Taxes and health insurance are two areas of your business that you probably don’t want to spend much time thinking about.
These topics are boring and confusing to most people. I get it. The good news is that I actually enjoy numbers and figuring out what the IRS needs, and I want to help you get this right. Today, I am going to walk you through how to get some of your hard-earned money back on your taxes after spending it for your health insurance. I’ll also answer some common questions my clients have in regards to health insurance for their S Corporations.
Can My Business Pay for My Health Insurance as a Tax-Free Benefit?
No. Unfortunately, even though there are many benefits to owning your own S Corporation, getting tax-free health insurance for yourself is not one of them. If you own more than 2% of your business on any given day of the year and your business pays for your health insurance, then the money paid for your insurance is considered taxable income.
There is good news, though! You do not have to pay Medicare tax, unemployment tax, or Social Security on the money your business pays for your health insurance. This is true as long as that insurance plan is available to all employees in the same class of employees at your business.
Additionally, you can also provide health insurance to any of your non-owner and non-family employees as a tax-free fringe benefit to them. (Fringe benefits are benefits offered to employees in addition to wages.) You can do this by offering a group health insurance policy to employees and then deducting the cost of that health insurance as a business expense. This means that your business will not pay taxes on the insurance premiums paid for your employees.
Can My Spouse or Kids Be Considered a Non-Owner Employee?
No. You might think you and your family can get around this income tax by employing your spouse and getting coverage through him/her. Not so fast! If you own an S Corporation, your spouse and other family members are treated as owners (in regards to health insurance) even if they don’t have any stock in their names.
Can I Deduct the Cost of Health Insurance From My Taxes?
Yes! This is the ticket: On your personal taxes, you can deduct the money your business has paid in health insurance premiums on your Form 1040. In addition to health insurance premiums, you can also deduct premiums for accident insurance, dental insurance, and long-term care insurance policies.
In order to qualify for this deduction, the following criteria must be met:
- Your business must establish your health insurance policy (see the examples below for what this can mean).
- Your business must pay the premiums for your health insurance policy. You can meet this criteria by having the business pay the premium directly or by having the business reimburse you for paying the premiums on your own.
- You must correctly report premiums on your business and personal tax returns. So, on your Form W-2, this should be included as gross wages.
- You cannot take the deduction if you are able to receive health insurance coverage through another employer, including your spouse’s employer.
Here are four examples of what this looks like in the real world:
Example 1:
- Your business obtains an accident and health insurance policy in the business’s name to cover you and your family.
- Your business makes all the premium payments.
- Your business reports the amount of the premiums as part of your gross wages on your Form W-2.
Outcome:
- The premiums the business paid can be deducted on your Form 1040 (line 29) and as a business expense on Form 1120S.
- Your health insurance premiums paid by your business are included in your gross wages on your W-2.
Example 2:
- You obtain an accident and health insurance policy in your own name to cover you and your family.
- You pay all of the premiums and keep records of your payments.
- Your business reimburses you for the premium payments you’ve made.
- Your business reports the amount of the premiums as part of gross wages on your Form W-2.
Outcome:
- Even though you originally set up the insurance in your name and for your family, since the business reimbursed you for all of the poiIcy premiums, the business has established the policy (in the eyes of the IRS).
- The premiums paid by the business can be deducted on your Form 1040 (line 29) and as a business expense on Form 1120S.
Example 3:
- You obtain an accident and health insurance policy in your own name to cover yourself and your family.
- Your business does not make any premium payments and does not reimburse your premium payments.
Outcome:
- Since the business did not pay the premiums or reimburse your premium payments, you cannot deduct the premiums on your Form 1040.
- You can claim the deduction on your Schedule A (itemized deduction) as a medical expense. This means that you will only see a benefit from this deduction if your total medical expenses exceed 10% of your adjusted gross income.
Example 4:
- You obtain an accident and health insurance policy in your own name to cover yourself. Your spouse and your children remain on a health insurance plan through his/her employer, but you have decided not to participate in that plan even though you could.
- Your business makes all of the premium payments for your health insurance coverage.
Outcome:
- Since you could have received health insurance through your spouse’s employer, you cannot deduct your premiums on your Form 1040.
- You can claim the deduction on your Schedule A (itemized deduction) as a medical expense. This means that you will only see a benefit from this deduction if your total medical expenses exceed 10% of your adjusted gross income.
- Note: Your ability to obtain health insurance coverage through another employer can obviously change throughout the year, and the IRS allows for that. Your accountant can help you figure out how to best calculate these deductions on your tax forms.
Can I Participate in a Health Reimbursement Arrangement (HRA)?
If you’ve heard about HRAs, where employees are reimbursed tax-free for medical expenses, you’re probably hoping you can get in on that, right? The short answer is: No. If you own an S Corporation, you and your family members are not eligible for HRAs.
You can, however, offer an HRA to any of your non-owner and non-family employees. This might be a good option for you if you want to allow your employees flexibility in choosing how they spend their health care money.
What About a Health Savings Account (HSA)?
As an S Corporation owner, you can have an HSA and you can contribute to your employees’ HSA accounts. However, you cannot receive tax-free contributions to your HSA through your business by any route, including a cafeteria plan. So why would you want this? Well, you can deduct your HSA contributions from your personal taxes on Form 1040. This way, you will get back some of the taxes you initially paid on that income.
What Other Options Do I Have to Provide Health Insurance to My Employees?
Rather than providing a health insurance plan, an HRA, or an HSA to your non-owner and non-family employees, you might consider simply increasing their pay. This will allow them to find health insurance coverage on their own.
Important Note: You should not directly pay or reimburse an employee for health insurance premiums, nor should you stipulate that you are raising an employee’s pay only if they use the additional money for health coverage.
To sum it up, in order to avoid problems with the IRS and with qualifying for tax deductions, make sure your business either pays for your health insurance premiums upfront or reimburses you for those premiums. As you can see, health insurance is tricky. It’s always a good idea to speak to an insurance agent and your tax professional to make sure you’re doing what’s best for you, your family, and your business. I promise if you schedule time in your calendar to look through these “boring aspects” of your business, you will thank yourself (and me!) later.
