Today TaxMama® hears from Ann in the TaxQuips Forum, who has a very enthusiastic staff. To make a long story short: “Ann just converted her 25-year business to an S Corp. Her staff did the research and found a terrific health insurance policy. They want Ann to set up a flexible spending account so they can pay for their coverage off the top of their wages. And suggested that if Ann pays half their premiums, she could get reimbursed by generous tax credits. Ann is interested – and wants to know if the benefits apply to her, as the S corp shareholder-employee?”
Well, congratulations for changing your status after 25 years. Unfortunately, if you want benefits from your business, the S corp is exactly not the business entity to choose.
Read the IRS Fringe Benefits publication – Pub 15-B – with respect to employee benefits. It says do not treat a 2% shareholder of an S corporation as an employee of the corporation.
But, yes, a flexible spending account IS a great idea for your employees.
- They can reduce their wages off the top by deducting their health care costs. They avoid paying SS, Medicare, and income taxes on those amounts – as well as other benefits on their own tax returns.
- YOU avoid paying your share of SS, Medicare, (FUTA) and Workers Compensation insurance on those amounts.
- The savings is generally far more than the cost of administering the plan.
But you? If you want the company to pay for your health care, you need to ADD the cost to your wages. Then, you may deduct the cost as an adjustment to income on your personal income tax return.
Now, you also asked about the tax credit for paying all or part of their insurance.
There is a small employer health insurance tax credit. The IRS has an entire area of their website devoted to this.
In 2012 and 2013, the tax credit is UP TO 35% of the premiums you pay. (Note: it is not 35%, it’s UP TO that amount.) In 2014, the maximum will rise to 50%.
(Folks, read the rest of the details in the TaxQuips Forum.)
Overall, I think this may turn out to be a benefit to you. Your employees are enthusiastic. They may want to run other things through the Flexible Spending Account, like child care, and medical expenses, which will save YOU even more in taxes. It’s definitely worth exploring.
And remember, you can find answers to all kinds of questions about employee benefits and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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