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Avoid This Family Member S Corporation Health Insurance Mistake

I’m reaching out to remind you of two important issues related to health insurance deductions for S corporations.

First, if you own more than 2 percent of an S corporation and provide health insurance coverage, there are three steps you need to follow to claim a deduction:

  • Step 1. The cost of the insurance must be on the S corporation’s books.

  • Step 2. The corporation must include the cost of the health insurance premiums on your W-2 form as taxable income (but not subject to payroll taxes).

  • Step 3. If eligible, you must claim the health insurance deduction as an above-the-line deduction on Schedule 1 of Form 1040.

Second, this three-step procedure applies to your spouse, children, grandchildren, great-grandchildren, parents, grandparents, and great-grandparents if they work for your S corporation and the corporation covers them with health insurance. 

The three rules apply to the relatives listed, even if they don’t own any stock directly. For health insurance purposes, the tax code attributes your stock ownership to them and deems that they own what you own.

It’s crucial to get this right, as failing to do so could result in a lost health insurance deduction for your family members and zero deductions for the S corporation.

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Remember to consider your Section 199A deduction in your year-end tax planning. If you don’t, you could end up with an undesirable $0 for your deduction amount.Here are three possible year-end moves that could, in the right circumstances, simultaneously (a)

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