This Just In... New Rules for S-Corps Shareholders Deducting Health Premiums

Hi Julie,

No, the plans can be in your name. As a sole proprietor, there is no legal distinction between you and your business so having the plans in your personal name is fine.

Both the premiums and the HSA contributions are reported on the 1040, not the Schedule C (which is a bummer because you end up paying SE tax on it).

The HSA contribution goes on line 25 of the 1040 and the premiums paid go on line 29.

If you include the premiums on the Schedule C and the 1040, you'll be deducting it twice and underreporting your income.

Hope this helps.

L:)

Hi Adam,

Actually if you're already covered under another plan, the HRA isn't really going to help you.

The trick to the HRA is you have include the payments as part of your W-2 income. Then you deduct it under the self-employed health care premiums, line 29 on your 1040. This is deduction is covered under IRC Section 162(l).

In order to be eligible to take this deduction you or your spouse cannot be eligible for a subsidized health plan by another employer. If your current health plan is not subsidized then you could have an HRA.

Otherwise the HRA would actually increase your taxable income because you would include the payments in W-2 income but you couldn't deduct it anywhere except as an itemized deduction & you're pretty much back at paying for the health care costs out of pocket.

You would get a little benefit as you would save on the FICA tax of the HRA payments and you could increase your retirement plan contribution because your W-2 wages are increased.

Hope this helps.
L:)

Hi,

The HRA is in the name of the Corporation. You as an employee enroll in the plan. Also, the HRA is funded completely by the employer. The employee is not allowed to make contributions to an HRA. Don't confuse and HRA with an HSA. An HSA can have employee contribution but its a different beast entirely and is extremely limited in the associated health plan & the types of expenses it can reimburse.

I don't think adding your wife as an employee would minimize the paper work because now you're going to have a payroll for 2 people.

Assuming your medical costs are $10k/yr for your family, you could pay yourself $215K and then have $10K of reimbursed medical through the HRA. You would still be getting $225K as you are now, but you would safe the 2.9% Medicare tax on that $10K.

As >2% shareholder the HRA reimbursements are included in your wages (Box 1 of your W2) but they are exempt from payroll taxes, FICA & unemployment. The S-Corp medical payments are also reported in box 14 of your W2 which are then deducted on your 1040 as self-employed medical expenses. The net result is the company pays the medical expenses with no tax implication to you other than the paperwork.

Hope this helps.
L:)

Hi SD,

OK. Lots going on here.

First you can deduct the overseas business travel on your US return if purpose for the travel is entirely business. If the overseas travel was only partly for business reasons then a plethora of exceptions could apply to limit the deductibility of the travel expenses. See Chapter 1 of IRS Publication 463, Travel, Entertainment, Gift, & Care Expenses".

So when you say "this country" is that the US or overseas? Why isn't the company paying for the business-purpose travel expenses? I don't think I have the whole picture. :)

Per diem is handy because, if you qualify and you only reimburse employees the per diem rates, then that satisfies your "adequate accounting requirements" & you don't have to produce any receipts for the travel expenses. Instead you would reimburse at the lodging & meals rates given on the State Dept page you references. You can only use 3/4 of the rate for the day you depart and return.

Now for the bad news...

If you own 10% or more of your S-Corp (either directly or indirectly through a family member), the per diem rates DO NOT satisfy the accounting requirements and you must be able document all your expenses. (See page 29, IRS Pub 463)

That means, yes, you do need a receipt or other documentation for every single travel expense. Other documentation could be a travel log that documents tips, taxi & public transit expenses when a receipt is not readily available. So if you don't have a receipt jot the expense in your journal & that will suffice. You should probably come up with a monthly travel expense reimbursement form that you use to document the expenses reimbursed.

Pub 463 has a lot of great information in it. Especially about record keeping & what kind of documentation you need. The problem is it's so jam packed with info it takes a while to absorb it all.

I hope this helps!
L:)

Yes, in reading Pub 535, you can apply Rev. Proc. 2008-1 to 2007 and earlier tax years.

You can go back to 2006 & earlier years and amend your returns using the treatment described. Actually I think the 4 examples listed in Rev. Proc. 2008-1 are the easiest to understand but the rest of it is "taxlish". :)

Hope this helps.
L:)

Linda,

Great site! But, can I say I'm so sick of reading about all these rules. Why does the US govt make it so difficult for VERY small business people???

So I've been reading about the clarification of the S-Corp ruling of Medical Insurance FOR 2008. And the HRA stuff. But, I'm still trying to figure out 2007.

I'm S-Corp.
Insurance Premiums in MY name (due to MN law)
My corp paid/pays them.
My corp reimbursed me for Out of Pocket Medical in 2007.

WHAT do I enter in Box 1,3 & 5 of my W-2 besides my Salary?

If both the insurance premiums and the out of pocket, I "assume" I get to write off the premiums on my personal 104. But, what about out of pocket?

Also, are Heath Club dues paid by the S-Corp considered a "fringe benefit" and thus must be reported in Box 1,3 & 5? And if yes, WHERE is the tax advantage???

Julia

In your case, you would the premiums are an adjustment to gross income & reported on line 29 (on the 2007 Form 1040) titled "Self-employed health insurance deduction". The title is a little confusing but that's where it goes.

Because of the adjustment you end up paying tax on $40K.

L:)

Hi Anbu,

Starting in 2008, yes, the S-corp can make payment on your behalf. If you arrange it like that, you cannot take the self-employed health insurance deduction on your 1040.

I still prefer setting up an HRA because through that plan, the S Corp can reimburse you for your out-of-pocket medical expenses in addition to the premiums. And since the value of the HRA payments increase your W-2 wages the company can make a larger retirement plan contribution on your behalf.

The way you've set it up, the company can only pay the premiums.

Hope this helps.
L:)

You are not self employed. You are a statutory employee of the S-Corp. You are eligible for the HRA with the caveat that the reimbursements must be included in your W2 wages. Which are then deducted as self-employed health insurance adjustment to gross income.

Yes, the labels do make it confusing. But we have to live with it. :)

L:)

Unfortunately, no. The federal rules don't recognize domestic partners.

L:(

No, the S-Corp could not reimburse your family for the premiums paid through another employers plan. The reason is those premiums are already deducted from her check with pre-tax dollars.

If you form an S-Corp 50/50 you might be able to say she does not materially participate and not have to take a salary, but then her share of the company's income/loss is considered passive and special & complicated rules apply. I would not do this. Better just to make you a 100% owner.

Hope this helps.
L:)

Hi Jean,

First I'm going to assume that your multi-member LLC is being taxed as a partnership. So this member should not be getting a standard paycheck. Instead her "salary" is considered a guaranteed payment.

As such, the health care premiums are deducted by the LLC/partnership as guaranteed payments. These will show up on the member's 1065 Schedule K-1 and will be reported on her 1040 in addition to her share of the partnership's income.

Then she deducts the health care premiums as an adjustment to gross income. The net result is the LLC deducts the premiums. For the partner it's basically a wash. She recognizes the premiums as income and takes a deduction for the same amount. So in essence the LLC pays for the premiums with no tax consequences for the partner, with the exception of the reporting hoops to jump through.

L:)

Hi Maurice,

I'm glad this site has been helpful. I completely understand about this being confusing & I'm about to add another wrinkle. :)

Usually when an employee has to pay a portion of health care premiums to a company plan, the premiums are deducted from the employee's paycheck with pre-tax dollars. Meaning the employer deducts the health premium and then the employee pays FICA, income tax withholding tax, etc.

If you reimburse your wife and then deduct that from your taxable income you're effectively making that deduction twice for the same dollars. Something that's definitely frowned upon. :)

Assuming you & your wife are still married & filing joint, don't reimburse your wife as the dollars being used to pay for the premium should already be tax free. I'd setup an HRA so the company can reimburse you for your out-of-pocket expenses, like doctor visit co-pays, Rx, etc.

If for some reason your wife's employer isn't using pre-tax dollars to pay for the premiums you have a couple of options. First ask why they aren't making a pre-tax deduction. Then if they don't make the small change to their payroll, then the HRA you set up can also reimburse for the after tax premiums you pay.

I hope this helps rather than just confuse things more!
L:)

You can have an HRA & an HSA that work together. The HRA would allow the company to pay the the premiums plus dental and vision care. Once the HSA's plan deductible is reached the HRA can be used to pay the co-pays and other out of pocket expenses.

The premium payments are not qualified expenses for the HSA but they are for the HRA.

L:)