The Critical S Corporation Health Insurance Deduction Mistake You Must Avoid

Hey S Corp owners, here's something you might not know about providing health insurance for your family members working in the business. It's a bit of a tax trap that could cost you if you're not careful. Let's dive into what you need to watch out for and how to make sure you're getting all the tax deductions you're entitled to.

The Mistake That Could Cost You

Imagine you run an S Corporation and your daughter, who doesn't own any stock, works for you. You've got her covered under the company's health insurance plan. Sounds good, right? But here's where things get tricky: if your S Corp tried to deduct those insurance premiums as a regular business expense, you've made a mistake. The IRS says those premiums should be treated as W-2 wages to your daughter. Ouch.

Why This Matters

Getting this wrong means you lose out on a tax deduction for the S Corporation and your daughter misses out on a potential deduction on her personal taxes. It's a lose-lose situation where the only winner is the tax man.

How to Get It Right: S Corporation Owner Insurance 101

If you own more than 2% of your S Corp, there's a specific way to handle your health insurance premiums to ensure you can deduct them:

1. Get the insurance costs on the books. This can be through the S Corp paying the premiums directly or reimbursing you for them.

2. Include the premiums on your W-2. This amount goes in box 1 for taxable income but isn't hit with payroll taxes.

3. Deduct it on your Form 1040. If you're eligible, you can take this as a self-employed health insurance deduction.

The Family Member Surprise

Here's a twist: tax laws consider your family members (like your daughter in our example) to own the same percentage of the S Corp as you, thanks to something called attribution rules. This means the health insurance deduction rules apply to them too.

The Right Way to Deduct Health Insurance for Family Members

If your S Corp provides health insurance to your working family members, you must include the value of this insurance in their W-2 income. This allows the S Corp to deduct the insurance cost as a wage expense, and your family member might also get a tax deduction on their personal return.

Fixing Past Mistakes

Realized you've been doing it wrong? Don't worry, there's a way to fix it:

- Amend the S Corp and personal tax returns to reflect the insurance as wages.

- Claim the self-employed health insurance deduction on the amended personal return if eligible.

Key Takeaways

- For S Corp owners and their employed family members, health insurance premiums must be treated as W-2 wages, not a direct business expense.

- This process ensures both the S Corp and the individual can potentially benefit from tax deductions.

- If you've made a mistake in the past, amending your returns can correct it.

Final Thoughts

Navigating S Corp health insurance deductions can be tricky, but getting it right means maximizing your tax benefits. Always keep the IRS rules in mind and consult with a tax professional to ensure you're on the right track. This way, you and your family can enjoy the full benefits of your hard work without leaving money on the table.