Understanding the S Corporation Health Insurance Deduction

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If you own an S corporation, you may wonder if you can deduct health insurance premiums you pay for any of your employees, but it’s not that simple.

There are rules you must follow to ensure you can deduct the health insurance as an expense on your business tax returns.

Here’s what you must know.

Understanding the Health Insurance Deduction for an S Corporation

To take the health insurance deduction you must own at least 2% of the S corp. You must record the health insurance cost on your books and make the premium payments for yourself and any dependents.

You make the payments to the insurance company yourself and supply the company with an expense report. This proves your payments. You then get reimbursed for the payments.

Once you pay the insurance, you include the amount paid on your W-2. It’s taxable income. But there’s a difference – you don’t pay payroll taxes on it like you would for self-employment income.

Deducting Insurance Premiums

To deduct the health insurance premiums, you take an above-the-line self-employed health insurance deduction.

To qualify, you must meet the following:

  • You cannot be eligible for any other group insurance, including insurance for your spouse’s employer
  • Your deduction must be less than you draw for a salary

There are exceptions to the rule too.

Any family members that also work for the company, even if they aren’t shareholders, can get the health insurance deduction too. The insurance payments must be reported on their W-2s for you to get the S corp deduction though.

This is the case whether you own 5% or 100% of the company and it applies to spouses, children, grandchildren, and parents.

Are you Doing it Wrong?

If you own an S corp and have been claiming or not claiming your health insurance the wrong way, you may think you’re out of luck.

Fortunately, you can fix it. If nothing else, you can start fresh, reporting the health insurance payments the right way so you can get the deduction for the 2022 tax year. Simply claiming the insurance on each employee’s W-2 is enough for you to get the deduction on your tax return.

If you’ve been missing your health insurance deduction for your S corporation, we’re here to help. Feel free to reach us at 714-383-2307.

 

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