Starting an S-corporation comes with some great tax perks, like avoiding corporate income taxes and lowering social security and Medicare taxes. However, figuring out health insurance for S-Corp owners can be a bit tricky. Here’s a simple guide to help you understand how to get company-sponsored health insurance, deduct those expenses from your taxes, and navigate the different medical benefits available.
Can My S-Corp Pay for My Health Insurance?
You might think all businesses can offer tax-free health insurance to both employees and owners, but that’s not the case for S-corporations.
For S-corps, you can provide tax-free health insurance to your non-owner employees and deduct these costs as a business expense. But for S-Corp owners who own more than 2% of the company’s stock, the health insurance costs paid by the company must be included as taxable income according to Internal Revenue Code Section 707(c)1.
The silver lining is that if the company pays these premiums under a plan that covers all employees or a specific group of employees, the amount isn’t subject to Medicare, unemployment, and social security taxes. Unlike LLC or partnership owners, S-corp owners can’t get around this rule by employing their spouse and getting coverage through them. For health insurance purposes, spouses and family members of an S-corp owner are treated as S-corp owners, even if they don’t own any stock.
How S-Corp Owners Can Deduct Health Insurance
While S-corp owners can’t get tax-free health insurance like their employees, they can still get some tax benefits by taking a personal income tax deduction for premiums paid by the company.
To qualify for this deduction:
- The health insurance policy must be established by the business.
- The company must pay the owner’s insurance premiums and report these payments as gross wages on the owner’s Form W-2.
- The company can either pay the insurance provider directly or reimburse the owner.
If the owner pays the premiums without reimbursement from the business, they won’t qualify for the tax deduction. Qualified owners can deduct premiums for health, dental, accident, and long-term care insurance on their Form 1040.
What About HRAs for S-Corp Owners?
Health Reimbursement Arrangements (HRAs) are great for employees because they offer tax-free reimbursements for medical expenses. However, S-Corp owners and their families are considered shareholders rather than employees, so they can’t participate in HRAs.
Even for tracking expenses, S-corp owners can’t use HRAs because reimbursed premiums aren’t considered “established by the business,” making these expenses non-deductible. Still, S-corps can offer HRAs to their non-owner employees, allowing owners to manage the budget while giving employees flexibility in their healthcare spending.
Taxable Fringe Benefits for S-Corp Owners
S-corps can provide taxable fringe benefits, like stipends for medical expenses, to employees. S-Corp owners can also receive these benefits as long as they report them as additional income. These stipends are subject to FICA, FUTA, FITW, and SITW. While these benefits can be deducted as wages on Form 1120S, they must be included as taxable income. Given the complexities of managing income tax returns and benefits, it’s a good idea to consult a tax advisor or accountant for personalized advice on deductions, benefit costs, or tax liabilities.
Wrapping Up
Health insurance for S-corp owners doesn’t offer the same tax-free benefits as it does for C-corp owners, but there are still tax advantages to be had. If the business establishes the health insurance policy, owners can deduct premiums on their Form 1040. Meanwhile, S-Corp owners can offer employees quality health benefits through traditional policies, stipends, or HRAs. For help with these benefits, reach out to ABT Financial Consultants and schedule a consultation with Chad Folse.