How to pay for health insurance for your business

Published on 2023-07-27

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How do you pay and claim deductions for Health Insurance as a business owner?

Below we have outlined some of the most common scenarios for you to help you understand how to take advantage of this deduction:

S Corporations

If you own more than 2 percent of the shares, you must include the cost of your health insurance paid through the business as income, according to Section 707(c) of the Internal Revenue Code. This means the amount S-corp owners pay for their health insurance is subject to income tax. However, the amount paid is excluded from FICA (Medicare tax), FUTA (unemployment tax), and Social Security if the premium payments are made on behalf of an employee under a plan that provides for all employees, or a class of employees

Although you have to report the premiums paid for Owners as wages to owners, the IRS allows for a deduction on the personal tax return of the owners for the Premiums paid for health Insurance.

For S-corp owners to qualify for the deduction, their health insurance policy must be established by the business and not by the S-corp owner personally. Although, in some states getting a group policy may be difficult if you are the only shareholder, so the IRS has exceptions for these states.

Use the following guidelines during establishing Health Insurance for tax purposes:

  • The business must pay the owner’s premium.
  • It must include the premiums as gross wages in the owner’s W-2.
  • The business may pay for the premiums directly or by reimbursing the Owner.
  • Owner cannot pay the premium directly, without getting a reimbursement from the S Corporation

Owners can use this method to deduct premiums for accident, dental, and long-term care policies as well as for health insurance policies.

HRAs for S Corporation Owners and family members

HRAs are only available to the company's W-2 employees. Since, S-corporation owners are taxed as shareholders representing the company’s profits, owners and their families aren’t employees and therefore aren’t eligible to participate in the benefit.

Single-Member LLC (Schedule C)

If you are a single-member LLC that is a sole proprietorship, your are Self Employed in the eyes of the IRS and eligible to deduct 100 percent of your health insurance premiums, with some limitations. See below:

  • Only take the deduction for months during which you were not eligible to participate in another employer-sponsored health plan, even if you chose not to participate(including spouses health plan).
  • You cannot take the deduction if the amount you paid in insurance premiums exceeds the earned income you received from the business.

Partnerships

If you are a member in a partnership, you are Self Employed in the eyes of the IRS and eligible to deduct 100 percent of your health insurance premiums, with some limitations. See below:

  • Only take the deduction for months during which you were not eligible to participate in another employer-sponsored health plan, even if you chose not to participate(including spouses health plan).
  • You cannot take the deduction if the amount you paid in insurance premiums exceeds the earned income you received from the business.
  • IF the health insurance policy is in your name and you pay the premium, the business needs to reimburse you and include the premium as guaranteed income on your Schedule K-1. Claim the deduction on your tax return.
  • IF the policy is in the company's name and it pays premiums, include the premium as guaranteed income on your Schedule K-1. Claim the deduction on your tax return.

If you need help with items referenced in this post, feel free to reach out to us at info@accountingbiz.co or schedule a free consultation with us here.

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