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2% S-Corporation Owner Wages Question


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7 replies to this topic

#1 bzorc

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Posted 02 June 2005 - 03:01 PM

In reading instructions to Form W-2, and knowing what I know of Section 125 plans, it is agreed that a 2% S-Corporation owner could not participate in a POP plan, or any Section 125, for that matter. However, a question that has come up is in regard to the actual reporting of wages. In looking at the Form W-2 instructions, it indicates that the payment of insurance premiums on behalf of 2% owners is added back to Box 1, 3 and 5 of Form W-2, thus meaning the payments are subject to FICA. However, a client has presented me with a memo that seems to indicate that if there is a "plan" in place for the S corporation employees and their dependents, that the amount of premiums would only be subject to Federal Income Tax Withholding, and would not be subject to FICA.

Is this true? We have been under the impression that the premiums are subject to FICA, but the S Corporation owner gets the 100% "above-the-line" deduction for the premiums paid on their behalf. Thanks for any replies.

#2 oriecat

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Posted 02 June 2005 - 04:14 PM

IRS Pub 15-B says:

"Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee's wages subject to Federal income tax withholding. However, you can exclude the value of these benefits (other than payments for specific injuries and illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes."

So my question is then, what does "other than payments for specific injuries and illnesses" mean? So a general health plan would be excludable, but something that only covered a specific illness, like an AFLAC cancer plan, wouldn't be?


The W-2 instructions says "Cost of accident and health insurance premiums for 2% or more shareholder-employees paid by an S corporation, but only if not excludable under section 3121(a)(2)(B)."

3121(a)(2)(B) says "(B) medical or hospitalization expenses in connection with sickness or accident disability"

So based on all this, I think I would agree that it is probably excludable for FICA. But definitely confusing. :)

#3 mbozek

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Posted 02 June 2005 - 04:36 PM

IRC 1372 includes the cost of fringe benefits for 2% owners as taxable income for purposes of subtitle A (income tax). Wages subject to FICA tax are defined under Subtitle C which excludes amounts paid by the employer for accident or health ins. of an employee. The sub S owner deducts the health ins premium from their income on line 31 of the 1040 and can claim exempton from withholing for amount of health ins. So in the end the cost of employer provided health ins results in 0 tax to an S corp owner.
mjb

#4 GBurns

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Posted 02 June 2005 - 10:09 PM

Line 31 of a 2004 Form 1040 is for self employer persons and should not be applicable to a Sub S Corp owner who would have had the amount of premiums added to Box 1 of the W-2. Deductions for health insurance would most likely be a schedule A item subject to the 7.5% limitation and might very well not necessarily be even deductible which would result in a tax liability for the premiums.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#5 mbozek

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Posted 02 June 2005 - 11:51 PM

The instructions to line 31 notes that the health insurance deduction for self employed persons is available to S corp owners.
mjb

#6 bzorc

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Posted 03 June 2005 - 11:45 AM

My confusion came into play when reading IRS Announcement 92-16, which indicates that the premiums are exempt from FICA taxation for the 2% owner if the payments are made under a "plan" for the S Corporation employees and their dependents. What is a "plan"? A Section 125 "plan"? A health insurance "plan"? Indeed, very confusing.

#7 GBurns

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Posted 03 June 2005 - 09:41 PM

The Instructions for Line 31 has conditions for use of that deduction, such as "Health insurance benefits paid for you may be shown in Form W-2, box 14". What happens if it is not but shown included in box 1 or elsewhere?

The Instructions also state "But if you were also eligible to participate in any subsidized health plan maintained by your ... employer ...... amounts paid...cannot be used to figure the deduction." It also states that for details see Pub 535.

Pub 535 pages 24 and 25, in Section 7. Insurance explains and includes Worksheet 7-A.

bzorc,

It should not matter since a section 125 deduction is not for "section 125 plan" itself but for the "health insurance plan" or other eligible benefit.

Edited by GBurns, 03 June 2005 - 09:43 PM.

George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#8 mbozek

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Posted 06 June 2005 - 09:24 AM

The cite in Pub 535 mirrors the language in the 1040 instructions for deducting the health insurance premium for 2% owners of an S corp. I dont understand the rest of your post.
mjb