S-corp self employed health insurance deduction

[dmertz]

Ah, I see.  This seems to result from the line 29 deduction not being permitted to exceed wages as wages are defined in section 3121 of the tax code.  The section 3121 definition of wages explicitly excludes amounts paid for insurance (even though the amount must be included as "wages" in box 1 of the W-2 of the S corp).  So the box 5 amount is the amount that must be entered.  I stand corrected.

It appears, then, that all of these people who believe that they are entitled to the line 29 deduction when the amount in box 5 does not support it are incorrect.

[flyinhigh]

a BIG thank you to @slhayes61 for the tip!  In the 2nd screenshot (titled Self-Employed Health Insurance), I had not entered the Medicare Wages (the amount from Box 5 on my W-2) because of the note at the bottom that said not to enter premiums if you bought insurance through a state marketplace (I overlooked that bold word 'only'!), so line 29 was blank.  Since I bought insurance through a state marketplace, I have a 1095-A.  Once I entered the Medicare Wages, TurboTax pulled the amount from my 1095-A into Line 29.

I spent HOURS trying to figure out how to get a number to appear on Line 29 (it worked fine last year)!

BTW, I had a hard time getting back to the Self-Employed Health Insurance screen because, on the Other Situations screen, the checkbox next to, "I personally paid health insurance...." was NOT ticked (even though I ticked that box when I went through the step-by-step the first time).

[enon]

This does not work for me, even though wages are much higher than insurance premium. It does not pull it on line 29. How the heck does this work?

[TaxGuyBill]

@epitka   Did you re-enter your Medicare wages in the K-1 section?  You need to do that (in addition to entering all of yourW-2 information in the W-2 section).

[enon]

@TaxGuyBill, Yes on W2 box 5 has amount that is much higher than the insurance cost. So I come over to K1, check the box that activity is at risk, and that I paid all insurance. Next question asks how much were medicare wages (box 5), and I enter amount from W2. Next question is how much was insurance, I enter that (11,400), move to next screen that asks about long term care insurance costs, which are none, and I don't see my tax due drop at all. If I go to 1040, line 29 and override it, my tax due drops by 3K. What to do?

[enon]

@TaxGuyBill Ok, figured it out, it works as intended. Since I tried manually overriding this field value before I knew how to add health insurance costs, deleting the value from 29 is not enough. You have to right click on the field, and click cancel override. Once that was done, it pulled the values in. Wooohhooo

[TaxGuyBill]

Great, I'm glad you figured it out.

[Mark-s-corp]

@dmertz  I'm having the same issue for 2019 taxes.   The IRS worksheet for calculating the deductible amount of the self-employed health insurance premiums compares the premiums with the amount of your net profit AND any other earned income.   For a 2% shareholder in your S-corp, you (and the current version of TurboTax) correctly take W-2 line 5 Medicare wages for the other earned income.   However, TurboTax does not include the shareholder's net profit that flows in from the K-1.    My reading of the IRS instructions says both are to be used, since both end up as income, and the total is what should be used to cap the insurance premiums deduction.   This will also match the guidance from the IRS under "S Corporation Compensation and Medical Insurance Issues".

[dmertz]

Pass-through income reported on the Schedule K-1 (Form 1120-S) is not involved in the calculation.  The only amounts that matter are the amounts in boxes 1 and 5 of your W-2.

[Mark-s-corp]

Seems like you need to have twice the W-2 wages to actually get the above the line shareholder health insurance deduction.   While the 2% shareholder has to report the premiums as W-2 line 1 wages, the IRS worksheet uses line 5 wages as a ceiling, so since the shareholder insurance premiums are line 1 only and 0 for line 3 and 5, the shareholder has to have twice the amount of wages so that the non-insurance wages create line 5 (Medicare) wages of at least the amount of the shareholder insurance premiums.   So the S-corp has to actually pay out extra wages as opposed to keeping them as pass through retained earnings.   Unfortunately,  this is additional wages that need to be paid above the guidance from the IRS under "S Corporation Compensation and Medical Insurance Issues" seems to indicate.   The QBI deduction is also limited by 50% of the Medicare wages (line 5 of W-2), so the shareholders are forced to pay out additional wages beyond what are supported by what are justifiable as "reasonable compensation".

Am I missing something, or am I stuck with paying out double the wages in order to take advantage to the shareholder health insurance above the line deduction?

[ThomasM125]

The way it is supposed to work is the company includes your health insurance premiums in box 1 of your W-2 form, but not in box 3 or 5 so you don't pay social security tax on it.

The company deducts the wage amount as reported in box 1 on the S corporation tax return, thereby reducing the company income by the amount of the health insurance.

Next, you pick up the wage income and then deduct the self-employed heath insurance on your personal tax return. Thus, the company deducts the health insurance, then you break even on reporting it on your tax return. Your benefit then is the lower S corporation income reported to you, since the health insurance was deducted from the S corporation income.

So, the health insurance needs to by paid by the company in order for the shareholder to get the deduction. 

[Mark-s-corp]

Thanks @ThomasM125   and @dmertz  Yes, this is supposed to be the benefit of it.   However, the IRS worksheet only allows you to deduct the health insurance if you have Medicare wages from the S-corp that exceed the health insurance premiums that were paid by the S-corp (and created box 1 wages on your W-2 form).  The only way to get the deduction and "break even" on the added W-2 wages reported is for the S-corp to have made enough to also pay you social security/medical wages that match the health insurance premiums.   Otherwise you net nothing from having the S-corp pay the premiums and take the wages.   Without being able to deduct the premiums, the S-corp shareholder loses the health insurance benefit of being a tax free benefit as it is for non 2% shareholders.

I'd love someone to point out my error, but Turbo Tax does the calculation as I've described above and matches what I've researched through IRS instructions.

[AmeliesUncle]

Yes, you need to have ACTUAL wages paid, not just the health insurance added to Box 1.  It is not "double" wages, it is just REAL wages that is required for a S-corporation officer.

[ThomasM125]

@AmeliesUncle is correct, you can only deduct the health insurance if you pay enough wages to allow it - the IRS does not want owners of S-Corporations avoiding social security tax by not declaring wages but still getting the benefit of the health insurance deduction.

[Elizabelle]

@ThomasM125  As a follow up to your explanation, do I get to use the standard deduction PLUS deduct the self-employed health insurance on Line 29 personal tax return?  Or can I only deduct my health insurance premiums (paid by my S-Corp of which I am the sole employee) if I itemize?