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Schedule K-1 (1120S) Medical Insurance Premium for more than 2% shareholders - Deductibility

Forum|Forum|5 years ago
April 30, 2021
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A client received a Schedule K-1 for an S Corp for which he is a more than 2% shareholder. He is also an employee of this company. He indicated to me that the medical insurance premiums paid for his coverage are not included in his W2 income. However, in the additional information it states "medical insurance premiums for more than 2% shareholders" is $9k.

My understanding is that this is an above the line deduction for self-employed taxpayers if it is included in box 1 of his W2. Again, he is said it is NOT included on his W2.

My question is if this is not included in W2 income and therefore, not deductible to him, then why would the person preparing the S Corp return even include this in the additional information? Am I missing something here?

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Best answer by qbteachmt

"He indicated to me that the medical insurance premiums paid for his coverage are not included in his W2 income."

Just how wrong did the employer get it? Who prepared the 1120S? They should have checked for this provision.

"However, in the additional information it states "medical insurance premiums for more than 2% shareholders" is $9k"

Do you see it as part of Box 1, or not? You mention "the additional info" but what is that from?

Have you talked to that S Corp provider, or the payroll person? They can make late amended/corrected filings.

Here are nice references to email to them; the second one has nice imagery:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

https://www.rmncpas.com/~rmncpas2/files/S%20corp%20health%20insurance%20rules.pdf

qbteachmtAnswer

Level 15

"He indicated to me that the medical insurance premiums paid for his coverage are not included in his W2 income."

Just how wrong did the employer get it? Who prepared the 1120S? They should have checked for this provision.

"However, in the additional information it states "medical insurance premiums for more than 2% shareholders" is $9k"

Do you see it as part of Box 1, or not? You mention "the additional info" but what is that from?

Have you talked to that S Corp provider, or the payroll person? They can make late amended/corrected filings.

Here are nice references to email to them; the second one has nice imagery:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

https://www.rmncpas.com/~rmncpas2/files/S%20corp%20health%20insurance%20rules.pdf

*******************************Don't yell at us; we're volunteers

B

bill6Author

Level 3

That's what I thought too because I read the same section of that IRS publication.

To answer your questions:

I think they got it wrong to the tune of the full $9k. Box 1, 3 and 5 of the W2 are the exact same dollar amount which shouldn't be.

When I said additional information, I was really referring to Box 17 other information and the related supporting schedule that explains what what in that box. In Box 17 there is code "AD". When you look at the detail pages for explanation, AD is explained as ""medical insurance premiums for more than 2% shareholders" and the amount is $9k.

Again, my client insists what shown on W2 is his normal compensation and does not include health insurance premium and he seems to be right based on the fact that boxes 1, 3 and 5 of the W2 are the same.

What you are saying is they screwed up his K-1 and possibly the 1120S altogether, correct? I have talked to the S Corp filer accountant before and he is a little defensive. How would you handle this and still report on time?

qbteachmt

Level 15

"is his normal compensation and does not include health insurance premium and he seems to be right based on the fact that boxes 1, 3 and 5 of the W2 are the same."

Well, that's not very well worded, to help you.

It could be that they pay his insurance from his base pay and he doesn't even realize he is paying with Post-tax dollars. In other words, this is not an additional fringe paid by his employer; they are "doing the banking" by making his premium payment, most likely because it is under their group plan.

"I have talked to the S Corp filer accountant before and he is a little defensive."

We simply need to understand the employer's benefit package. It might be really simple.

You earn $120,000 a year gross.

We compute taxes.

We then deduct for your health insurance.

You get the difference = your take home.

*******************************Don't yell at us; we're volunteers

T

TaxGuyBill

Level 15

@bill6 wrote:

Again, he is said it is NOT included on his W2.

It is required to be on the W-2. The W-2 should be corrected.

qbteachmt

Level 15

I have taught payroll and done payroll for lots of companies. You might not be surprised at how employees have no idea what is what and they cannot even describe their employment financial terms between them and their employer. Him stating it is not on his W2, doesn't give me much comfort, unless you can examine, for instance, a Paystub to see deduction details. Because the W2 doesn't show you how the benefits are managed. The final paystub for 2020 is where I would start looking.

*******************************Don't yell at us; we're volunteers

B

bill6Author

Level 3

After talking with my client and having him provide me with his paystubs for the last three years, there is no indication that health insurance premiums have been added to his W2 income. It seems like his assertion that they are not included in w2 income is correct.

In this case, he would not deduct them as self-employment health insurance premiums on his 1040 because the S Corp received the benefit of all employee healthcare premiums through a deductions from ordinary income.

It is still odd that the employer included medical insurance premiums for more than 2% on his K-1. Seems irrelevant to the tax return, at least.

Any thoughts?

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