2% S Corp Health Insurance

Each type of business is treated differently when it comes to the IRS. For example, owners of a S Corporation that offer health insurance must be aware of the 2% shareholder rule. Continue reading for more information on 2% S Corp health insurance.

What is an S Corporation?

First, let’s establish how an S Corporation is different from other types of businesses. From an IRS perspective, S Corporations, or S Corps, are businesses that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. S Corps do not pay corporate income taxes, but rather pay their shareholders, who are responsible for the taxes. Only small businesses with 100 or fewer shareholders can be eligible for S Corporation tax status.

Next, we will review what a 2% shareholder is. Under IRS code, a 2% shareholder is anyone who owns 2% of the company’s stock, or voting power, at any time during the year. An owner of a S Corp is more than likely considered a 2% shareholder.

How does this affect 2% shareholders’ health insurance?

S Corporations that offer health insurance as a fringe benefit, must know how to handle taxes on the health insurance. While health insurance can be offered to employees of a S Corp tax-free, things are different for those 2% shareholders.

For any shareholders with 2% or more of the company’s stock, health insurance premiums paid by the company must be added to their income. Since this amount is added to their income, the insurance premiums are subject to income taxes. While these premiums are added to the shareholder’s W2 for income tax purposes, the additional wages are not subject to additional payroll taxes such as FICA taxes, Federal Unemployment Tax (FUTA), or State Unemployment Tax (SUTA).

How is the business owner affected?

While owners of a S Corp may not have the same access to tax-free insurance premiums as employees do, they can still receive tax-advantage premiums. The owner can take a personal income tax deduction on any health insurance premiums paid by the company. For owners to be eligible for this personal tax deduction, the company must either pay for the premiums directly or by reimbursing the S Corp owner.