Shareholder Wages/Health Insurance

[cpabsd]

I am having a brain freeze. I have a more than 2% shareholder in an S corporation. The health insurance is paid through the business. I know the amount is added to box 1 of the W2. Question - is this amount subject to SS/Medicare?

[Maribeth]

I am having a brain freeze. I have a more than 2% shareholder in an S corporation. The health insurance is paid through the business. I know the amount is added to box 1 of the W2. Question - is this amount subject to SS/Medicare?

No, only subject to FIT.

Maribeth

[cpabsd]

Thank you.

[adamkelly]

No, only subject to FIT.

Maribeth

And SIT, right?

[Maribeth]

And SIT, right?

You have to check with your State for the taxable. "Usually" the premiums are taxable for SUTA purposes also.

Maribeth

[cpabsd]

This client is already over limit for Suta. Not an issue. Thanks for the heads up though.

[OldJack]

So really what happens if the S-corp does not add the benefit to the W2 and just expenses it as insurance expense? The S-corp profit is reduced on the 1040 and no deduction for self-employment insurance. If added on the W2 it increases wages and self-employment insurance is deducted on 1040 page 1. But the net effect on the 1040 is zero either way. No big deal.

[Maribeth]

So really what happens if the S-corp does not add the benefit to the W2 and just expenses it as insurance expense? The S-corp profit is reduced on the 1040 and no deduction for self-employment insurance. If added on the W2 it increases wages and self-employment insurance is deducted on 1040 page 1. But the net effect on the 1040 is zero either way. No big deal.

However . . . . it is a good way to get officers wages on Page 1 of the 1120s without incurring ss tax.

Maribeth

[mgmea]

So really what happens if the S-corp does not add the benefit to the W2 and just expenses it as insurance expense? The S-corp profit is reduced on the 1040 and no deduction for self-employment insurance. If added on the W2 it increases wages and self-employment insurance is deducted on 1040 page 1. But the net effect on the 1040 is zero either way. No big deal.

True, but the IRS is making a big deal out of this. In their recently issued notice, the exact number escapes me right now, they state that if the premium is not on the employee-shareholder's W-2, no deduction is allowed for the corporation. This is on their hit list. The very real possibility of a $5000 penalty on the preparer for disregarding the IRS notice has made a believer out of me.