S Corp Health insurance tax deductibility 1

[glass99]

For the S corp owners out there: As you probably are aware, the owners' health insurance premiums pass through as taxable income on your personal 1040, which is a very expensive and unfair from a tax perspective. Is there a workaround for this? Going on a spouse's insurance would work, but I personally don't have that option. I have asked my accountant and he doesn't have any easy answers, but I suspect there are more complicated options. Perhaps converting to a C corp?

https://www.irs.gov/businesses/smal...ion-compensation-and-medical-insurance-issues

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[SWComposites]

Well, at that link, it looks like you can deduct the insurance premiums on your 1040 return (with some specific rules), just like a Schedule C self employed person can do. Why can you not take the deduction?

 

[glass99]

@SWComposites: the language is a bit convoluted, but it says that medical premiums are added to W2 wages. They are not taxable for FICA but are for income tax. Medical premiums are deductible at the corporate level, but as an S corp that doesn't help much because you don't pay any federal or state tax anyway (I just pay City corporate tax, so its a small help)

 

[phamENG]

as a solo member S-corp and because my spouse also doesn't have access to employee benefits, I have my policy in my own name. The S-corp reimburses me for the premium, and it is considered wages for federal withholding but not for Social Security, FICA, or FUTA. I can then deduct them above the line at tax time, wiping that out.

Because I have 'fewer than 2 employees', I'm exempt from the $100/day penalty for violating the ACA.

The link you posted has all the details.

 

[phamENG]

And I'm not sure I'd call it 'unfair'. The ability to claim S-corp status and shield all of your profits from FICA and FUTA taxes is a huge benefit if you make enough. You have a choice: pay an extra 13% on your profits, or pay your effective tax rate on your insurance costs.

Fortunately for me, I can do both.

 

[LOTE]

There is a benefit to the insurance being counted as W2 wages: it counts as part of your reasonable compensation as an S-corp employee (increases what you can take as dividend). Most fringe benefits work this way with the Scorp.

 

[SWComposites]

Yes, says that medical premiums are added to W2 wages. But, you can then deduct them from your gross income. So they are not taxed (along as you follow the rules in that IRS doc).

 

[glass99]

@LOTE: I did not know that the health premiums could count towards your reasonable compensation. Useful info!

@phamENG: shielding your "profits" from FICA is of minimal benefit because you still have to pay almost to the FICA cap with your "reasonable" W2 compensation. The biggest tax benefit from an S corp in our world is QBI, which is 20% of profit applied against your 1040.

 

[XR250]

The ability to claim S-corp status and shield all of your profits from FICA and FUTA taxes is a huge benefit if you make enough

For sure this is the biggest benefit for me.

 

[phamENG]

I could be wrong, but I'm pretty sure you can get QBI deductions from schedule C income, too. So it's not really a specific benefit of S corps.

The cap for social security is what? $168k. That's a lot for an engineer. Senior engineers around here have a median pay (according to the internet) of $105k. Managing engineers maybe $115-120k. I don't manage people (solo LLC, no other employees), so I consider myself at most a 'senior structural engineer'.

Rule of thumb for most firms here is that billables need to be 3x salary to to turn a profit.

So I can put my max "reasonable salary" at $105k, all the way down to 1/3 of my revenue. Once my revenue exceeds $300k I'll likely be hiring and the calculation will change.

So that still gives me $63k to protect from social security, and up to $200k to protect from medicare taxes (since there's no cap on medicare tax).

So that's as much as $14k saved. Not exactly a king's ransom, but worth it.

 

[SWComposites]

Yes, I have taken QBI deductions from schedule C income; tax prep software does it automatically.
And the health insurance premiums are deductible from both Schedule C and S-corp income.

 

[glass99]

@phamEng: Yes you are right about the Medicare portion being uncapped. Yes a senior engineer salary is not unreasonable in the case of a solo practitioner. Where on the internet did you find the median salaries? I have been told by my accountant that I need to pay myself more than my highest paid engineer, which in my case is significantly more than $105k, which totally screws up my FICA and QBI. But if LOTE is right and I can include my health insurance in my reasonable salary, it would save me in the order of $5k/yr in taxes

 

[phamENG]

Salary.com. Not a great source, but better than nothing. I just checked the ASCE salary survey for 2023, and putting in my own data it says my median base pay would be $84k with a total primary comp of $95k.

 

[glass99]

@SWComposites: You can apparently deduct Self Insured Health Insurance (SEHI) on Schedule 1 of your 1040, but my accountants have never thought I was eligible for some reason. You need to fill out IRS form F7206, which is a confusing form.

https://www.irs.gov/pub/irs-pdf/f7206.pdf

https://ttlc.intuit.com/turbotax-su...rance-premiums-corporation/L00Gt7nVn_US_en_US

 

[phamENG]

glass99 - I'm confused by your confusion. The link you posted at the top explains that, under a 2008 memo you can deduct it. Then the ACA came along and you can't unless you meet one of two exceptions. Then another memo came out in 2015 saying that, until there's further guidance, you can still use the 2008 memo and the ACA rule won't be enforced against S-corps as long as you're just reimbursing the shareholder employee.

So...as a 2% shareholder employee of an S-Corp, you can still deduct the health insurance premiums.

 

[SWComposites]

glass - you need a new accountant, or just use tax prep software. I've taken the deduction for many years when self-employed and never had an issue.

 

[XR250]

Salary.com. Not a great source, but better than nothing. I just checked the ASCE salary survey for 2023, and putting in my own data it says my median base pay would be $84k with a total primary comp of $95k.

My acct. has been using 90k for me.

 

[glass99]

@phamEng, @SWComposites: I just spoke to my accountant - apparently the reason I cannot take the Self Employed Health Insurance deduction is because I am an employee of my S corp and not "self employed". I could reclassify myself as "self employed" but I would lose all the benefits of the S corp, especially the QBI and the reduced FICA burden. This is essentially the same thing my previous accountant told me. I still reading though...

 

[XR250]

This is the reason i finally hired an accountan t 5 years ago so I would not have to deal with this minutia.

 

[phamENG]

A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements. If, however, the shareholder or the shareholder's spouse was eligible to participate in any subsidized health care plan, then the shareholder is not entitled to the above-the-line deduction. IRC § 162(l). (An above-the-line deduction is a deduction the IRS allows you to subtract from your annual gross income in order to arrive at your "adjusted gross income".)

Insurance laws in some states do not allow a corporation to buy group health insurance when the corporation only has one employee. Therefore, if the shareholder was the sole employee of the corporation, then the shareholder has to purchase health insurance in the individual’s own name.

Notice 2008-1 provided rules by which a 2-percent shareholder would be allowed an above-the-line deduction even if the health insurance policy was purchased in the name of the shareholder. Notice 2008-1 provided four examples, including three examples in which the shareholder purchased the health insurance and one in which the S corporation purchased the health insurance.

Notice 2008-1 states that if the shareholder purchased the health insurance in the individual’s own name and paid for it with his own funds, the shareholder would not be allowed an above-the-line deduction. On the other hand, if the corporation obtains and pays for health insurance in its name, covers the shareholder under the policy, and reports the premiums as W-2 wages to the shareholder, then the shareholder is allowed an above-the-line deduction. Similarly, if the shareholder purchased the health insurance in his own name but the S corporation either directly paid for the health insurance or reimbursed the shareholder for the health insurance and also included the premium payment in the shareholder's W-2, the shareholder would be allowed an above-the-line deduction.

The bottom line is that in order for a shareholder to claim an above-the-line deduction, the health insurance premiums must ultimately be paid by the S corporation and must be reported as taxable compensation in the shareholder's W-2.

....

Notice 2015-17 provides that, unless and until additional guidance provides otherwise, S corporations and shareholders may continue to rely on Notice 2008-1 with regard to the tax treatment of 2-percent shareholder-employee and their healthcare arrangements for all federal income and employment tax purposes.

Until such guidance is issued, the excise tax under IRC § 4980D will not be asserted for any failure to satisfy the market reforms by a 2-percent shareholder-employee healthcare arrangement.

I think you mentioned that you have another engineer. With the size of your company, are you able to purchase group health insurance? If so, then the sticking point may be who took out the policy.