S Corporation Health Insurance-Subject to Payroll Taxes?

July 2nd, 2014 at 10:26 AM

If you want to deduct the cost of your health insurance when you operate your business as an S Corporation, you have to pay for the health insurance through the corporation. The corporation must either pay for the insurance directly or reimburse you for the cost you paid personally.

The corporation payment is recorded as W-2 income, and you then take the self-employed insurance deduction on your personal From 1040. Since the health insurance is considered income from the corporation the question is whether you are subject to payroll taxes on the W-2 income.

According to announcement 92-16, you do not have to pay payroll taxes in certain situations. According to this announcement and statue, your health insurance benefit is free from payroll taxes on the benefit amount included on the W-2 income in two situations:

Your S Corporation offers a health plan generally for your employees and their dependents, or
Your S Corporation offers a health plan for a class or classes of employees

In addition, you’re free from payroll taxes on the health insurance W-2 income when:

Your S Corporation buys group health insurance for all employees and includes you in the plan
Your S Corporation has you as its only employee, and it pays for the health insurance directly or reimburses you for it.

If you do not fit neatly into one of the above scenarios, then your situations becomes ambiguous.

IRS Support

The IRS ofter relies on its own guidance. That’s good in this case because both the IRS publication 15-B and the IRS’s online guide say that neither you nor your S Corporation pays payroll taxes on the value of health insurance included on the W-2. Although, neither the IRS publication nor the online guide carry precedential value with the courts, then both carry weight inside the IRS, which is the first hurdle to the deduction.

If possible, you want to avoid payroll taxes, and you can do just that if you fit into one of the scenarios alluded to above.