What is tax treatment difference for health insurance premium among LLC, S Corp, and C Corp?

[kwyp]

Health insurance premium expense seems treat differently among LLC, S Corp and C Corp. 

Please correct me if I am wrong.

If it is LLC entity on Sch C, health insurance premium is treated as tax deduction on Sch 1, line 17 Part two

If it is S corp entity, health insurance premium is included in W2 wage as taxable income but except FICA taxes. it also need to be included on sch1 line 17  Part two. (Does it mean health insurance premium under S corp not allow deduction)? 

If it is C corp entity, is health insurance premium included at line 24-employee benefit grograms on 1120C form ?

[abctax55]

This company has MANY webinars; I searched for just free ones on health insurance:

   https://www.cpaacademy.org/search_webinar?search_box=health+insurance&field_of_study=&professional_d...

[qbteachmt]

This is such an ongoing mess of a developing topic with the inclusion now of ACA, I will provide just a bit of perspective that might be helpful.

"health insurance premium is included in W2 wage as taxable income but except FICA taxes. it also need to be included on sch1 line 17 Part two. (Does it mean health insurance premium under S corp not allow deduction)?"

Only for the >2% shareholder. On your topic here: https://accountants.intuit.com/community/proconnect-tax-discussions/discussion/is-it-allowed-that-11...

I stated: "Any shareholder working for the company is an employee; there are many rules for this as a way to avoid special treatment and avoid allowing the shareholder to shift personal costs to the business. That's why you'll see ">2%" or "10% or more" limitations and requirements."

Also, as you see, there are businesses that can take a deduction as business expense for their employee benefits. To provide parity, the Sole Proprietorship and other "self-employed" persons who don't get payroll also might qualify for the health insurance premium as a deduction against their personal income, when circumstances create a self-paid scenario. The same benefit as should exist as when an employee with employer coverage might be offered a pre-tax payroll deduction, for example.

What that provision does is turn the health coverage premium paid by the company into a taxable fringe benefit to an S Corp >2% shareholder-employee, which is why it then qualifies to be passed through as if that is a self-employed person paying it personally (and it goes on Sched 1).

And that's a simplified answer.

[kwyp · Accepted solution]

After searching about the health insurance treatment on 1120S. Here is the update:

S-corp owners' health insurance is actually deducted at entity level. Even though wages expense and health insurance expense are two separated items, but they are combined together on line 7 at deductions section on 1120S return. Obviously it is not easy to identify that health insurance is deducted on 1120S return. 

Even though health insurance expense is deducted at entity level but it is actually reported at line 10(a) on 1040.

Conclusion:   Health insurance is treated as business deduction for both  LLC and S Corp 

[qbteachmt]

"Conclusion: Health insurance is treated as business deduction for both LLC and S Corp"

Yes, I explained this.

If you knew the history, you would know over the course of many years, how this has changed. A group health policy payment on behalf of the >2% shareholder was treated as a Distribution. Then, the IRS cracked down on this handling of what was a taxable fringe benefit. The ACA introduced the marketplace coverage, new coverage and premium provisions, the Advanced PTC, the issues of spousal coverage, and the provisions for self-insured to be able to include it (but not as business deduction) and the pass-through entities. Because of the marketplace provision, you might also have the "payment" of the premium amount as a reimbursement going directly to that person and not to the coverage provider.

"Obviously it is not easy to identify that health insurance is deducted on 1120S return."

If the entity wants to deduct it, they have to do it the way the IRS wants it, which is taxable fringe benefit through payroll, as a type of compensation. That's why it's supposed to be on the W2 Box 1 and Box 14. If you don't see both of these, your client didn't handle it correctly. But you might also notice it wasn't taxed, it isn't subject to FUTA and there is no reason to withhold for Income taxes when the shareholder will turn around and take it as a deduction on their 1040.

Why not start using the IRS as your source of info? Click this:

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

[kwyp]

Why not start using the IRS as your source of info? 

It is a valuable advise. I would do so since now and in the future. 

What  the "Key Word" did you use for searching the above topic?  

[qbteachmt]

Keep in mind that the way we all are used to using Search has changed. It doesn't rely on keywords. There is AI and the use of heuristics. I googled:

s corp shareholder health

And sometimes, I will do it like this:

s corp shareholder health IRS

To attempt to specifically get IRS results, not just news articles.