The Confusing IRS Code: 2% Shareholder Health Insurance
Since the beginning of time, nothing has been as confusing as the Internal Revenue Code. It started out “all fine and dandy,” but as time marched on it has taken the lead over “parking in driveways and driving on parkways.” A great example of this is the requirement surrounding S-Corporation shareholders and health, dental, and vision insurance. As we approach the end of the year, there is an important, yet confusing requirement.
What’s the Deal?
If you own 2% or more of an S-Corporation and have heath, dental, and vision insurance, grab some coffee and read on. S-Corporations are similar to partnerships and Limited Liability Companies in a lot of ways, but there are differences. One of the big differences is that S-Corporation owners are required to pay a reasonable wage (we can help with that).
This makes it sound like the owner is an employee and should be treated as such. This is where the confusion starts. The IRS says 2% owners are treated as a partner in a partnership with regards to benefits.
What Should You Do?
If you are a 2% shareholder and the company pays for your health, dental, and vision insurance or the company reimburses you for your these insurances, there are certain steps you must take to ensure your insurance is deductible for tax purposes.
Before the end of the year, make sure that the cost of your health, dental and vision insurance is included in your payroll. If your company pays for the insurance, this will be an easier computation than if you pay for your insurance personally.
If you pay for your insurance personally, you will need to add up your insurance costs for the entire year. This will include family coverage if you have it. The company will need to reimburse you by the end of the year.
Your W-2 and Insurance
Now for the fun. The cost of your insurance is included in Box 1 of your W-2. This is the box titled “Wages, tips and other compensation”. Interestingly, Boxes 3 and 5 do not include this amount. Based on this reporting requirement, you may have Federal and State Income Taxes withheld, but you will not pay Social Security or Medicare taxes.
I know, I told you that in order for your insurance to be deductible, you had to follow the above steps. If the coffee is working, you are asking yourself how is it a deduction when I just included the cost in Box 1 of my W-2. Yes, you are properly confused.
There is one more place the W-2 that needs to be filled out. In Box 14 “Other” there should be a notation of SCORP 2% (or something like that to signify 2% owner insurance) and the cost of your insurance listed. This entry in and of itself does not remove the taxability of Box 1, but gives the information to “get you there.”
When you complete your personal tax return, you will include Box 1 of your W-2 on the line for wages. On a separate schedule (for 2019 it was Schedule 1 Part II Line 16) you will list the amount in Box 14 of your W-2. This will deduct the cost of your insurance from your income.
The 3-Step Process
So what should have been a simple deduction, has resulted in a three-step process. First, the company must pay directly or reimburse you for the insurance. Second, the company includes this cost in your W-2 (the company gets a deduction for “wages”). Third, you report the wages, but also the deduction on your personal return. If you notice there are two deductions (company deducts insurance as wages and you take a deduction on your return) and one income (insurance as wages on your W-2) thus resulting in you eventually getting a deduction.
The Bottom Line
Why did the IRS make it so confusing, I don’t know. I do know that if you want to deduct your insurance you better follow the above steps. If the above is confusing, give us a call. We strive to make the complex, simple, and are glad to help.
Holden Moss CPAs is dedicated to aiding businesses in this difficult time. We will provide you with all the tools and information necessary to succeed. If you have any questions regarding your W-2 in regard to insurance please give us a call at (919) 556-6216. Contact us via email at admin@holdenmoss.com. We look forward to bettering your business.