S-Corp Owner? – Hire your Spouse!

Hiring Your Spouse: A Tax-Saving Opportunity (If Done Right) 
Employing your spouse in your business could unlock substantial tax savings, especially for sole proprietors or single-member LLCs taxed as sole proprietorships or partnerships (provided your spouse isn’t a partner). However, this strategy comes with risks. If mishandled, it can backfire and cost you more than you save. 

Health Insurance for S Corporation Owners: 2024 Update 
Operating your business as an S corporation continues to offer favorable conditions for health insurance in 2024. In this guide, we’ll detail the critical steps to take so you can maximize deductions while avoiding costly penalties under the Affordable Care Act (ACA). 

Key Steps to Ensure Compliance 
Step 1: Record the Insurance Cost on the S Corporation’s Books 
You have two methods to accomplish this: 

• Direct Payment: The S corporation directly pays premiums for an accident and health insurance policy covering the owner-employee (over 2% ownership), their spouse, and dependents. 

• Reimbursement: The owner-employee pays premiums out-of-pocket, submits proof to the S corporation, which then reimburses them. 

Step 2: Report Premiums on the W-2 
Health insurance premiums paid or reimbursed by the S corporation should appear as additional compensation in box 1 of the W-2. However, they are exempt from Social Security and Medicare taxes (not included in boxes 3 or 5). 

Step 3: Deduct the Premiums 
As an owner-employee with over 2% ownership, you can claim a "self-employed health insurance" deduction on line 17 of Schedule 1 of Form 1040—provided you meet all IRS requirements. 

Two IRS Hurdles to Clear 

1. Employer-Sponsored Insurance Restriction: Neither you nor your spouse can have access to employer-subsidized health insurance, even if unused. 

2. Salary Threshold: Your deduction is capped by your salary from the S corporation. 

Practical Scenarios 
Example 1: If you pay health insurance premiums without involving the S corporation, you forfeit the self-employed health insurance deduction. 
Example 2: If your S corporation reimburses you for premiums and includes them as wages on your W-2, you qualify for the deduction—provided no other employer-sponsored insurance is available to you or your spouse. 

Handling Health Benefits for Employees 
As a small employer (fewer than 50 full-time employees), your S corporation isn’t required to provide health insurance. However, if you choose to offer benefits, compliance is crucial to avoid penalties: 

• Reimbursement Restrictions: Direct reimbursement of employees’ individually purchased health insurance triggers a $100/day penalty per employee. 

• Permissible Plans: Use a QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) or an ICHRA (Individual Coverage HRA) to reimburse employees within legal limits. 

What About Group Insurance? 
For non-owner employees, contributions to group insurance plans are tax-deductible, and the benefits remain tax-free for employees. For owner-employees, group insurance benefits must follow the three-step deduction process outlined above. 

Discrimination and Premium Tax Credits 
Currently, the IRS does not enforce ACA non-discrimination rules, allowing S corporations to tailor health benefits to owners without penalty. If you purchase insurance via a government marketplace, you may combine premium tax credits with self-employed health insurance deductions—but only after factoring in the tax credit when calculating your deduction. 

Future Changes on the Horizon 
The IRS is expected to issue further guidance on ACA-related rules, including discrimination and owner health insurance deductions. Any changes will likely take effect in the following tax year, providing time for businesses to adjust. 

Key Takeaways 
Your S corporation can continue to cover your health insurance under 2024 rules, benefiting you, your spouse, dependents, and children under 27. To claim deductions: 

1. Ensure the S corporation pays or reimburses premiums. 

2. Report premiums as wages on your W-2. 

3. Deduct premiums on your personal tax return. 
   **And remember, neither you nor your spouse can have access to employer-sponsored insurance elsewhere. 

For rank-and-file employees, avoid reimbursing individually purchased insurance directly. Opt for group insurance, QSEHRA, or ICHRA to provide tax-advantaged benefits and maintain compliance. If you are still unsure about your situation and want help, you can click this link to set an appointment to speak with an expert at Lisa Brugman, EA & Associates.