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Can all S corporations buy health insurance?
S corporations take on many different forms, from single-person operations to large, established businesses. However, not all S corporations can buy health insurance—at least, not directly.
The main consideration that determines the process of purchasing health insurance through your S corporation is the percentage of the company that shareholders own. Shareholders that own more than 2% of the business can’t take health insurance premiums as a tax-free benefit. This means if your S corporation has a single shareholder and no employees, it technically can’t buy a group health insurance plan.
In any S corporation that has employees, a group health insurance plan can be purchased and shareholders can participate while enjoying some above-the-line deductions, but with some important caveats you should know (more on that below).
What are above-the-line deductions?
Above-the-line deductions are expenses that reduce your taxable income. The IRS lets you deduct these expenses directly from your gross income which, in turn, becomes your adjusted gross income, or AGI.
Most tax deductions are considered below-the-line. This means they are subtracted from your AGI—think of your AGI as being the line in “above-the-line” and “below-the-line.”
For the self-employed, these deductions are tallied up on your Form 1040. While the S corporation can still enjoy tax deductions for paying health insurance to its shareholders, the shareholders benefit from claiming these health insurance premiums on their personal tax returns. Let’s break down how this works depending on how your S corporation is structured.
Health insurance for S corporations without non-shareholder employees
If you’re a part of an S corporation where the only employees are shareholders, the S corporation cannot provide health insurance as a tax-free benefit. Essentially, for shareholders with more than a 2% share in the S corporation, any health insurance premiums must be included as compensation. Health insurance premiums are then treated as taxable income.
You can either purchase a personal health insurance plan which gets reimbursed by the company or have the S corporation purchase it for you directly. However, if you are the sole shareholder and employee, you’re not eligible for a group health insurance policy and must purchase insurance under your name.
Both you and the S corporation still have tax benefits from running health insurance through the company. The S corporation gets a tax deduction the same way they would for employee compensation. The shareholder gets to report health insurance as a deduction on their Form 1040. For both, their taxable income is reduced so long as the S corporation is the one ultimately covering the expense through a direct purchase or reimbursement.
To make sure everyone can report the health insurance premiums as a deduction, it must be included in the shareholder’s Form W-2.
Health insurance for S corporations with additional employees
If you’re part of an S corporation that has other, non-shareholder employees, you can purchase a group health insurance policy through the business. Shareholders can be included on the plan, but with a catch.
Even if your shareholders are employees of the company, they cannot take health insurance as a tax-free benefit. Any premiums that cover shareholders must be reported as compensation on the W-2 of the shareholder. This is considered taxable income, but it is excluded from FICA and FUTA taxes.
On personal tax returns, shareholders can report any health insurance premiums they collected as income as their own health insurance expense. For example, if a shareholder collected $1,000 in health insurance premiums over the course of the year, they can report it as $1,000 in contributions to health insurance. This becomes an above-the-line deduction on their personal income tax. These deductions offset the income taxes paid on the premium.
The bottom line
Providing health insurance as an S corporation isn’t as straightforward as it is for other corporations. Shareholders can still benefit, but there are extra steps that need to be taken to make sure that any applicable health insurance premiums are properly accounted for.
Accurately recording transactions is key to avoiding an audit and keeping your tax bill to a minimum. With a bookkeeper by your side, this is made much easier.
Enter Bench, a bookkeeping service that pairs you with a team of bookkeepers who process, review, and categorize transactions so you have accurate reporting and insights when you need it. Not to mention we work with tax professionals to ensure all reporting is IRS compliant.
