S-corp health ins ??

[schirallicpa]

I am looking for confirmation, I guess.

The owner cannot take the deduction on the 1120S without issuing themselves a W2, correct?  (This owner is not an employee, which is a whole other topic, I know....)  

Do I take the payments made for health insurance as distributions?

[Lee B]

26 minutes ago, schirallicpa said:

 

Do I take the payments made for health insurance as distributions?

Either the owner needs to repay the S Corp or as a practical matter recording them as distributions doesn't exactly meet the definition of quarterly distributions?

Are there other employees?

[schirallicpa]

no employees at all. 

 

[Lion EA]

Why is the S-corporation paying the shareholder's health insurance? Is it because he provided services to the corporation? If so, then he's an employee; the corporation should issue a W-2 with HI in box 1

However, the S-corp HI is pretty much a wash anyway. You add it to wages on W-2 and S-corp deducts, but shareholder/employee subtracts it above the line on the 1040 and doesn't have to use Sch A. (Was that law written when the % was less than 100% or something?) It always seems like going around in circles for no extra benefit to either!

[schirallicpa]

That's kinda what I thought.  

 

 

[Lee B]

Medicare wages in box 5 still needs to exceed the amount of the of the SEHI

[G2R]

On 2/16/2023 at 1:56 PM, Lion EA said:

However, the S-corp HI is pretty much a wash anyway. You add it to wages on W-2 and S-corp deducts, but shareholder/employee subtracts it above the line on the 1040 and doesn't have to use Sch A. (Was that law written when the % was less than 100% or something?) It always seems like going around in circles for no extra benefit to either!

One benefit to including the health insurance amounts in the wages (as you're suppose to do anyways) is that is helps fulfil the reasonable compensation requirement.  With health insurance as high as it is, it's a nice chunk of the reasonable comp being covered and it's not subject to FICA.  WIN-WIN. 

[Lion EA]

Does the IRS compare RC to Box 1? Or, Box 5?

I have clients that RC would compare well to Box 1 (HI) and wouldn't have to have any Box 3-5 income at all if it won't reflect poorly on their RC. They could take all the rest they need to live on as distributions.

[Lee B]

My understanding is that only wages subject to employment taxes are "reasonable compensation"

[G2R]

39 minutes ago, Lion EA said:

Does the IRS compare RC to Box 1? Or, Box 5?

I have clients that RC would compare well to Box 1 (HI) and wouldn't have to have any Box 3-5 income at all if it won't reflect poorly on their RC. They could take all the rest they need to live on as distributions.

32 minutes ago, cbslee said:

My understanding is that only wages subject to employment taxes are "reasonable compensation"

I've always assumed it was box 1. Is there some place you've read that box 3-5 are the determining factor for reasonable comp? 

The thread made me dig for more research and though I couldn't find anything that outright gave the answer, this article by the AICPA discusses it ambiguously, but admittedly, it's not a slam dunk.   

The Wage Compensation for S Corporation Officers fact sheet from the IRS discusses reasonable salary and then mentions >2% Shareholder HI in the same sheet so it seems like they might be alluding to it being included, but if I've read too much into that, I'd definitely want to know. 

 

 

[Lee B]

In all the court cases of which there are many, the focus is on the payment and/or avoidance of employment taxes

directly related to whether or not reasonable compensation has been paid.

Since the Health Insurance added to Box 1 is not subject to employment taxes, there is really no difference taxwise from a distribution of profits.

[Sara EA]

On 2/16/2023 at 1:43 PM, schirallicpa said:

no employees at all

If there are no employees at all, and the owner doesn't work there either, how does the corp make money?  If the corp paid the health insurance, who did the paperwork and wrote the check, a volunteer?  Unless you've stumbled across the only corp in the world run entirely by bots or AI, I'd pass on this return.

[mircpa]

There are 2 separate issues being discussed

One is reasonable officers compensation on which SS & medicare needs to be paid.

Amount of SEHI needs to be added in line 1 of W2. Also you will take deduction of SEHI amount against AGI in 1040. For you to take this deduction, amount of SEHI should be less than SS & medicare wages.

Should the amount of SEHI is higher than medicare wages then your deduction is limited to amount of SS & medicare wages & excess will get reported in Sch A under medical expenses.

[Lion EA]

So, HI in Box 1 does NOT help an employee/shareholder meet RC, because no SS/Medicare is being paid on HI.

[G2R]

10 hours ago, Lion EA said:

So, HI in Box 1 does NOT help an employee/shareholder meet RC, because no SS/Medicare is being paid on HI.

It doesn't seem that there are specific regulations that state this one way or another, none that I have found at least. 

As @cbslee stated, court cases have focused on the payment and/or avoidance of employment taxes so I wouldn't avoid the employment taxes entirely.  I'd expect many of these cases were primarily about compensation being too low and not about HI not being applicable to RC calculations. And as @mircpastated, having Medicare wages be at least equal to the SEHI to get the benefit of the deduction makes logical sense. 

The way I see it, if you had solid proof that reasonable comp was say $80k for the industry and $10k of it was HI, it would be in the IRS's hands to prove their regs say the HI isn't includable in the RC calculation.  JMHO.

[Medlin Software, Dennis]

11 hours ago, Lion EA said:

So, HI in Box 1 does NOT help an employee/shareholder meet RC, because no SS/Medicare is being paid on HI.

Depends on who is asking and how the owner/employee replies.

Mortgage lender, does not likely count Section 125 or S corp insurance. Other lenders, make them define what they are asking for and they may ask for Box 1 earnings.

I push to include health premiums as pay. I am going to have insurance, pre tax or not, so why should I be punished (lower countable pay) just because I can avoid taxes on the premiums.

For those trying to just meet RC, this is a real issue to ponder since their premiums could be 20k plus (family).

[Medlin Software, Dennis]

G2R’s quote actually has the answer for RC. “Remuneration”. This means they insurance counts towards RC since is is money received because of employment. Remuneration is the term to stand on, and their definition is favorable.

back when we got our first mortgage I was an employee only. The lender said we did not have enough income. “Suddenly” I had a new stub with no Section 125 (health insurance) and that same amount added to taxable wages. I also had a letter from employer stating I declined Section 125 going forward. Silly exercise, but it worked. 

[Lion EA]

I have only 2 S-corps left, and both pay their shareholder/employee well. One has very cheap union insurance; the other has very expensive (pre-existing conditions) family insurance ~$35,000.

I turned away a potential client who wanted to use his S-corp like his personal bank, paying for everything he could think of our of his corp, OIH, Cadillac health insurance, taking distributions whenever he needed funds to live on, telling me that HI should be the only amount on his W-2, because he wasn't going to pay payroll taxes nor use a payroll company. I declined to accept him as a client. Maybe that one part was correct, but he was too much of a player for me and my biz model.

[Medlin Software, Dennis]

So many believe they do better not paying RC and payroll taxes, versus a good long healthy contribution to SS...  While it does not come up often among my customers, I have yet to hear from one who was doing better with their investments over SS, as many seem to skirt RC.  I share this as often as I can.  In the last couple of decades (maybe longer?), SS is still a better "deal" for the average person.  What often gets overlooked is coverage for non working spouses, disability, survivor benes, and how a disabled child/adult can transition from SSI to SSDI when a parent claims SS (or on death).  I have a huge bias - to be clear.  My grandmother collected well from SS for 50 years.  I was a survivor bene recipient.  I have a non working spouse.  I have a disabled child/adult - who will likely draw SSDI from my record for 30-40 years (a significant "raise" from SSI, and with no means test).

[Lion EA]

...paying for everything he could think of out of his corp...