When you are an S corporation, you may be wondering if health insurance premiums are tax deductible. The answer is yes, but there are some limitations. Here is a look at the basics of how this works. First, let’s take a look at what health insurance is. Health insurance is coverage that provides for medical expenses, whether those expenses are covered by your employer or not. In some cases, you may also be able to receive benefits such as prescription drugs and hospitalization. Now, let’s take a look at what an S corporation is and why it might need health insurance.
As an S corporation, you are allowed to have employees who are treated as shareholders in the company. This means that employees are taxed on their share of the profits, rather than their salary. This means that if your health insurance premiums are paid by your company, they may be tax deductible for you as an S corporation. Keep in mind that this depends on the specific situation and there may be other limitations that apply.
Health Insurance Premiums
Are health insurance premiums tax deductible for S Corps? Surprisingly, the answer to this question is somewhat confusing. According to IRS Publication 587, health insurance premiums are not generally deductible for S corps. However, there are a few exceptions to this rule. The first exception is if the premium is paid using employer funds. In this situation, the premium would be considered an expense of the business and would be deductible.
The second exception is if the premium is paid through an employee’s personal health insurance plan. In this situation, the premium would be considered an employee benefit and would generally be deductible. If you have any questions about whether a particular health insurance premium falls within one of these two exceptions, consult with your accountant or tax advisor.
S Corporation Status
For tax purposes, an S corporation is a type of corporation that allows businesses to operate as Sole Proprietorships. This means that the business owner (the sole proprietor) is personally liable for all business debts and taxes, including income, social security, and Medicare taxes.
One of the benefits of forming an S corporation is that it can allow businesses to take advantage of the corporate tax structure. This means that rather than paying personal income taxes on profits earned by the business, the profits are instead taken into account as part of the company’s taxable income.
This benefit is illustrated in Figure 1 below. In this example, Sally owns a business as a Sole Proprietor. Her business earns $100,000 in profit in year one and pays $9,000 in personal income taxes on this profit. However, if Sally were to form an S corporation for her business, the $100,000profit would be considered part of her company’s taxable income and she would only pay corporate income tax on this amount ($101,000). As a result, her overall tax bill would decrease by $9,000.
Health Insurance Premiums as Taxable Income
Health insurance premiums are often treated as taxable income for individuals who are self-employed and file their taxes as sole proprietorships or S corporations. However, health insurance premiums paid by an S corporation may be deductible if the corporation meets certain conditions. In order to deduct health insurance premiums, the S corporation must:
1. Be organized under the laws of a state or United States territory;
2. Be engaged in a trade or business; and
3. Make payments of at least a specified amount (dollar amount) into an accident and health insurance account for each employee who is an active member of the corporation’s workforce during the taxable year.
Health Insurance Premiums as Deductible Expenses
Yes, health insurance premiums are generally tax deductible as an expense for a small business owned and operated by an individual. This deduction is subject to certain limitations, including the amount of the premium that is paid and whether the health insurance is provided through an employer. The deduction may also be subject to various other restrictions, such as the use of medical expenses as a partial or exclusive means of calculating income.
Conclusion
Health insurance premiums paid by an S corporation are generally not deductible for federal income tax purposes. This is because the company is treated as a partnership for federal income tax purposes and health insurance premiums are considered expenses of business operations. In fact, one of the main reasons why health insurance premiums are not deductible for an S corporation is to avoid double taxation — once when the premiums are paid and again when they are used to offset taxable income from other sources.