Health Insurance for Owners of Subchapter S Businesses
Owners of businesses that file taxes on Form 1120S are entitled to deduct premiums paid for health insurance as an adjustment to reduce income on Form 1040 IF that business pays wages to the owner(s) as employees and issues W-2’s. But there is a certain correct way to do that so it will stand up to IRS scrutiny.
If premiums are paid by the Subchapter S business (they should be), those premiums should be recorded as health insurance expense. If the premiums have been paid personally by the Subchapter S owner(s), the business should make a journal entry to record the premiums paid as health insurance expense and as a reduction of distributions or draws taken by the owner(s).
Here’s the key step that must be taken NOW: Total health insurance premiums paid for 2018 must be recorded on the owner’s W-2 as an addition to box 1 wages and as an entry in box 14, and your payroll service provider must be made aware of that and the total amount of premiums paid in 2018 well before the end of December. Doing this will trigger the reporting of health insurance premiums as both income and as a deduction for the owner(s). So, for the owner(s), it’s a wash on their Form 1040, but they benefit by their Subchapter S business being able to deduct that expense.
Not following the methodology outlined above could result in the premiums being disallowed as a Subchapter S deduction or being pushed to Schedule A of the owner’s Form 1040 as a medical deduction, where they will probably lose some or all of their value as a deduction because of the new tax law and the limitation on deducting medical expenses.