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    2% shareholder employee in S-Corp

    Another attack by the IRS

    From lacerte update

    Thus, when the "More than 2% shareholder in S Corporation" box in the wages screen (Screen 10) is checked, the program has historically included box 1 wages in earned income. However, according to code section 162(l)(5)(A), an S Corporation shareholder’s earned income, as defined in section 3121 equals the shareholder-employee’s FICA taxable wages form the S Corporation as shown on the individual’s W-2 for purposes of determining the shareholder’s above-the-line deduction for self-employed health insurance.

    We have corresponded with the IRS on this issue, and have been informed that, since FICA wages can be limited to $94,200 in 2006, the more precise amount to use from the W-2 is the S Corporation shareholder’s Medicare wages. Therefore, for CD-5, the shareholder’s Form W-2 box 5 Medicare wages (as opposed to box 1 wages) is included in earned income for the SE health insurance deduction.

    #2
    What this can mean

    Let's say you have a father retired mostly who is an owner in an SCorp. The kids run the business and the only compensation the father has is derived from Health Insurance premiums paid. So now he gets to include it in income and gets no deduction for the health insurance premiums.

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      #3
      Veritas, I don't follow you. It would be added to his wages, then he would back it out on the front of his 1040. No?
      Dave, EA

      Comment


        #4
        In the example I gave

        the health insurance premiums would be included in wages box 1. Since it is not subject to fica taxes it is not earned income according to the IRS. So he would not get an offsetting deduction on form 1040.

        Comment


          #5
          Well Duh! Of course, now I see it. Wow, this is not such a good thing is it. I have one client who will be caught up in this new rule.
          Dave, EA

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