S Corporations and Health Insurance Premiums

Health and accident insurance premiums paid by an S corporation on behalf of a more than 2% shareholder-employee are deductible from the shareholder-employee's gross income. The reporting process, however, is somewhat convoluted. Here is what I mean. The health insurance premiums are added the shareholder-employee's gross wages but they are not subject to Social Security, Medicare, or unemployment taxes. The S corporation deducts this amount as officer's salary but since this amount is reported to the shareholder-employee as gross wages it increases gross income. When the shareholder's personal tax return is prepared the amount is deducted on his or her individual income tax return as a deduction direct from gross income. The net affect is they shareholder gets to deduct the health insurance premiums. The benefit is that the health insurance premiums are not subject to certain limitations and phase-outs as when they are required to be deducted as an itemized deduction.

The year is about to end. If you are a more than 2% shareholder-employee of an S corporation and you haven't been reporting your health insurance premiums as additional wages on your Federal Form 941, its time to correct the problem.