If you are forming your new company, you are probably considering which business structure will provide the most appropriate legal and financial protections for you—LLC, S corporation, C corporation, or sole proprietorship.
Many entrepreneurs choose an S corp, which is a great option for small businesses because:
- They don’t have to pay corporate income tax.
- FICA (Social Security and Medicare) taxes are lower.
This is because the profits are distributed among shareholders, who must then report the income or loss on their individual income tax returns.
When it comes to S corp health insurance, things can get complicated:
- Non-owner S corp employees can claim employee health insurance as a tax-free benefit.
- Shareholders who own more than 2% of the company cannot.
With an adequate understanding of the rules and regulations, however, an S corporation can certainly be worth the tax advantages. Below, we’re taking a deeper look at how health insurance deductions work for this type of business.
S Corp Health Insurance Deductions: How Do They Work?
For Non-owner Employees
An S corp can offer group health insurance to employees and deduct the costs as a business expense. Neither you nor your employees will be taxed for it—it’s as simple as that!
For Shareholder Employees
While S corp owners are considered employees, they’re treated more like self-employed for insurance benefits. Stakeholders who own more than 2% of the company cannot receive tax-free accident or health insurance.
As an S corp owner, your insurance costs are:
- Included in your gross wages.
- Subject to federal and state income taxes.
- Appear on your Form W-2.
Compliance Heads-up: Your S corp ownership extends to your spouse and family members, meaning you cannot employ your non-owner spouse to get insurance for you and the rest of your family.
Offering Health Insurance Through an S Corporation
To maximize your tax deductions, offer your employees the same health plan as you offer yourself.
While businesses with fewer than 50 full-time or full-time equivalent (FTE) employees are not legally required to provide health insurance, this is how you avoid paying FICA and federal unemployment (FUTA) taxes on your personal health insurance benefits.
You can avoid FICA and FUTA payroll taxes when all or a class of employees (e.g., all full-time employees) can get health insurance coverage.
Your S corp might also qualify for a small business tax credit when you pay for at least half of your employees’ health insurance premiums.
Note: Some states don’t allow corporations with only one employee to buy health insurance policies. Not to worry, you can qualify for a self-employed health insurance tax deduction.
S Corp Owner Personal Tax Deduction
Fortunately, S corp shareholders can avoid paying Social Security and Medicare taxes on the business’s contribution and get a personal tax deduction on their health insurance premiums.
For S-corp owners to qualify for the deduction:
- The business must pay for the health insurance costs, not the individual shareholder.
- The S-corp owner and their spouse must not have been eligible for another subsidized health insurance plan, as the deduction only applies to owners who can’t get health insurance any other way.
The IRS confirms that the policy is established by the business by considering:
- Who pays the insurance premiums, and
- How the premiums are reported for income tax purposes by both the business and S-corp owner.
S Corp Health Insurance Frequently Asked Questions
Does the Affordable Care Act affect S corporation insurance?
Although the Affordable Care Act (ACA) doesn’t affect how shareholders deduct their S-corp-provided health insurance benefits, it does complicate things for non-owner employees.
The ACA requires that S corporations establish group health insurance plans, rather than reimbursing employees for their individual plan costs. Companies that violate ACA rules are hit with a daily $100 excise tax for every employee and violation.
S-corps with fewer than 50 full-time and FTE employees are the exception. As long as they follow the rules, small S-corps can reimburse their employees for medical costs up to a maximum amount. This is allowed under the Qualified Small Employer Health Reimbursement Arrangements (QSEHRA), which can be
What happens if my health premiums are higher than my S corporation income?
Your self-employed health insurance deduction can’t exceed your portion of S corp income.
Example:
- You own 25% of an S corp that earned $50,000 last year = $12,500 in income.
- You and your family’s medical health insurance premiums totaled $15,000 last year.
- Maximum self-employment health insurance deduction: $12,500
How do I include healthcare costs on my W-2?
While your payroll software automatically generates your W-2s at the beginning of each year, your need to add your healthcare costs into the record to adjust your gross wages. Your software probably has a feature that lets you enter your shareholder healthcare costs for tax reporting purposes.
Can I participate in a health reimbursement arrangement?
A health reimbursement arrangement (HRA) is an IRS-approved, employer-funded health benefit used to reimburse employees for out-of-pocket and health insurance premiums. As an S corp owner, you may be wondering how these insurance and tax rules affect your eligibility to participate in an HRA.
HRAs are only available to W-2 employees. S corp owners are taxed as shareholders representing the company’s profits, meaning they are not employees and therefore aren’t eligible for an HRA. The same goes for their families.
Additionally, when insurance premiums are reimbursed, the IRS does not consider them established by the business. So even if S corp owners and their families could participate in an HRA, they would lose their ability to deduct their premiums.
Considering offering an HRA to non-owner employees? You can, and it’s not a bad idea. With an HRA, your S corp has complete control over your health benefits budget while giving employees the freedom to choose how to spend their health care funds.
Set Up Your S Corp Health Insurance Correctly
Although S corp owners can’t receive health insurance as a tax-free fringe benefit like C corp owners, they can still enjoy tax-advantaged health insurance through the business.
If you need help setting up your new S corporation’s health insurance and filing your taxes properly, BlueLion can guide you through the process. Contact us today at 603-818-4131 or info@bluelionllc.com to speak to one of our HR experts today!
The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.
