S corporations can run into some muddy waters when calculating total compensation, particularly relating to medical insurance premiums. According to the Internal Revenue Service (IRS), when it comes to treating medical insurance premiums as wages, “health and accident insurance premiums paid on behalf of a greater than 2 percent S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee’s Form W-2, subject to income tax withholding.”
It is important to note that these additional wages are not subject to Social Security, Medicare (FICA) or Unemployment taxes if the payments of premiums are made to (or on behalf of) an employee under a plan that makes provision for all or a class of employees. For tax purposes, the additional compensation:
- is included in the shareholder-employee’s Box 1 (Wages) of Form W-2
- is NOT included in Boxes 3 and 5 of the W-2
Above-the-line deductions may also be impacted. A 2 percent shareholder-employee is eligible for an above-the-line deduction for “amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements.” However, if the shareholder or their spouse was eligible to participate in any subsidized health care plan, then no above-the-line deduction is available.
For more information on compensation issues for small businesses and those self-employed, visit https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed.