S Corporation Shareholder Health Insurance – 2013 Update

I wrote about about the reporting of health insurance for more than 2% shareholders last November and provided an excerpt from my book on the subject, but for 2013, this issue is even more crucial because of several tax changes.  As a more than 2% S Corporation shareholder, your total health and dental insurance premiums for the year need to reimbursed (if not paid directly) by the corporation and included on your W-2.  If this is not done correctly, you are technically not allowed to claim the self-employed health insurance deduction on your individual tax return, and instead you have to claim the deduction on Schedule A.  This treatment has never been desirable because of limitations on Schedule A, but for 2013 the limitations have been increased.  First, the medical expenses floor has increased to 10% (up from 7.5%), which means you only get a deduction for the amount of expenses that exceed 10% of your adjusted gross income.  Secondly, the itemized deduction phase-out (Pease limitation) is back for 2013 for higher income taxpayers, so even if your medical expenses exceed the 10% floor, you could encounter further limitation.  Overall, the difference between a self-employed health insurance deduction and a very limited deduction on Schedule A can translate to thousands of dollars in taxes for a shareholder, and all because of a minor reporting error.

Here is what you need to do before year-end:

  • Calculate total health and dental insurance premiums for the year for each >2% shareholder (including premiums that will be paid before year-end).
  • Make sure the premiums have been paid or reimbursed by the S Corporation.
  • If amounts were deducted from a >2% shareholder’s wages for a portion of their health or dental insurance, contact your CPA or tax preparer, as adjustments will need to be made.  These deductions should not have been made, so immediate modifications will need to be made to your payroll processing.
  • Contact your payroll processor to have the total 2013 health/dental insurance amount added to your W-2 BEFORE the last pay date in the calendar year.  Also, have them coordinate with your CPA or tax preparer to make sure it is reported correctly.
  • If you self-prepare payroll through QuickBooks, I recommend this resource for recording the insurance amount properly.

I strongly recommend putting this at the top of your to-do list for December, as it can be very costly to amend W-2s and federal and state payroll tax filings after their due dates.

If you are in the Portland metro area and need assistance with this issue, you can reach me at brian@pandgcpa.com or 503.244.8844.

About Brian Germer, CPA

CPA with Parsons and Germer CPAs, LLP in Portland, OR

11 thoughts on “S Corporation Shareholder Health Insurance – 2013 Update

  1. Pingback: Reporting Health Insurance for S Corporation Shareholders | PDXCPA - Portland Small Businesses Tax Blog

  2. Can an S corp owner have a health insurance policy from the Marketplace (with a government subsidy) and still have the policy reimbursed by the Corporation, have the amount included on his w-2 and get an above the line deduction on his personal return ?

    • Good question!

      First off, temporarily ignoring the matter of a subsidy, the S Corp shareholder is able to reimburse policies that are in their personal name (Notice 2008-1). They can even reimburse Medicare premiums deducted from Social Security, so I don’t see a problem reimbursing premiums from the exchange.

      Now, back to the subsidy or premium assistance credit – from what I have read, I do not believe it would bar you from being able to claim the self employed health insurance deduction. ACA did not really modify the deduction itself, so there should not be a problem. That being said, most of my S Corp owners would not qualify for the credit, so I have not had to research the issue much.

      If anyone has done research on this specific issue, I would be interested in hearing what you found.

  3. Thanks for your input. I was at a seminar where the speaker mentioned that an S owner would still be able to have his S Corp reimburse his insurance premium for the policy that he obtained in the markeplace even if they received a susidy. In trying to confirm this, I have not been able to find any information either supporting or contradicting that statement.

  4. Hi, I am a 100% owner of my s corp and have been personally paying the health insurance premiums for the past 3 months (Jan – Mar). I understand that I should include the premiums in my upcoming quarterly payroll, but would my s corp still need to reimburse myself?

    If s corp reimburses me and then add the premium in my payroll, would that be a duplicate payment/reimbursement? I am very confused about this point.

    Thanks in advance for any clarification.

    • The reporting of the S Corp health ins for payroll is more of a W2 adjustment in that it should not affect net pay. In fact, most payroll processing companies have a preset item that adds the amount to box 1 but does not actually pay the amount to the shareholder.

      My recommendation – have S corp reimb the premiums or pay them directly, and then at year end, make the W2 adjustment to add it to payroll. If you record it correctly, there is no duplication, as you are reclassifying the reimbursed amount from one expense to another (typically, from health ins expense to wages exp).

      • Hi Brian, now that December has rolled in, my S Corp will be issuing the final quarterly paycheck to me. I understand that you mentioned that the health insurance would be a W2 adjustment, but wouldn’t there be additional fed/state/city tax withholdings when the health insurance is added to my gross pay? What about in form 941 to match the W2?

      • Most payroll processing companies have special pay items set up for it so that it is more of a memo entry than an addition. If fact, with ADP/Paychex, the item does not add to net pay and does not increase withholdings. It is reported on 941 (only as a box 2 wage), on 940 (but exempt), and the state reports. In Oregon, we actually have to pay a transit tax on the health ins amount. W-2 as well, but only box 1 & box 16 and then the box 14 note.

        DIY processors should be very cautious, as there are a lot of overrides needed. I have had to many DIY mess this one up over the years, so I would really recommend having a tax preparer assist and review. It is much more costly to amend later.

  5. Hi Brian,
    Now if the owner is also an employee on payroll and the company (the S.Corp) is paying for the premium (unlike for other employees)., how can one what share of the premium is paud by the employer vs employee?

    You said :”have S corp reimb the premiums or pay them directly, and then at year end, make the W2 adjustment to add it to payroll. ”


    • The concept of and employee and employer portion is irrelevant when it comes to a >2% S Corp shareholder. The corporation needs to pay or reimburse the full amount of the premium charged by the insurance company each month and the full amount for the year is added to the W-2.

      This is due to the fact that the tax code treats a >2% S Corp shareholder much like a partner in a partnership. A partner would claim the entire amount of health insurance as self-employed health insurance and would not pay any portion back to the partnership for the insurance, as that would be capital contribution. Likewise, >2% S Corp shareholders should not pay the corporation back for any portion of their health insurance, as you would have to ultimately classify such a payment as a loan from shareholder.

      The only time this employee vs. employer portion comes into play is if there are multiple shareholders who have different levels of insurance. For example, if you have two 50/50 S Corp shareholders and one has individual coverage while the other has family coverage. In that type of scenario, you have to work out a form of equalization, and part of the calculation would involve the employee vs. employer portions.

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