Health Insurance for Business Owners

If you own a company (or part of one) and that company pays for your health insurance, be sure you are taking full advantage of it. Two types of companies that can give their owners a great tax benefit from these expenses are the Sole Proprietor and the S-Corporation. However, the health insurance payments (or reimbursements) must be reported correctly. Here are some comparisons between the two:

Sole Proprietor:

• Report business income and expenses on Schedule C of Form 1040
• No deduction for health insurance is reported on Schedule C
• Health Insurance expenses are taken as the Self-Employed Health Insurance adjustment, which reduces your Adjusted Gross Income
• This means that health insurance is not taken as medical expense on Schedule A, therefore it is not subject to the 7.5% floor

S-Corporation Shareholders:

• Report business income and expenses on a separate tax return, which then flows through to the shareholders’ return(s)
• Health Insurance payments (or reimbursements) are taken as a business deduction, but it is reported as wages expense paid to the shareholder(s)
• The health insurance payments increase wages to be reported in Box 1 of the shareholder’s W2, but not in Boxes 3 or 5
• This means the income to the shareholder is not subject to FICA or Medicare taxes
• Health Insurance expenses are taken as the Self-Employed Health Insurance adjustment, which reduces your Adjusted Gross Income
• This means that health insurance is not taken as medical expense on Schedule A, therefore it is not subject to the 7.5% floor
• To be eligible for this adjustment, you must own 2% or more of the shares of the company

All of this can be a little much to take in if you aren’t already familiar with it. If you own a business and you’ve paid health insurance for yourself, then get with us or your tax professional before you file your W2’s or tax returns, in order to discuss the best strategy for you.

Thank you!

-Heritage Accounting and Tax Services
<><