ACA AND S CORP REVISITED

[TAXMAN]

I have husband and wife both over 65, that owns 100% of S-Corp. They have 2 salaried employees. S corp pays for h and w supplemental health care. Is included in their w-2 box 1 but not the other boxes. Dilemma is this: Employee 1, married cannot be covered on husbands insurance due to costs and can't get Obamacare due to cost.(she supposedly checked this out). Employee #2 has his own insurance. The S-corp does not provide any HE for anybody except as noted above. Does S Corp have a problem or not? I am not sure 100% because of discriminate rule. Any help here? Many Thanks. 

[Lee B]

I have a number of S Corp clients so I have been spending a lot time on this subject.

 

1. Your clients S Corp cannot reimburse then or pay directly for their medicare supplement.

 

2. The inclusion of the premium in Box 1 wages no longer works.

     I have had to remove the premiums  from Box 1 wages and run that result thru my 4th quarter payroll reports

     for a number of clients.

 

3.  Opinions as how to clean up the 2014 corporate books differ:

 

      a. Have clients repay the corporation for the premiums ( cleanest approach)

 

      b. Treat the payments as distributions

 

      c.  Leave the payments on the books but treat them as nondeductible

 

I have done a fair amount of reading on this subject and I have not read any credible analysis which supports the continuation of treating the health insurance premiums of S Corp owners like we used to in 2013 and earlier. If anyone has read any credible analysis which seriously supports the 2013 and prior years approach, please post it.

 

Thanks,

 

Lee Barckert

[TAXMAN]

If we include these premiums as wages subject to all the taxes can shareholder still take the above the line deduction instead of Sch a medical?

[Jack from Ohio]

The shareholders CAN take above the line deduction for self-employed health insurance.

 

However, the employees must have any money given to pay medical insurance premiums added to box 1, 3 & 5 of the W-2.  Schedule A is the only deduction option for the employees.

Edited January 20, 2015 by jklcpa
modified per Jack's request

[Medlin Software, Dennis]

Jack,

 

This is just for conversation and my education, and is based on what my customers ask, and tell me they are being told to do.  My perspective is from payroll processing and reporting, not tax prep.

 

If I am following correctly, it is not just a matter of altering a W2, the amount needs to be added as taxable wages on the paycheck(s), likely as paid (not at EOY) and both the EE and ER must pay all the appropriate taxes on the "extra wages".  This would create a proper W2, 940, 941, state reports, UI reports, worker's comp reports, and so on - showing the amount as taxable wages.

 

It appears to be a Catch-22 as far as the tax preparer "end" and the payroll "end" - to get the employer to do what they are supposed to have been doing.  The tax preparer (rightly so) cares only about a proper W2, and tells the employee (or in some cases, their client is an employer) to create/get a correct W2.  The employer then asks me how to edit a W2.

 

So, selfishly, I am trying to come up with a non-official recommendation for the payroll end.

 

In the example in this thread (pls correct me if I am wrong):

In this case, money given for medical is now wages, and should be added to the paychecks when given.  This allows proper taxation (increase subject wages).  This will properly include the amount on all payroll reports.  Employees handle any deductability through their personal tax return.

[Jack from Ohio]

Jack,

 

This is just for conversation and my education, and is based on what my customers ask, and tell me they are being told to do.  My perspective is from payroll processing and reporting, not tax prep.

 

If I am following correctly, it is not just a matter of altering a W2, the amount needs to be added as taxable wages on the paycheck(s), likely as paid (not at EOY) and both the EE and ER must pay all the appropriate taxes on the "extra wages".  This would create a proper W2, 940, 941, state reports, UI reports, worker's comp reports, and so on - showing the amount as taxable wages.

 

It appears to be a Catch-22 as far as the tax preparer "end" and the payroll "end" - to get the employer to do what they are supposed to have been doing.  The tax preparer (rightly so) cares only about a proper W2, and tells the employee (or in some cases, their client is an employer) to create/get a correct W2.  The employer then asks me how to edit a W2.

 

So, selfishly, I am trying to come up with a non-official recommendation for the payroll end.

 

In the example in this thread (pls correct me if I am wrong):

In this case, money given for medical is now wages, and should be added to the paychecks when given.  This allows proper taxation (increase subject wages).  This will properly include the amount on all payroll reports.  Employees handle any deductability through their personal tax return.

You are correct.  Must be added as paid wages.  This includes 941s as well.  If the employer has not been reporting correctly, 1st, 2nd & 3rd quarter 941 may need to be amended.  In some instances, adding the necessary income to 4th quarter 941 may work.  Each situation will be different. 

 

No more pre-tax compensation for employees health insurance premiums.  Effective Jan. 1, 2014.

[Medlin Software, Dennis]

Thank you.  The results, as to what yo do for payroll purposes, are easy, once the employer decides what they want to do.  I very carefully stay out of the decision... The trouble (for me) is when my customer has been told something by someone, and that someone really has no idea what they are saying, or will not back up their opinion.

 

The most common is "I was told" to add the health insurance to Box 1, 3, and 5.  I reply with how/why/for what purpose, without actually collecting the required withholding for the taxable amount increase, reporting it on 941, etc.  The customer eventually get to the realization they should have added the amount to paychecks, and they turn the mess to their tax person to clean up.  I cannot recall any inquires from a single person setup, where the healthcare amount may possibly be excluded from income.

Edited January 21, 2015 by kcjenkins

[easytax]

Thank you.  The results, as to what yo do for payroll purposes, are easy, once the employer decides what they want to do.  I very carefully stay out of the decision... The trouble (for me) is when my customer has been told something by someone, and that someone really has no idea what they are saying, or will not back up their opinion.

The most common is "I was told" to add the health insurance to Box 1, 3, and 5.  I reply with how/why/for what purpose, without actually collecting the required withholding for the taxable amount increase, reporting it on 941, etc.  The customer eventually get to the realization they should have added the amount to paychecks, and they turn the mess to their tax person to clean up.  I cannot recall any inquires from a single person setup, where the healthcare amount may possibly be excluded from income.

 

Just a side question/comment as I no longer do payroll, etc. for any of my clients and "Jack" has excellent knowledge.   Is it part of your "payroll" service to make sure the employer UNDERSTANDS that the money NOW being paid for "health, etc."  CAN NOT be demanded/even understood to be for "health" because that could be construed as a "plan"?  The employee can spend it as they deem fit and still go out after "other health insurance" (such as marketplace, etc.) so the employer (if big enough) could still be "on-the-hook" for ACA penalties, for NOT meeting ACA requirements.     READ this question as to not only 2014 but possibly in future years, etc.?

 

Thanks in advance.

[Jack from Ohio]

Just a side question/comment as I no longer do payroll, etc. for any of my clients and "Jack" has excellent knowledge.   Is it part of your "payroll" service to make sure the employer UNDERSTANDS that the money NOW being paid for "health, etc."  CAN NOT be demanded/even understood to be for "health" because that could be construed as a "plan"?  The employee can spend it as they deem fit and still go out after "other health insurance" (such as marketplace, etc.) so the employer (if big enough) could still be "on-the-hook" for ACA penalties, for NOT meeting ACA requirements.     READ this question as to not only 2014 but possibly in future years, etc.?

 

Thanks in advance.

The employer cannot designate what the employee does with his raise in pay.  If he DOES designate that it is for health insurance premiums, then, and only then, is he on the hook for penalties.

 

If I am doing payroll for a company, it is my responsibility to have informed them 15 months ago that the change was coming.  We are already seeing that the big payroll companies are NOT doing that.  Trust me, there are going to be a lot of unhappy people when the effects of this are known at tax time.

[Medlin Software, Dennis]

easytax,

 

If your question was for me, we do not offer a payroll "service".  We offer payroll "software".  We try to limit our assistance to the operation of the software, but do get asked about operating a computer, as well as questions on payroll preparation and reporting.  Most of the ACA questions I am getting are based on "someone" telling my customer to alter the W-2.

 

Since I am not in a position to give tax advice to my customers, I am doing mostly "steering" to information for the employer to refer to.  I sometimes will add something along the lines of "while not specific advice for your situation, I might..., but I would certainly seek the written opinion of a local tax professional who backs their written advice with a written guarantee and E&O insurance."  I also point out, if they are paying for a person/ company to manage/provide their health coverage, part of that payment likely includes advice on administering their plan, including proper reporting advice.

 

The stories I could tell if this was not a public forum...

[Jack from Ohio]

The stories I could tell if this was not a public forum...

Lots of campfire stories, I am certain!!

[kcjenkins]

easytax,

 

If your question was for me, we do not offer a payroll "service".  We offer payroll "software".  We try to limit our assistance to the operation of the software, but do get asked about operating a computer, as well as questions on payroll preparation and reporting.  Most of the ACA questions I am getting are based on "someone" telling my customer to alter the W-2.

 

Since I am not in a position to give tax advice to my customers, I am doing mostly "steering" to information for the employer to refer to.  I sometimes will add something along the lines of "while not specific advice for your situation, I might..., but I would certainly seek the written opinion of a local tax professional who backs their written advice with a written guarantee and E&O insurance."  I also point out, if they are paying for a person/ company to manage/provide their health coverage, part of that payment likely includes advice on administering their plan, including proper reporting advice.

 

The stories I could tell if this was not a public forum...

No doubt in my mind that it is your reputation for helpful 'support'  that is why your software is so often recommended here.   

[TAXMAN]

Just a quick clarification. Jacks note above says no more pretax health ins. Are you saying this only applies to the S-Corps? What about the Schedule C guys who bought ins through an insurance company for his employees. They pay one half he pays the other half. How should this be handled?

[Jack from Ohio]

Just a quick clarification. Jacks note above says no more pretax health ins. Are you saying this only applies to the S-Corps? What about the Schedule C guys who bought ins through an insurance company for his employees. They pay one half he pays the other half. How should this be handled?

That is a Section 125 plan and is still acceptable.  The employer is reimbursing the employee.  It counts as a group plan.

[Medlin Software, Dennis]

As we near the W2 deadline, for me, the most common issue is the S Corp owner who is a DIY payroll and tax person.  Inevitably they had no idea of the ramifications of ACA on their own health insurance.  A large percentage of those are not happy about me directing them to a local tax expert to clean up their mess...  (Had three of these already within my first 30 minutes of opening for the day.)

 

So far, only one is a one employee setup, and I still suggested they get at least annual outside advice...