For those who have wondered how the long-term care insurance self-employed tax deduction works for owners of S-Corporations, this straightforward explanation clears it up. Greater than 2% shareholders of S-Corporations can lower the cost of long-term care insurance with this tax deduction when you think it through.
The entire premium paid by the S-corp employer on greater than 2% shareholders should be included in the shareholder’s Form W-2 as taxable wages, but not subject to Social Security, Medicare (FICA), or Unemployment (FUTA) taxes (see below). Then you deduct the age-based amount on Line 29 of Form 1040 as part of your self-employed health insurance deduction. Here is the age-based table for 2021. These numbers usually grow each January.
|Attained age before the close of the taxable year||Amount that counts as part of self-employed health insurance deduction in 2021
|40 and younger||$450|
|71 and older||$5,640|
If you pay the premium out of your personal checking account, the age-based amounts are deductible on Schedule A as medical expenses but as you know, you have to have medical expenses in excess of 7.5% of your adjusted gross income to enjoy that deduction.
Here’s the total explanation that I have in my agent training materials in case you find it helpful, plus you can refer to S Corporation Compensation and Medical Insurance Issues.
S-Corporations: That IRS section says that greater than 2% shareholder/employees of an S-corporation are entitled to this deduction if the premium is paid by the S-Corporation and added to the shareholder/employee’s gross income. The premium payments are included in wages for income-tax withholding on W-2 but are generally not subject to Social Security, Medicare (FICA), or Unemployment (FUTA) taxes. The net result is the LTC insurance premium amount lowers adjusted gross income. Some greater than 2% shareholders of S-corporations do this as they want the business to pay the premium for cash-flow purposes, rather than pay it out of their personal checking account. Plus, their salary is reported as “Compensation of Officers” on Line 7 of Form 1120S, which lowers their taxable business income.
Rule of Spousal Attribution: Some think if the greater than 2% shareholder’s spouse is an employee of the S-Corporation and doesn’t own any shares, 100% of all eligible health insurance including 100% of the LTC insurance premium (not the age-based amount) can be deducted on Schedule C as a business expense. This is not true. IRC Section 1372(b) treats the spouse of a more than 2% shareholder as also owning the shares owned by the more than 2% shareholder spouse. In other words, both spouses are treated as a greater than 2% shareholder even if all the shares are directly owned by only one spouse.
Disclaimer: This is in no way intended to impart tax advice and you should ultimately seek the advice of a competent tax professional.