S Corp health insurance

[Jim-from-Ohio]

picked up a new S Corp client.. prior CPA messed up and just deducted health insurance as part of employee benefits. W-2s already done and they are not going to amend the payroll tax returns. At this point are we limited to deducting that insurance on Schedule A or is there a way to get it to the "front of the return" thank you.

[TaxGuyBill]

IRS Notice 2008-1 explains that it is taxable income to the employee.

That means the W-2 is wrong and either needs to be amended or file Form 4852 to show the correct taxable amount.  In my opinion, there isn't really any way around that.

And because it will be added to the corrected W-2 or 4852, you can use the Schedule 1 deduction.

[Jim-from-Ohio]

thanks Bill.. picked up a mess here. i should have passed on this one. 

[rbynaker]

Isn't this usually just a W-2c to increase Box 1 (and state) wages?

[IRonMaN]

Unless the anvils are coming back to haunt me, that's all it takes so it tends to be an awfully easy fix.

[Jim-from-Ohio]

so have the payroll company amend it?..

- W-2s

-W-3 ?

- 941?

- state and local issues?

[IRonMaN]

Or do it yourself to save time and to make sure it is done right.  You need to complete a W-2C and a W-3C and maybe a correction for the state W-2 submission.

[RCBCPA]

At this point I would disregard the error and leave W-2 wages as filed.  Take the deduction as employee benefit.  It will net out on the K-1.  Do not use Health Deduction on the 1040 or deduct it on Sch A.  Problem solved at the Federal Level.

[sjrcpa]

@Jim-from-Ohio In my experience the payroll company won't amend it unless it is their error. Even when it is their fault it is hard to get them to amend and it can take months. The client was probably at fault here for not telling them. (Not to mention that client may not have even known)

[dascpa]

Years ago I was advised by an IRS agent (not quoting law) to get around this issue, (a) leave the entity return with the insurance deduction, (b) add the S Corp paid health insurance to the 1040 other income line as Other K-1 Income and then (c) deduct it like regular self-employed health insurance on the 1040.  The net is two subtractions and one addition = one subtraction.  I've followed this method for years for those clients who handled it incorrectly and I found our months after the fact, and so far, no letters, notices or anything.

[IRonMaN]

That seems like a lot of clowning around for nothing.  Why would you get a notice since the IRS doesn’t know the circus is in town and hasn’t seen that clown act before.  As long as they have enough Medicare wages to allow the deduction, you might as well just leave the insurance as is in the corporation and skip the clown show.

[Frustrated-in-IL]

Don't you just hate when things like this happen and because of the unplanned extra time needed to fix it, you can only finish 19 returns that day instead of the usual 20?