Can a S-Corp deduct health insurance premiums reimbursed to a Shareholder?
Updated: Jan 23, 2019
The answer is YES! And, there are added benefits for shareholders who are greater than 2-percent owners of the S-Corp...
IRS Notices 2008-1, 2013-54, 2014-41, and 2015-17 give us guidance in determining how we treat these deductions for tax purposes.
The key is that many small business owners rely on Obama Care (Affordable Care Act) for health coverage. However, the subject of this article is not limited to Obama Care. The S-Corp may deduct Paid or Reimbursed Accident & Health Insurance Premiums (PRAIPS) to greater than 2-percent shareholders, their spouses, and children. But, the S-Corp must report the PRAIPS as income on the shareholder/employee’s IRS Form W-2. Yet, the PRAIPS are not subject to Social Security & Medicare taxes. This is an advantage of the S-Corp. Moreover, the PRAIPS are reported in W-2 Box 1; they are not reported in Boxes 3 & 5.
The next step is to account for the PRAIPS income on the shareholder/employee’s personal tax return. The PRAIPS are deductible to the eligible shareholder/employee “above line” on IRS Form 1040 page 1, line 29. First, we must pause to define the eligible shareholder/employee. For IRS purposes, the shareholder/employee, married spouse, and children count as one person. If the shareholder/employee chooses to include the married spouse jointly for IRS purposes, the taxpayer must file IRS Form 1040 as “Married Filing Jointly”. Moreover, the taxpayer’s children must be dependents in the family unit to be included as applied to the IRS Notices listed in this article. For IRS purposes, the deduction is limited to the shareholder/employee, legal spouse, and legal children as one person.
In summary, the PRAIPS of the eligible shareholder/employee is deductible to the S-Corp. The S-Corp reports the PRAIPS on the shareholder/employee’s W-2 Box 1 and not in Boxes 3 & 5. The PRAIPS income passes through to the shareholder/employee’s personal IRS Form 1040 tax return. The income from the PRAIPS is fully deductible for the shareholder/employee “above line” on IRS Form 1040, page 1, line 29 and the PRAIPS income is not subject to Social Security & Medicare taxes.
IRS Notice 2008-1
IRS Notice 2013-54
IRS Notice 2014-41
IRS Notice 2015-17