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Ugly rule for owners of S Corporations deducting health insurance

By
Industry Observer with Green Krist CPA PLLC 34463

When your S corporation covers or reimburses your more-than-2-percent-shareholder-employee health insurance expenses, it classifies the payments as box 1 W-2 wages but not box 3 or box 5 wages.

When calculating the amount eligible for the Form 1040 self-employed health insurance deduction, you must use your Medicare wages (listed in box 5 of Form W-2) as your “earned income” rather than the amount reported in box 1.

Here are two examples that show you the impact of this rule:

  • Ted’s S corporation pays him $0 in cash wages and reimburses him $18,000 for health insurance. His W-2 shows $18,000 as box 1 wages and $0 as box 3 and box 5 wages. Although Ted has $18,000 in taxable wage income from the corporation’s reimbursement of his health insurance, his Form 1040 self-employed health insurance deduction is $0 due to his lack of Medicare wages.
  • Janet’s corporation pays her $107,000 in cash wages and reimburses her $22,000 for health insurance. Janet’s W-2 from her S corporation shows box 1 wages of $129,000, box 3 wages of $107,000, and box 5 wages of $107,000. The IRS allows her Form 1040 self-employed health insurance deduction of $22,000 because her Medicare wages exceed the insurance cost.

To avoid unfavorable tax outcomes, ensure that your S corporation reports Medicare wages (box 5) equal to or greater than the health insurance costs paid or reimbursed.

Green Krist, CPA  specializes in assisting taxpayers with IRS and North Carolina Department of Revenue issues in the greater Raleigh, North Carolina area.

Don Baker
Lane Realty - Eatonton, GA
Lake Sinclair Specialist

I'm fortunate that real estate isn't my primary job and that I'm covered as is my wife by my employer (which is the state of Georgia).  But our real estate business is a c-corp with different rules.

Jun 05, 2023 11:30 AM
Bob "RealMan" Timm
Ward County Notary Services - Minot, ND
Owner of Ward Co Notary Services retired RE Broker

Thank you Kelly Green-Krist for this information. I will be checking with my CPA to see if this was even on his radar.

Jun 05, 2023 01:06 PM
Charles Ross - eXp Realty LLC
eXp Realty LLC Salina Group - Salina, KS
Love To Help People

Excellent information.Thank you for sharing. Have a wonderful day and a blessed week.

Jun 06, 2023 04:27 AM
Joe Jackson
Keller Williams Capital Partners Realty - Columbus, OH
Clintonville and Central Ohio Real Estate Expert

This is an excellent post with great information. Thanks for sharing it.

Have a super fantastic week!
Joe Jackson, Realtor-KWCP

Jun 06, 2023 04:59 AM
Diana Dahlberg
1 Month Realty - Pleasant Prairie, WI
Real Estate in Kenosha, WI since 1994 262-308-3563

Enjoyed this informational post ... great information.  I appreciate your sharing with us.  Enjoy your weekend!  I have followed you.  Hoping you can reciprocate! Kelly Green-Krist 

Jun 09, 2023 12:24 PM
Lise Howe
Keller Williams Capital Properties - Washington, DC
Assoc. Broker in DC, MD, VA and attorney in DC

I wish the tax code were more simple!  I get my health insurance from my retirement but I ask my accountant every year about this issue

Jun 18, 2023 07:06 AM