Health and accident insurance premiums paid on behalf of a greater than 2% S corporation shareholder-employee are deductible by the S corporation and reportable as taxable wages on the shareholder-employee's Form W-2, subject to federal income tax withholding.
These additional wages are not subject to Social Security, or Medicare, or Federal Unemployment taxes.
Therefore, additional wage compensation is included in the shareholder-employee's Box 1 (wages) of Form W-2, but is not included in Boxes 3 and 5 of Form W-2.
The shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income on Form 1040 if the medical care coverage was established by the S corporation (but see IRS Notice 2008-1) and the shareholder met the other self-employed medical insurance deduction requirements.
If the shareholder-employee or the shareholder-employee's spouse was eligible to participate in any subsidized health care plan, then the shareholder-employee is not entitled to the above-the line deduction.
IRS notice 2008-1 states that if the shareholder-employee purchased the health insurance in his/her own name and paid for it with his/her own funds, the shareholder-employee would not be allowed an above-the-line deduction. If the shareholder-employee purchased the health insurance in his/her own name but the S Corporation either directly paid for the health insurance or reimbursed the shareholder-employee for the health insurance AND also included the premium payment in the shareholder-employee's W-2, the shareholder-employee would be allowed an above-the-line deduction.
The bottom line is that in order for the shareholder-employee to claim an above-the-line deduction, the health insurance premiums must ultimately be paid by the S Corporation AND must be reportable as taxable wage compensation on the shareholder's Form W-2.
This article was written by Donald M. Scherzi, CPA, CFP, LLC
Mike Lupo, SCORE Counselor
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