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Accident and health insurance premiums - S corporations.


Accident and Health Insurance Premiums -- S Corporations

Under Internal Revenue Code Section 1372, relating to freinge benefits, accident and health insurance premiums paid by an S corporation on behalf of a 2% or more shareholder-employee as consideration for services rendered are treated like guaranteed payments under IRC 707(c).

Such premiums are deductible by the S corporation under Section 162 (subject to the capitalization rules under Section 263).

The S corporation is required to file a Wage and Tax Statement (Form W-2) for each 2% shareholder-employee.

The Form W-2, box 10 must include for a 2% shareholder-employee the cost of accident and health insurance premiums paid on behalf of the shareholder-employee in the shareholder-employee's wages to include any applicable gross up amount for taxes paid by the S-Corporation (Rev.Rul. 86-14). Separately state the premium amount on Form W-2 in box 23. The premiums are not excludable from the recipient shareholder-employee's gross income under Section 106. The shareholder-employee may deduct the cost of the premiums to the extent provided by Section 162(1) currently only 25%, with any excess deductible as a medical expense on Schedule A.

Unlike a partnership, an S corporation may not account for accident and health insurance premiums paid on behalf of a shareholder-employee as a reduction in their distributions because the shareholder-employee's pro rata share of S corporation income would not be subject to employment taxes.

For S corporation tax years beginning before January 1, 1991, the Service will not challenge the treatment of corporations for 2% shareholder-employees in accordance with the instructions to the Form 1120S and Schedule K-1 to the Form 1120S. These instructions provide that such fringe benefits are nondeductible by S corporations and cannot be treated as deductible or excludable employee fringe benefits (except for benefits allowed partners, such as Section 162(1)).

The Service does not consider accident and health insurance premium payments by an S corporation on behalf of 2% shareholder-employees to be distributions for purposes of a single class of stock requirement of Section 1361(b)(1)(d).

In the sample W-2, the recipient has wages of $40,000. Box 10 is computed thus: $40,000 + $3,200 from Box 23) + $265 (grossed up FICA on amount reported in Box 23) = $43,465. Box 11 is computed by adding the amount of FICA on the salary, $3,060 ($40,000 x 7.65%), to the grossed up FICA on the health insurance premiums, $265.

However, a simpler alternative to these complex calculations would be to transfer $245 ($3,200 x 7.65%) from Federal withholding to Social Security withholding. This easier approach saves $20. [Tabular Data Omitted]
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Title Annotation:Debits & Credits
Author:Green, Gary L., Jr.
Publication:The National Public Accountant
Article Type:Column
Date:Dec 1, 1991
Previous Article:Civil Rights Act of 1991.
Next Article:Investing in tax preparation software: as easy as 1-2-3.

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