S Corp HSA

[Blaire]

The S corp paid for the single shareholder's HSA contribution of $5,000 for 2018. The HSA was not included on her W2 for total wages and also not included in box 12. My question is, can the S Corp take this deduction and can they take the deduction on the employee benefits line? And, also, I'm assuming the shareholder doesn't report any contributions on their tax return because it wasn't reported as taxable wages to her.

[jmcdtax]

See pages 19-17 and 19-21 TaxBook Deluxe. Line 18 1120S to show HSA contribution and K1 Line 17 Code AC

[TaxGuyBill]

The HSA was not included on her W2 for total wages .

Then the W-2 needs to be corrected.

Once that is done, the corporation can deduct the additional wages on the corporate return, and the taxpayer can deduct the HSA contribution on their personal return (if they qualify).

[kathyc2]

Might be easier to class the HSA payment as a dividend. SH could then take it as a deduction on 1040.

[TaxGuyBill]

Might be easier to class the HSA payment as a dividend. SH could then take it as a deduction on 1040.

If it is treated as if the corporation did not pay the HSA, then the shareholder has receive $5000 LESS of "Reasonable Compensation", which may NOT be "reasonable". I would guess that the have already tried to keep the "Reasonable Compensation" as low as possible, so reducing it by another $5000 would be problematic.

If the corporation paid for the fringe benefit, it is required to be in Box 1 of the W-2.

[kathyc2]

We don't know if reasonable compensation is an issue, if SH has basis to take a dividend, or even if 5K is a material or insignificant amount for the corp. Unless taking a dividend would cause another problem, that's the way I would go. K.I.S.S.

[TaxGuyBill]

We don't know if reasonable compensation is an issue,

I disagree. Reasonable compensation is ALWAYS an issue.

If the client and tax preparer determined that Reasonable Compensation was a certain amount, doing it your way now makes it $5000 LESS than reasonable. If the client and tax preparer had high enough compensation so that subtracting $5000 still makes the compensation reasonable, then that was poor tax planning on paying too much Reasonable Compensation.

[kathyc2]

I disagree. Reasonable compensation is ALWAYS an issue.

If the client and tax preparer determined that Reasonable Compensation was a certain amount, doing it your way now makes it $5000 LESS than reasonable. If the client and tax preparer had high enough compensation so that subtracting $5000 still makes the compensation reasonable, then that was poor tax planning on paying too much Reasonable Compensation.

Then let me rephrase: We don't know if the reasonable compensation was already met with the W-2 as originally prepared. I'm not seeing anything in OP to indicate that the amount originally determined to be reasonable was reduced by 5K.

[TaxGuyBill]

Then let me rephrase: We don't know if the reasonable compensation was already met with the W-2 as originally prepared. I'm not seeing anything in OP to indicate that the amount originally determined to be reasonable was reduced by 5K.

Reasonable Compensation includes wages and fringe benefits. So the determination of Reasonable Compensation should have already included the $5000 HSA contribution. Now that you take that away (by the treating it the payment as a distribution), then Reasonable Compensation has now been reduced by $5000.

[WICPA]

Not knowing the S-Corp profit or compensation that was paid to the shareholder it is hard to say if $5,000 would be material or not. I would go with Kathyc2's suggestion of a distribution and mention the possible consequences to the client. The net result would be the same and would save client cost of corrections.