Discussion:Life Insurance Premiums Deductible by S Corp?

Fringe benefits paid to a more than 2% shareholder should be treated as wages to the extent that the amounts paid are not in excess of a reasonable salary. Wages that are inadvertently omitted from the W-2 form should nevertheless be reported on line 7 of the 1040.

It seems that the shareholder's treatment of the medical insurance premiums depends upon whether or not the S/H has any other coverage available to them, either through another employer or a spouse. If there are no issues with this, then we look to see in whose name the insurance was purchased. If purchased under the shareholder's name, then they would be able to deduct as an itemized deduction subject to limitations. Otherwise, they could deduct these premiums as an above the line deduction.

Do I understand this correctly?

JC, health insurance payments made on behalf of an S corporation shareholder pursuant to a "plan" that covers specific classes of employees or employees in general are exempt from FICA and Medicare taxation. See Sec. 3121(a)(2). This exclusion applies whether or not the policy is issued under the name of the corporation. There is nothing in the law that requires that the plan be in writing; however most practitioners recommend that the corporation issue a memo to all eligible employees explaining their right to insurance coverage or reimbursement for health insurance coverage.

This topic is so confusing!

This is from PPC's Payroll Tax Deskbook...

S Corporations. Accident and health insurance premiums paid on behalf of more-than-2% S shareholder-employees are reported as additional compensation to the shareholders. The additional compensation is reported as wages on the shareholder-employee’s Form W-2...

The compensation is subject to federal income tax withholding (FITW), computed using either regular withholding rates or the flat supplemental rate. However, the compensation is not taxable for FICA and FUTA tax purposes if the premium payments are made pursuant to a plan providing accident and health coverage [IRC Secs. 3121(a)(2) and 3306(b)(2); IRS Ann. 92-16].

I think it is a couple of hundred bucks or so.

In general, premiums for life insurance are tax-deductible. However, premiums paid on a policy covering the life of an officer, employee or other key person are not deductible if the business is a direct or indirect beneficiary under the life policy. Premiums paid on a life insurance policy of which the business is a beneficiary are not deductible, since life-insurance proceeds would not have to be included in taxable income when received by the company.