Running an S Corporation has its perks, but health insurance benefits can get complex. Unlike employees, S-corp shareholders with over 2% ownership can’t receive tax-free health insurance. In this blog, we’ll outline the steps S-corp owners need to take to access company-sponsored health insurance and correctly deduct these costs.

Understanding Health Insurance Deduction for S Corporation Owners

If you’re an owner of an S Corporation, you can generally deduct health insurance premiums as a business expense. However, the IRS Notice 2008-1 has specific requirements for how these premiums must be reported and deducted. As an owner with at least 2% stake in the company, you can’t claim health insurance deductions the same way your employees do, but you can still enjoy a tax advantage by following these guidelines.

Set Up Health Insurance Under the S Corporation

The first step is to establish a health insurance plan under the company. This is crucial for meeting IRS requirements. Essentially, the company should pay the premiums directly, or you can pay them personally and get reimbursed. If the S Corporation pays the premiums, these payments need to be included in your W-2 wages as taxable income.

Report Premiums on Your W-2

Reporting the premiums correctly on your W-2 is non-negotiable. Health insurance premiums paid by the company on your behalf must be added to your wages as taxable income. This might seem counterintuitive, but adding the premiums to your taxable wages actually opens the door for you to deduct them on your personal income tax return.

Related: Learn more about the difference between gross income before and after taxes here.

Claim the Deduction on Your Personal Tax Return

Once the premiums are reported as income, you’re eligible to deduct them on your Form 1040. Here’s how it works: S Corporation owners who meet the IRS requirements can deduct the health insurance premiums as a self-employed health insurance deduction. This deduction applies to your personal tax return (Form 1040), which reduces your adjusted gross income.

IRS Requirements to Keep in Mind

While it’s exciting to save on taxes, remember that the IRS has strict guidelines for these deductions. Make sure to keep accurate records of premium payments and follow these requirements:

   – Ownership Stake: You must own more than 2% of the S Corporation.

   – W-2 Reporting: Premiums must be reported as taxable income on your W-2.

   – Established Health Plan: The S Corporation must establish the health insurance plan and either pay directly or reimburse you for premiums.

Consult Our Professionals for IRS Notice 2008-01

Given the intricacies of IRS Notice 2008-1 and its implications, consulting with a tax professional is highly advisable. If you need personalized guidance or support in managing your tax strategies, MARIELA RUIZ, CPA, PLLC is here to help. Contact us today at (956) 997-0067 or visit our website at mruiz-cpa.com to learn more about how we can help you make the most of your tax benefits!