I am a principal owner of an S-corp with an HSA and need help getting my contributions to carry to line 25 of my 1040.

[schneebaer]

I am a principal owner of an S-corp with an HSA.  I did not shelter any of my HSA contributions from tax on my check, and added my HSA benefits as additional wages.  My W2 box 12 shows my total contributions, and my 1099-SA shows my gross distribution in box 1.  It is my understanding that my contributions should fill out Form 8889 and carry over to live 25 on my 1040, however nothing is coming over.  What am I doing wrong?

[dmertz]

[Deleted]

[BMcCalpin · Accepted solution]

You are not doing anything wrong - it's just that TurboTax is set up to handle the normal use of code W in box 12 on a W-2 and not the special case of a 2%+ owner of an S corporation.

In the case of a "normal" employee, the HSA contribution paid by the employer and the employee (by payroll deduction) is removed from Wages in boxes 1, 3, and 5 on the W-2. But in the case of a 2% owner of an S corp, the HSA contributions are not removed from Wages in box 1 on the W-2 but are included in these Wages (i.e., after-tax).

Note that the same HSA contributions can still be removed from Wages in boxes 3 and 5 on the W-2 because they are not subject to either Social Security or Medicare taxes (FICA). This is described in IRS Notice 2005-8 (https://www.irs.gov/pub/irs-drop/n-05-08.pdf).

So, your HSA dollars coming from the S Corp are after-tax (as you noted). You recover your tax benefit by making a direct (“personal”) contribution to your HSA. Normally, this would appear on line 25 on page 1 of the 1040 as an adjustment to gross income. Thus, you have ultimately received the same benefit that any employee would concerning the HSA contributions, you just have to make the entry manually to make the amount appear on line 25.

You will enter the HSA contributions on the “Let’s enter your HSA contributions” screen in the HSA interview (Federal->Deductions & Credits->Medical->HSA MSA Contributions) – see below. You will enter your contribution on the second line (where the $2,000 is), because that’s where after-tax contributions go.

As noted, this will appear on line 25 on page 1 of the 1040 as an adjustment to gross income.

Note: if you are filing an Alabama, California, or New Jersey state return on your your personal return, come back and comment on that - these states use the code W in box 12 to add back the HSA contribution (HSA contributions are not deductible in these states), and I am not sure if TurboTax will handle the situation correctly unless we tell it to ignore line 25 in these states. For the other 47 states, however, you will be fine.

[schneebaer]

OMG!  That is SO helpful!  I thought I wouldn't have a chance finding someone that understood without talking to an actual person!  And let me tell you how much that was NOT working out for me!  I couldn't get the person that called me back to understand that my question really WAS a question about personal taxes and not business.  She ended up h

And to top that off - you shared a bonus!  I was not sheltering from FICA and Medicare.

As a resolution, I entered my contributions on the window that you show - so essentially I had numbers in both  both places (because I did everything through my payroll check).  The top line had two years worth because last year was the first year we had an HSA, and I put the full amount possible on the prior year.  This caused me to have to increase my excess, but I know have an8889-T pushing over the full amount to line 25 of my 1040. Woo-Hoo!

Should I not print a W code on line 12 of my W2?  Thinking that thru, it seems I should keep it there if I'm sheltering my FICA.

[BMcCalpin]

This issue of when to use the code W for HSA contributions is not described, so far as I know, for 2% owners. The IRS notice I referred to above was issued more than a year after the initial HSAs took effect, because there were so many unanswered questions...and there have been more notices and there are still unaddressed questions.

For my part, I would prefer that you not put the code W amount on the W-2. This tax return is a federal income tax return, not a Social Security or Medicare tax return. So whatever we do has to be right for federal income tax.

If you enter anything with code W in box 12, then TurboTax is going to treat it as an "employer contribution" to your HSA on form 8889. So when you add the contribution also to the "personal" contribution line, you artificially inflate the reported contributions, which probably creates a false report of excess contributions.

Instead, you should remove the code W from box 12 on the W-2 and instead add an entry to box 14. Box 14 codes are mostly up to the employer so the description can be anything you want (try "HSA"). Because box 14 codes are not standardized, TurboTax won't be able to use it to automatically update anything, which is what we want.

Note that this same process is used by employers who add HSA contributions as a Section 125 benefit but don't remove the HSA contributions from Wages.

Then, when you enter the HSA contribution on the bottom line on the "Let's enter your HSA contributions" screen, TurboTax knows about only the one contribution, and correctly puts it on line 25 on the 1040, and also won't report an excess contribution (unless you really had one). Win-win-win.

[schneebaer]

Thanks again Bill!  You have been amazing help!

[BMcCalpin]

I assume since your S corp is issuing W-2s to yourself, that you can take care of the corrected W-2, if you have already filed the first copy with the IRS.

[schneebaer]

Hi Bill!
I have another somewhat related question.  I handled my health insurance pretty much the same way I handled my HSA.  While I exempted tax for my employees benefits, I taxed mine.  As I'm trying to finalize my tax return, I realize that I  haven't accounted for this anywhere, and it is a much larger amount.
Can you offer any guidance on this?

[BMcCalpin]

Your health insurance premiums will be treated in a very similar way to your HSA contributions - added to your box 1 Wages, but deducted from box 3 and box 5 Wages.

"Health and accident insurance premiums paid on behalf of a greater than 2-percent S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee’s Form W-2, subject to income tax withholding.

However, these additional wages are not subject to Social Security, or Medicare (FICA), or Unemployment (FUTA) taxes if the payments of premiums are made to or on behalf of an employee under a plan or system that makes provision for all or a class of employees (or employees and their dependents). Therefore, the additional compensation is included in the shareholder-employee’s Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2.

 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements."
See <a rel="nofollow" target="_blank" href="https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...>

You deduct this amount as an "above-the line deduction" on line 29 on page 1 of the 1040 - see the instructions for line 29 on page 32 at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i1040gi.pdf">https://www.irs.gov/pub/irs-pdf/i1040gi.pdf</a>.

[schneebaer]

Thanks again for the help!

Is there any chance you know anything about the state of Indiana?  Specifically if either the withholding or unemployment was sheltered due to the HSA?

If you do not, can you direct me to where I would find out that answer?

[BMcCalpin]

There are only three states that don't recognize HSAs: Alabama, California, and New Jersey...and Alabama is going to start doing so in tax year 2018 (i.e., right now).

I don't know of any adjustments needed for Indiana. Other things being equal, the state income reported in box 16 or whatever on the W-2 should be the same as the federal income...unless Indiana does something funny like not recognize 401(k) contributions - I have no reason to think this is the case, not knowing all the peculiarities of Indiana.

[FeliusMaximus]

Do you know if it is any different for filing this year? I am trying to do my taxes this year for the first time on TurboTax. I an a 2% shareholder in an S corp and I have an HSA. I can see what the accountant did last year, I know I need to add the HSA contributions to line 25, and I cannot get the same results as described. Is it different this year? (I see no updates to this technique)

You wrote "You will enter the HSA contributions on the “Let’s enter your HSA contributions” screen in the HSA interview (Federal->Deductions & Credits->Medical->HSA MSA Contributions) – see below. You will enter your contribution on the second line (where the $2,000 is), because that’s where after-tax contributions go."

The only place I can find that accepts any input at all in the HSA area is called "Let's Get the Numbers from your 1099-SA" There's a box 1 for Gross distribution, a Box 2 - Called Earnings on Excess Contributions, A Box 3 is a pull down menu, and Box 4 wants a FMV date of death, etc. So which is the "second line?" Am I looking at the right page? Anything I add to Box 2 causes my return to plummet.

Then I tried to put information into the section 12 of my W-2 (and section 14 as per another answer) and nothing budges.