When your S corporation pays for or reimburses your health insurance costs as an employee who owns more than 2% of the company, the payments are put in box 1 of your W-2 and not in boxes 3 or 5.
When figuring out how much you can deduct from your taxes for self-employed health insurance on Form 1040, you must use your Medicare wages (shown in box 5 of Form W-2) as your “earned income,” not the amount shown in box 1.
Here are two examples of how this rule affects things:
- Ted’s S corporation doesn’t pay him a salary in cash, but it pays back $18,000 for his health insurance. His W-2 shows that he made $18,000 in box 1, but nothing in boxes 3 and 5. Ted has $18,000 in taxable wage income because the company pays for his health insurance. However, he has no Medicare wages, so his Form 1040 self-employed health insurance deduction is $0.
- Janet’s company pays her a cash salary of $107,000 and pays back $22,000 for her health insurance. Janet’s W-2 from her S corporation shows that she earned $129,000 in box 1, $107,000 in box 3, and $107,000 in box 5. The IRS lets her deduct $22,000 from her self-employed health insurance on Form 1040 because her Medicare wages are more than the cost of the insurance.
To avoid bad tax results, make sure that the Medicare wages your S corporation reports (in box 5) are equal to or more than the health insurance costs you paid for or were reimbursed for.
We know that taxes can be hard. Schedule your free tax consultation and find out more about how the ideas in the article can apply to your specific tax situation.