S Corp Compliance Item: Owner's Health Insurance Premiums
In order to deduct an officer's health insurance premiums, the amount must be included in box 1 of the owner's W2 and in Box 14:
Wait my W2 reports higher wages, then aren’t I taxed more on that income? No you are not taxed more because the S-corp is able to deduct the cost of the premiums from its gross income. So your wages go up but there is a corresponding decreases in income from the S-corp. That nets you out in the same place. Continuing with our prior example, say the business made $200,000 before your salary of $70,000. The S-corp would report $110,000 of net income, not $130,000. The extra $20,000 reported on W2 Box 1 also reduced your net income.
But I already paid out of pocket for my health insurance this year. Is it too late to get any benefit? If you have already paid out of pocket for your premiums - it’s not too late! Make sure the S corporation reimburses you for all premiums paid and then reports the premiums as additional income in Box 1 of your W-2. So long as the premiums are ultimately paid by the S corporation and reported as taxable compensation on the employee-shareholder’s W-2, the IRS has historically allowed an above-the-line deduction of the premiums.
What about my other employees, do they have to include their portion of health insurance in their wages? No. The addition to wages is only necessary for shareholder-employees who own more than 2% of the company who also want the above-the-line adjustment for the premiums paid on their behalf. Instead, employees are getting fringe benefits from the S corporation.