who can be a dependent on a spousal plan or other MEC Minimum Essential Coverage plan, other than Individual Plans? That is, not discriminate because of salary Section 2716?

      We do not give tax or legal advise. Just use and interpret the citations on your own or check with competent professionals.

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