"S Corp Health Insurance: Key Tax Rules Explained"

S Corporations can deduct health insurance costs for employees, but special rules apply for shareholders owning 2% or more, requiring premiums to be treated as wages and reported on W-2s. Proper documentation, compliance with non-discrimination rules, and awareness of state-specific regulations are essential for accurate deductions and tax reporting.

Aspect	Explanation
Eligibility for Health Insurance Deduction	S Corporations can generally write off employee health insurance costs as a business expense. However, specific rules apply depending on the ownership structure and the relationship of employees to the shareholders.
2% Shareholder Rules	Health insurance premiums paid for employees who are not shareholders are deductible as a business expense. For shareholders owning 2% or more of the S Corporation, the rules are different. These premiums are treated as wages and must be included in the shareholder's W-2.
Tax Treatment for 2% Shareholders	Health insurance premiums included in wages for 2% shareholders are taxable for federal income tax purposes but are exempt from Social Security, Medicare, and federal unemployment taxes.
Deduction for Shareholders' Personal Taxes	2% shareholders can deduct the health insurance costs on their personal Form 1040, provided the S Corporation has properly included the premiums in their W-2 and the shareholder meets eligibility criteria for self-employed health insurance deductions.
Documentation Requirements	To deduct health insurance costs, S Corporations must maintain clear records of payments and properly report them in the payroll system and relevant tax forms (e.g., W-2 for shareholders).
Non-Discrimination Rules	Health insurance plans offered by the S Corporation must comply with non-discrimination rules, ensuring that benefits are provided fairly and equally to all eligible employees.
State-Level Variations	Some states may have specific rules about health insurance deductions for S Corporations. It's important to check state regulations to ensure compliance.

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