As we approach the end of the year and many businesses are preparing to run their final payroll runs for 2018, we thought we would take a moment to remind business owners of a common mistake we see regarding how health insurance premiums are treated.

For rank and file employees, employer paid health insurance premiums are generally not taxable to the employee, nor are they deductible by the employee as an expense.

However, for shareholders in an S corporation that own more than a 2% stake and who have their health insurance premiums paid for by the corporation, those premiums must be included in wages on their W-2 form, and can then be deducted as self-employed health insurance on their personal 1040. The premiums are not taxable for FICA or Medicare payroll taxes, but are included in taxable wages for income tax purposes. Note also that family members of 2% or greater shareholders are also included in this rule.

Further, these same shareholders may take a deduction for Medicare premiums paid by the shareholder and can treat them as self-employed health insurance premiums on their 1040 forms ONLY if they are reimbursed by the S corporation for the premiums AND that reimbursement is included in W-2 wages.

If you have any questions about this issue or any other year end items please don’t hesitate to contact us directly.

Onisko & Scholz, LLP