How Do Health Insurance Benefits Work for an S Corporation?
When deciding on the best entity type for your small business, you’re probably focused on tax saving benefits, ease of set-up, and the actual business you’re running. Health insurance benefits are probably not the first thing on your mind, but we can all agree they’re pretty important.
S Corporations have it in the bag for huge tax savings while providing liability protection for business owners. As you know, the S-Corp structure treats owners as employees who are paid a reasonable salary and then receive pass-through dividends, which are not subject to employment taxes. This structure is the basis for what makes S-Corps financially enticing for small business owners. However, this structure can also make health insurance benefits a bit more convoluted, particularly when it comes to benefits for S-Corp owners.
We’re here to break it down and show you exactly how health insurance benefits work in an S-Corp and what the tax implications are for S-Corp owners. Our CPA firm is a small business just like yours, and our mission is to help other small businesses. Feel free to give us a call if you have any questions or just prefer to chat with a real person who specializes in S-Corp accounting.
What is the S-Corp Structure for Health Insurance Benefits?
Let’s get the easy part out of the way first and learn how health insurance benefits work for non-shareholder employees of an S corporation. In the same way as other business structures, S-Corps can offer health insurance premium coverage to their non-shareholder employees as a tax-free benefit. The employee is not taxed on it, and the S-Corp can deduct its contributions on its business tax return. Easy peasy, most people are familiar with this structure.
Now it gets a little more complicated. As we said before, S-Corp owners are treated as employee-shareholders for income purposes, but despite being ‘employees,’ the health insurance benefits don’t extend to most shareholders. Owners are treated more like the self-employed when it comes to health benefits.
Shareholders who own more than 2% of the S-Corp cannot receive accident or health insurance as a tax-free benefit. If an employee-shareholder receives health insurance through the S-Corp, the costs are included on the employee-shareholder’s W-2 as gross wages and are subject to federal and state income taxes.
Now before you turn your back on S-Corps, bear with us and keep reading. There are still available tax strategies to help S-Corp owners save money on their health insurance benefits, which we’ll outline below.
What are the Health Insurance Tax Strategies and Deductions for S-Corp Owners?
Before we jump into the specific strategies, let’s address some housekeeping matters and clear up a few common questions. After you’ve gotten down the basics, download our flowchart PDF to see which strategies and deductions may work for your s-corp.
Answers to Common Initial Questions About Health Insurance in an S Corporation
- Do S-Corps Have to Offer Health Insurance to Employees?
No. If your S-Corp has less than 50 full-time employees, there is no legal requirement to offer health insurance. However, offering the same health insurance benefits to your employees as you do yourself is the best strategy to guarantee the highest tax savings.
- Can S-Corps with Only One Employee Purchase Health Insurance?
As for one-owner/employee S-Corps, some of the below steps won’t apply. You may still be able to purchase your health insurance through your S-Corp, but some states do not allow corporations to purchase a policy when there is only one employee. You’ll have to check with the state where your S-Corp is registered. If you’re the owner of a single-employee S-Corp and are not able to purchase a policy through the business, you can still qualify for a self-employed health insurance tax deduction.
- Can an S-Corp Owner Hire a Family Member as a Non-Owner-Employee for Insurance Purposes and Then Get on the Employee’s Policy?
Nope. We appreciate the creative thinking, but unfortunately the IRS doesn’t so much. As we talked about in family shareholders, S-Corp ownership extends to your spouse and your family. So in this case, there’s no workaround like that for health insurance benefits, but there are other tax strategies.
- Should an S-Corp Owner Pay for Health Insurance Costs Personally or Through the S-Corp?
In order to take advantage of the deductions and strategies below, your S-Corp must pay your health insurance costs. This means if you pay your premiums, make sure you are reimbursed, or better yet, pay directly with your S-Corp funds. You’ll need the amounts and payment information later, so keep track of it in your accounting software, or let us handle the bookkeeping with one of our S-Corp specialized subscription plans.
S Corporation Health Insurance Tax Strategies and Deductions
- How to Avoid FICA and FUTA Taxes with Your S-Corp Health Insurance Coverage
You can avoid paying social security and medicare taxes (FICA) on the S-Corp’s contribution, if your S-Corp meets the requirements. FICA and federal unemployment taxes (FUTA) are lifted by the IRS when all or a class of employees can receive health insurance benefits. An example of a class of employees would be “all full-time employees.”
This means that offering the same health insurance benefits to your employees as you do yourself is the recommended strategy to lessen the taxes on your personal health insurance benefits. Additionally, if your S-Corp covers at least half of your employees, you may also be able to qualify for a small business tax credit.
- See if You’re Eligible to Take a Personal Tax Deduction for Your S-Corp Health Insurance
If you, a shareholder-employee, receives coverage through your S-Corp, the health insurance costs are reported as gross income on your W-2, but you may be able to take a personal tax deduction if you meet requirements.
Notably, the personal tax deduction only applies if you or your spouse could not receive coverage another way. This means that you or your spouse must have not been eligible for any other subsidized plan.
- Deduct Employee Insurance Premiums on Your Business Tax Return
As you already know, S corporations are pass-through entities. Meaning their small business taxes are paid through their shareholders’ personal returns. However, S-Corps still file an informational return, and it is on this Form 1120-S, where you can deduct insurance premiums that were paid to employees. Deducting these premiums will lower your business’s taxable earnings. In turn, this will lower your personal tax bill when the business income passes through to your personal tax return.
- Deduct Your S-Corp-Paid Insurance Premiums as Self-Employed Insurance on Your Personal Tax Return
Remember, the S-Corp contributions to your health insurance costs will be on your W-2 as gross income, and as an S-Corp employee-shareholder, you are treated as self-employed for insurance purposes. This means you can use the self-employed insurance deduction to deduct the health insurance premiums paid by the S-Corp as gross income on your W-2.
In even better news, this deduction is considered “above-the-line,” which means it lowers your adjusted gross income, which has the potential to qualify you for other tax savings since the lower your AGI, the more likely you are to qualify for other deductions and credits.
We know, S-Corps and health insurance can be a lot to digest. Just remember, although S-Corps work differently when it comes to owner insurance benefits, it’s not necessarily bad news. There are definitely ways to strategize your S-Corp health insurance and taxes, and you don’t have to figure it all out yourself. Our accounting services are designed for S corporations, and our small business bookkeepers and accountants are always happy to pick up your call and offer our help or an explanation. In the meantime, don’t forget to check out our health insurance flowchart with all the strategies and deductions we talked about.