S-Corp W2 Medical Benefits ExplainedPat Fontana
As a small business owner, you have a lot of financial considerations every day. Some of those are related to your tax status and how your operations affect your employees and their paychecks. If you have formed an S-corporation, there are specific rules and guidelines to follow. It can be helpful for your record keeping to have S-Corp W2 medical benefits explained.
S-Corporations as Pass-Throughs
An S corporation is a business structure that elects to pass through to its shareholders any corporate income, losses, credits, and deductions for federal tax purposes. The shareholders then report the flow-through on their personal tax returns. They are assessed tax at their individual income tax rates. In this way, the S corporation avoids double taxation on its corporate income. The S corporation itself is responsible for tax on certain built-in gains as well as passive income at the entity level.
Certain rules apply to 2-percent S corporation shareholder-employees. A 2-percent shareholder is defined as an individual who owns more than 2 percent of the outstanding stock of the corporation or as stock that possesses more than 2 percent of the total combined voting power of all the corporation’s stock.
Medical Insurance Premiums as Wages
When the S corporation pays health and accident insurance premiums on behalf of an individual who is a greater than 2-percent S corporation shareholder-employee, those are deductible by the corporation. They are also reportable as wages on the shareholder-employee’s W2 and are subject to income tax withholding.
These premiums, considered to be additional wages, are not subject to Social Security, FICA, or unemployment (FUTA) taxes if the premium payments are made to or on behalf of an employee under a system or plan that makes provisions for all or a class of employees. The additional compensation is included on the shareholder-employee’s W2 in Box 1 (Wages) but is not included in Boxes 3 and 5 of the tax form.
Above the Line Deduction
If medical care coverage was established by the S corporation and the individual meets the other self-employed medical insurance deduction requirements, a 2-percent shareholder-employee is eligible for an above the line deduction when calculating Adjusted Gross Income (AGI) for those amounts paid during the year for medical premiums. The deduction is allowed by the IRS to be subtracted from the annual gross income to arrive at the AGI. The shareholder-employee is not eligible for the above the line deduction if the shareholder’s spouse was eligible to participate in any subsidized healthcare plan.
Affordable Care Act (ACA)
The Affordable Care Act of 2010 did not change the rules regarding federal tax treatment of health and accident premiums paid for S-Corp W2 medical benefits. For tax years after 2013, though, S corporations will face penalties if they offer a health plan and fail to comply with certain market reform provisions. These may include plans in which the S corporation reimburses employees for individual health insurance premium costs. Healthcare marketplace reforms do not apply to plans that cover fewer than two current employees.
S corporation owners participating in the management of the company are considered employees but are treated more like self-employed individuals when it comes to their insurance benefits. An S corporation can offer coverage for health insurance premiums for its employees who are not owners, as a tax-free fringe benefit. The employee will not be taxed for the benefit and the company can deduct the contributions on its tax return.
CONTACT CLEAR VIEW BUSINESS SOLUTIONS FOR HELP WITH TAX PLANNING
Taxes and payroll deductions can be confusing. Just as there are many tax forms, there are also penalties for not completing the appropriate forms on the federal and state level. The experts at Clear View know what you need to do and when you need to do it. We can also help ensure that you are maximizing your available credits and deductions and minimizing your tax payment.
We work with you at tax time and throughout the year to help you be better prepared to make sound financial decisions and to plan for your success. Learn more about how we can help you and your business by contacting Clear View Business Solutions to speak to our team about our services. Give us a call at (520) 544-0177.