Discussion:S Corp Paid Health Insurance NOT in W-2
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Discussion Forum Index --> Tax Questions --> S Corp Paid Health Insurance NOT in W-2
16 March 2009 | |
| I have a client who is the sole shareholder of an S Corporation. The S Corporation paid health insurance premiums for him in 2008. The premiums have not been included in his W-2, and I seriously doubt I will be able to convince him to incur the expense of asking his payroll company (they are a leased employee situation) to file a W-2C at this point, as they are undergoing an corporate bankruptcy in 2009 and I'm sure he will not deem this sufficiently important to deal with.
I am certain he will not be my only >2% S Corporation shareholder for whom I will have this problem. So, Question: what shall I do with these? IRS has pretty clearly said I can't just add them to Other Income on his 1040 and then deduct them as SE Health Insurance, since they weren't included as wages. Shall I just consider them not deductible on the 1120S, and let the shareholder pay additional taxes for his lack of willingness to change the W-2? That certainly is NOT the correct tax result, but then sometimes you lose the tax result because you don't do the paperwork correctly. Hrmph. Just looking for opinions really. Anyone? Anyone? Thanks. | |
| 16 March 2009 | |
| you could deduct them as 'officer/shareholder compensation' on the 1120-s, then add to 1040 line 21, only to deduct again on line 29. | |
| 16 March 2009 | |
| Well that's an inherent part of the question. So we'll start with - if it is deducted as usual on the 1120S, and is not included on his W-2, then what shall I do with it on his 1040, if we're not allowed to put it in 'other income' and then deduct it as SEHI? | |
| 16 March 2009 | |
| But everything I have read indicates that Notice 2008-1 pretty specifically indicates we can't just include on line 21 and deduct it again on line 29, that IRS has come down and said the premiums must be in the W-2. Which I think is totally inane, but I'm trying to *think around* what to do if it isn't in the W-2, given IRS' new guidance... whether to just do it anyway and fight it on audit based on the concept of the 'correct tax result' ? Even though it seems to be contrary to the current rules? Or if the deduction gets forfeited? | |
| 17 March 2009 | |
| Yes, but unfortunately the client is unwilling to pay the additional fee to go back to the payroll service to request a W-2C. The medical insurance premiums will not be in a W-2. And this will not be the only client I have in this situation, and I find it hard to believe others do not have clients in the same predicament. Hence I am curious what others might be doing. | |
| 17 March 2009 | |
| you don't need the payroll company to do a W-2c, you can do one yourself or the client can if they are that concerned about fees. Quite frankly the fees can't be that much so I would be concerned about a client who was unwilling to pay a few bucks to get a page 1 deduction on their 1040. Maybe if you gave it to him in the "this is what it will do to your taxes" and showed the difference between pg 1 or sch A? That is, I am assuming, that there is AGI and not an NOL. | |
Death&Taxes (talk|edits) said: | 17 March 2009 |
| I had one of these recently where I added the income on the 1040 to Line 7 as additional wages then backed it out as health insurance to get to the AGI. Former clients who returned to the fold...they'd formed an S Corp while away. Same problem.....too cheap to want to do it right. | |
| 17 March 2009 | |
| Honestly, VSCPA, I would simply deduct the health insurance on the form 1120S under employee benefits, informing the client that although the result was correct, the paper wasn't shuffled correctly and if he's audited, the IRS could do a "gotcha" and disallow the deduction.
This is just my humble opinion & many others may think it too cavalier. | |
| 17 March 2009 | |
| It's simple, do it correctly. If the client doesn't want the p/r service to issue the W-2c, then you can do it.
If he's unwilling to listen and do it correctly, give him his walking papers. | |
| 17 March 2009 | |
| Thank you Death&Taxes & Smokeytax for addressing the specific question I asked. I appreciate the comments related to 'just make him do it right,' and I may just do the W2c myself in the end ... but I'm after a more theoretical discussion, because as I said I have more than one client who may not do it right and so I'm after just opinions on that particular situation.
My ultimate thought is that the whole thing is DUMB because the number of people for whom you add it to their W2 and don't get to deduct it immediately on page one, thus resulting in the same exact difference as just deducting it on the 1120S and being done with it, is miniscule. And further, if they're going to insist on making S corps go through extra hoops anyway, I don't understand why it is insufficent to just add it to 'other income' on 1040 if it's not in the W2. Income on line 21 is exactly the same as line 7. My guess is too many people were taking the SEHI deduction on page one without including it in income first, thus getting a 'double deduction' ... but it's all just crazy to me. AT any rate, if anyone has additional thoughts under the premise that it is NOT going to be in a W2, I welcome them... if for nothing else than a nice break from actually DOING returns . . . . . | |
| 17 March 2009 | |
| You can't take the deduction as an employee benefit on the 1120S and then take it again on the 1040. | |
| 17 March 2009 | |
| Its not whether preparing it with the health ins will net to a different number that should be the determining factor. Its... what is the correct way to do this and, what happens if I go ahead & prepare it incorrectly and it is audited or automatically checked in the IRS system. | |
| 18 March 2009 | |
| If you take the route to prepare a corrected W-2 for your client, don't you then have to prepared a corrected W-3, 940, 941 and state unemployment forms so there won't be any matching problems in the end? | |
| 18 March 2009 | |
| No, my understanding is that it would not effect the 941. You would identify the sehi in box 14. I would have to look this up again to be sure. | |
| 18 March 2009 | |
| Since the W2c would be only for Boxes 1 & 16, there is no adjustment via a 941C. Yes, had the amount been reported originally then the first line would need to match what ends up in Box 1 of the W2, but a 941C has no adjustment for items that only affect federal taxable income. You can only adjust SS and Mediare. A corrected 940 wouldn't be needed because shareholder health insurance is not taxable for FUTA purposes. And yes you'd need a W3c to go with the W2c. | |
Scrabtree EA (talk|edits) said: | 18 March 2009 |
| Put the cost of the health insurance in the supplemental information on the K-1. I use the following explanation "Taxpayer needs to add to income health ins that was not reported on his W-2" I also use this for the personal use of vehicles. The income from the health insurance is subject to income taxes but not Social Security or Medicare. I list it on line 21, other income, Other accountants list it on line 7 with an explanation. I have been doing this for many years and had one client's corp audited with no problem. | |
| 18 March 2009 | |
| Scrabtree EA - I think alot of us used to do this, or something similar, before IRS Notice 2008-1 came out. Was your client audited after the IRS Notice came out specifically detailing the correct procedure? | |
| 18 March 2009 | |
| VSCPA - yes I meant only that the 941c need not be done, not the W3c...oops. | |
| 19 March 2009 | |
| I've done per diem work at a few different firms, and one method I've seen is to use a 1099-misc to report the premiums as income to shareholders, with additional info reporting on the K-1 detailing the related SEHI deduction. Obviously not correct, but it's another option, I suppose. Good-faith attempt to comply, maybe? Or maybe a request for an audit with a W-2 & 1099 issued from same corp. Should be interesting to see how much Notice gets enforced. | |
| 20 March 2009 | |
| So, VSCPA, what did you decide?
Now I'm liking the W2c approach, as prepared by me, probably with less cost to the client and definitely less chance of error than if prepared by the payroll service. | |
Seaside CPA (talk|edits) said: | 20 March 2009 |
| Why not just issue another W-2, this one being just for the health insurance. I don't believe there is a problem receiving two W-2's from the same employer. I've done this in the past. So far, no problems. | |
Harry Boscoe (talk|edits) said: | 20 March 2009 |
| Seaside: Excellent suggestion!! | |
| 20 March 2009 | |
| I was undecided about how to handle just this situation when I first started reading this thread. In a prior year I had a different client get their payroll company to prepare the corrected W-2/3. It was a nightmare! My client was charged a lot of money and when it was given to me it was wrong and I had to spend more of my time getting the payroll company to redo it properly. Yuck! I just didn't want to go through that again this year and therefore was very tempted to handle it off the W-2. But after reading this thread and being assured that only a W-2c/W-3c would need to be prepared, I just did it myself. Done in 10 minutes - the right way! | |
| 20 March 2009 | |
| I'm sure this is really stupid to admit, but I've never considered doing a W2 or W2c myself when the original was done by a payroll firm. First of all, thanks for the suggestion. Second, do you just sign up the company on ssa.gov like you would any other company? There's no problem with submitting W2's this way when the originals were submitted via another means? | |
| 24 March 2009 | |
| Hi - sorry, I got done with the return and left the conversation behind in my brain. Smokeytax - I ended up calling the client and explaining the deal, and the technical requirements, and the various potential options and potential pitfalls therein. And suggested they at least call the payroll company to inquire about a W2c. Turns out it was no big deal, minimal cost, and as far as I know they already have it in hand. Still won't be the last to come in without it in the W2, though. I may treat future ones differently.
As for preparing the W2c myself, the situation was a bit complicated by the fact that the employees were actually leased, and therefore the W2 didn't come from the company but from the payroll agent's EIN, etc. So actually I suppose I could have filed a W2/W3 in just the client company's name. The premiums aren't taxable for SS, Medicare, or FUTA or SUTA, so wouldn't have required filing any other returns... so I suppose we could have gone that route. Will consider that in the future I suppose. At any rate thanks to all for the conversation . . . | |
| 1 April 2009 | |
| Is there anything wrong with having more than one W-2 for an employee? I have seen it done by others. I have issued a W-2 and W-3 for just the health insurance and reported it as an additional W-2 on the 1040. Easy and does the job. Think it will cause trouble? | |
| 3 April 2009 | |
| It's late in tax season and my brain is tired. Please let me know if my thinking on this is correct regarding Notice 2008-1 and a sole shareholder S Corp.
If an S Corp paid the health insurance for the sole shareholder and did not deduct it on the 1120-S and did not include it on the shareholder's W-2 and the shareholder simply took a deduction for the amount paid on line 29 of the 1040, wouldn't this get you to the same place if it was reported on W-2 and then deducted on line 29. No deduction on 1120-S increases the income passing through to shareholder - a deduction on line 29 would then cancel this amount the same as if the health insurance payment was reported as Officer Compensation (reducing the income passing through to the shareholder) and included on the W-2 and deducted on line 29. | |
| 3 April 2009 | |
| You make it tough to read your post, but I think I get it. Usually it gets you to the same place numerically, which is why it has been a somewhat prolific workaround. There are times when it doesn't, such as for the EIC for certain taxpayers. However, Notice 2008-1 made it clear that they did not allow this. | |
Harry Boscoe (talk|edits) said: | 3 April 2009 |
| Me fix format.
Now me drink PBR. What did the S corp do with the premium expense? That will determine whether the net, overall, intuitive, whatever tax result is "equivalent" to what's been prescribed by Notice 2008-1. | |
20 January 2011 | |
| My situation is similar, but not the same. My S corporation client is a leased employee. The leasing company will not add his health insuarnce on his W2 since he is not an "officer" of the leasing company. He did not receive any W2 salary from his own S corp. It seems running the income through other income on the 1040 and then deducting it is not correct. Any sugestions? Thank you. | |
| 20 January 2011 | |
| ACS, take a look at Discussion:PEO and the S-Corporation, it's specifically about that situation, and has great cites, too. | |
| 21 January 2011 | |
| ACS, if the health ins was paid by his S Corp, issue him a W-2 in the EIN of the SCorp for the health ins amount. | |
| 24 January 2011 | |
| ACS, additionally I might add, on the books of the SCorp the health ins paid is expensed as Wages expense not insurance or employee benefit expense. Also it only goes on Box 1, subject only to federal and state income tax not SS or Medicare taxes. Then the S/H reports the W-2 income on his 1040 but is now able to deduct the amount on the front of his 1040 as SE Health Ins deduction. | |
Nightsnorkeler (talk|edits) said: | 24 January 2011 |
| How will he be able to deduct it on page 1 if he doesn't have FICA wages form the S-Corp? | |
| 24 January 2011 | |
| He may very well have W-2 wages otherwise from his SCorp and probably should. The point here is that SE Health Insurance paid for more than a 2% Shareholder in an S Corp is not subject to SS and Medicare taxes, (or Futa), only income tax. Due to the fact that the S/H had it added to his W-2 (taxed on it on his personal 1040 as wages), will allow him/her to deduct it on the front of the 1040 as "SE Health Ins".
If it's accounted for properly, the net effect is: 1. When paid by the S Corp (to the health ins co)it's deducted as Wages. (reduces bottom line profits in SCorp). 2. Added to S/H W-2. (increases his/her income on 1040). We're even at this point. 3. Deducted as "SE health ins" on front of 1040. Now the net effect is the cost of the S/H health ins is removed (deducted 100%) from the S/H income. | |
Nightsnorkeler (talk|edits) said: | 24 January 2011 |
| Due to the fact that the S/H had it added to his W-2 (taxed on it on his personal 1040 as wages), will allow him/her to deduct it on the front of the 1040 as "SE Health Ins"
Agree with everything except for this statment. The deduction on page one is limited to SEHI included in Box 1 of the W-2 up to the amount of wages subject to FICA from the same business. So if the W-2 has no FICA wages, then no deduction. OP (1/20/2011) said: He did not receive any W2 salary from his own S corp. As Riley stated in the post mentioned earlier: Internal Revenue Code § 162(l) limits the SE health insurance deduction to the amount of the shareholder’s FICA/Medicare wages from the S corporation. In this case, the shareholder’s FICA/Medicare wages from the S corporation are zero, forcing the shareholder to deduct his health insurance premiums on Schedule A. | |
| 24 January 2011 | |
| Yes, correct, sorry I forgot in this situation he had -0- wages otherwise. Would be also be limited to net profits if you're a Sch C. | |
| 5 March 2011 | |
| Facts:
S-Corp pays $11,692 Health Preiums where > 2% S/H contributes $2,492 - Net benefit to S/H $9,200. Is not $9,200 what is to be included on W-2 in Box 1 rather than total premiums? | |
Nightsnorkeler (talk|edits) said: | 6 March 2011 |
| What do you mean by "S/H contributes"? Are you saying that the shareholder-employee reimbursed the S-Corp $2,492? | |
