This letter is to advise you of the tax benefits available to certain S corporation shareholders for health insurance costs. Heath and accident insurance premiums paid on behalf of the more than 2% S corporation shareholders are included in the recipient’s Form W-2 as taxable wage income and the S corporation takes a compensation deduction. The S corporation cannot take the deduction as a direct health insurance expense for the more than 2% shareholders. These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. The additional compensation is included in Box 1 (Wages) of the Form W-2, issued to the shareholder, but would not be included in Boxes 3 and 5 of Form W-2. Payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2.
A more than 2% shareholder is eligible for a deduction on their personal income tax return for the amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation and the shareholder meets the other self-employed medical insurance deduction requirements. If, however, the shareholder or the shareholder’s spouse is eligible to participate in any subsidized health care plan then the shareholder is not entitled to the deduction.
The bottom line is that in order for a shareholder to claim the deduction, the health insurance premiums had to be paid by the S corporation and had to be included in the shareholder’s W-2.
If you should have any questions regarding this, please do not hesitate to contact our office.