S-corp shareholder health insurace premium

[NotEasy]

I have read there is a new rule that 2% shareholder of a S-corp can deduct the health insurance premium paid by the S-corp on line 29 of the 1040 if the premium is added to their W-2. And I also read that even if the premium has to be added to the W-2, it is not subject to FICA and medicare.

My question if how it should be reported on the Form 941. I think the premium has to be added to line 2 "Wages, tips, and other compensation". But since it is not subject to FICA and medicare, do we just ignore it and put only the regular wages in line 5a "Taxable social security wages" and line 5c "Taxable Medicare wages & tips"?

Thank you.

[TaxLadyinPA]

You are correct

That is exactly what you do .... And at year end when you do the FUTA you will write it in the "exception"
and when you do the W-2 the Line 1 wage will include the health, and you put the health amount in Box 14.

The corp is getting the deduction as wages paid.
And the more than 2% shareholder is claiming the wages on the return and then deducting the health portion on the health insurance line on Form 1040. Basically they are putting it in and taking it out and not really getting anything from it.


I am actually in an argument right now in regards to the State return. I am saying that unless the health insurance is in a Cafe Sec 125 plan that it is taxable to our state and local but my new client's ex accountant says no. So I would be interested in hearing others jump in and tell me their feelings on this at the state level. If it is not in said plan and it is considered simply self-employed health insurance it is taxable to the state.

[JohnH]

I'm not sure about your state question, but I think part of the reasoning behind adding it into gross wages and then deducting it on the personal return is to prevent unequal distributions to shareholders if their premiums are different, which would be an inadvertent termination of the S-corp election. So even though it's a wash between the corp and the shareholders as a group, there is a purpose for handling it this way.

[Gretel]

I am not sure what the state issue is either. Just as on the 1040 it will be a wash on the state return unless your state has a special rules for this deduction.

[DaveO]

State Issue

can't speak for other states but here it's not subject to state taxes. State taxable income starts with Fed AGI then adds or subtracts certain things. Also not subject to SUI here.

[WhiteOleander]

Also, remember that it used to be that the t/p didn't get 100% adjustment to income. I think it used to be about 65%. So, it did make a difference. It wasn't a total wash.

[Burke]

That is exactly what you do .... And at year end when you do the FUTA you will write it in the "exception" and when you do the W-2 the Line 1 wage will include the health, and you put the health amount in Box 14. The corp is getting the deduction as wages paid.
I am actually in an argument right now in regards to the State return. I am saying that unless the health insurance is in a Cafe Sec 125 plan that it is taxable to our state and local but my new client's ex accountant says no. So I would be interested in hearing others jump in and tell me their feelings on this at the state level. If it is not in said plan and it is considered simply self-employed health insurance it is taxable to the state.

Well, you are in PA so you should know. I did a quick review in AllStates and it says in income taxable to PA on Line 1A "fringe benefits, unless excludable." Is the health ins considered a fringe? Whether Sect 125 or not? It is not shown under "compensation" and I know Box 16 can be different from Box 1 in PA as it does not follow federal. So how do you show it on the W2? If at all?

[Burke]

I have read there is a new rule that 2% shareholder of a S-corp can deduct the health insurance premium paid by the S-corp on line 29 of the 1040 if the premium is added to their W-2. And I also read that even if the premium has to be added to the W-2, it is not subject to FICA and medicare.

My question if how it should be reported on the Form 941. I think the premium has to be added to line 2 "Wages, tips, and other compensation". But since it is not subject to FICA and medicare, do we just ignore it and put only the regular wages in line 5a "Taxable social security wages" and line 5c "Taxable Medicare wages & tips"?

This is correct. And the rule is not so new. It's been around quite a while. My question is, for Quickbooks users, how do you get QB to include the amount in the W2 and 941 without overriding? Is there a trick?

[JohnH]

Set it up as a separate payroll item, includible in Gross pay but not subject to FICA, Med, etc. It should pop out on the 941 in gross wages only, and also on the W-2. in box 1 only.

[Burke]

I am assuming you just do this once a year at the end so that it appears on the last quarter 941? If the health ins prem is paid monthly, and the check is drawn to the ins co, and the owner/employee does not always receive a monthly check, how does this work? I guess I was trying to see how it could be booked each month so it showed up on the 941 quarterly, but I can't figure out how to achieve it.

[JohnH]

Interesting question. Off the top of my head I'd say a monthly or quarterly journal entry might work, or maybe just coding the relevant part of the expense directly to the payroll item when the check is written to the insurance company.

But QB is finicky when it comes to payroll, so it might actually be necessary to prepare a dummy payroll check for each employee/shareholder on a monthly or quarerly basis to get it to flow through the payroll module correctly.