A frequent question that arises is whether a shareholder of an S corporation can deduct above-the-line Medicare premiums.
If an S corporation pays accident and health insurance premiums on behalf of a more-than-2% shareholder who is also its employee and who must include the value of the premiums in his gross income, the shareholder-employee can deduct the cost of the premiums paid on his behalf to the extent allowed under the Code Sec 162(I) self-employed above-the-line health insurance rules.
A 2% shareholder-employee of an S corporation, who is otherwise eligible to deduct medical insurance under the above rule, may do so only if the plan providing medical care coverage for that shareholder-employee is established by the S corporation. For purposes of this requirement, a plan providing medical care coverage for the 2% shareholder-employee is treated as established by the S corporation if:
- The S corporation makes the premium payments for the accident and health insurance policy covering the 2% shareholder-employee and his spouse, dependents, or child under age 27, in the current tax year; or
- The 2% shareholder-employee makes the premium payments and furnishes proof of premium payment to the S corporation and then the S corporation reimburses the 2% shareholder-employee for the premium payments in the current tax year (Notice 2008-1)
In addition, IRS has concluded that premiums for all parts of Medicare can be used in figuring the above-the-line self-employed health insurance deduction. The premiums can be deducted for coverage of the self-employed individual's spouse, dependent, or child who hasn't reached age 27 as of year-end. For Medicare premiums to be deductible (Chief Council Advice 201228037):
- A sole proprietor must pay the premiums directly.
- A partner can pay the premiums directly and be reimbursed by the partnership, or the partnership can pay the premiums. In either case, the premiums must be reported to the partner as guaranteed payments, and the partner must report the guaranteed payments as gross income on his Form 1040.
- A 2%-or-more S corporation shareholder-employee can pay the premiums directly and be reimbursed by the S corporation, or the S corporation can pay the premiums. In either case, the premiums must be reported to the 2%-or-more shareholder-employee as wages on Form W-2, and the shareholder-employee must report this amount as gross income on his Form 1040.