Get More from Your Self-Employed Health Insurance Deduction

May 31, 2023
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If you are a self-employed shareholder of at least 2% in an S-corporation, you may be subject to different tax laws. It is very important to understand how to report your health insurance expenses for the best tax benefits. Otherwise, you could be facing unfavorable tax outcomes.

An Important Distinction

When your S-corp covers or reimburses your health insurance expenses, it classifies the payments as box 1 wages on your Form W-2 income report. They are not classified as box 3 or 5 wages. However, you will need to use the Medicare wages listed in box 5 of the W-2 when reporting your personal “earned income.” This is a critical step when calculating the eligible amount of a self-employed health insurance deduction on Form 1040.

Two Different Scenarios

Let’s look at a couple of examples to show this rule in real-life scenarios:

Joe owns a significant share in an S-corporation. He is compensated $0 in cash wages for the year, but reimbursed $18,000 for his health insurance payments. His W-2 will show that $18,000 as box 1 wages. Meanwhile, boxes 3 and 5 will show $0. Ted has earned $18,000 in taxable wage income from the health insurance reimbursement. Unfortunately, his Form 1040 self-employed health insurance deduction will be $0 because there are no Medicare wages being reported in box 5.

A different scenario finds Maria getting paid $107,000 in cash wages and reimbursed $22,000 for her health insurance. Her W-2 shows box 1 total wages of $129,000, box 3 wages of $107,000 and box 5 wages of $107,000. The IRS will allow her Form 104 self-employed health insurance deduction of $22,000 because her Medicare wages exceed the insurance cost.

Making the Right Tax Moves

These are two common situations we see. You want to make sure that your S-corporation reports Medicare wages (box 5) that are greater than the health insurance costs paid or reimbursed. This provides a maximum self-employed health insurance deduction and helps you avoid an unfavorable tax outcome as an S-corp shareholder.

This is a tricky tax rule that often comes back to bite S-corporation owners and shareholders who are getting healthcare costs covered by the corporation. For all your personal and business tax planning needs, count on the team at Illumination Wealth. Contact us today to schedule an appointment with one of our leading financial advisors. Get the most out of your tax benefits and minimize your tax liabilities!