Medical Insurance Premiums paid by an S- Corporation

Medical Insurance Premiums are commonly paid for by S-corporations for their shareholders. Here is how you should be reporting those insurance bills per the IRS.

The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Tax Savings right there. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2.

A 2-percent shareholder-employee is eligible for an AGI deduction for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation. Previously, “established by the S corporation” meant that the medical care coverage had to be in the name of the S corporation.

In Notice 2008-1, the IRS stated that if the medical coverage plan is in the name of the 2 percent shareholder and not in the name of the S corporation, a medical care plan can be considered to be established by the S corporation if: the S corporation either paid or reimbursed the 2percent shareholder for the premiums and reported the premium payment or reimbursement as wages on the 2 percent shareholder’s Form W-2.

Payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2.
Schedule K-1 (Form 1120S) and Form 1099 should not be used as an alternative to the Form W-2 to report this additional compensation.

Bottom Line
Don't let the expenses for medical insurance paid by the company sit on the K-1 or on the 1120S under insurance expense. Group them with the other fringe benefits you pay for employees in the appropriate boxes as outlined above.

S-Corporation Salary Requirements

As you may or may not be aware, an Officer of an S Corporation is specifically included within the definition of an employee for payroll taxes ( FICA - Federal Insurance Contributions Act, FUTA - Federal Unemployment Tax Act, and Federal Income tax withholding under the Internal Revenue Code. As a corporate officer performs services for the company, and receives or is entitled to receive payments, his or her compensation is presumed to be wages by the IRS.S corporations should treat payments for services to officers as wages and not as distributions or loans to shareholders. This is common mistake, and results in an underpayment of payroll taxes by the corporation. The IRS will also insist that the corporation pay a reasonable salary. So what is a reasonable salary you might ask?

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various tax courts that have ruled on this issue have based their determinations on the facts and circumstances of each case. The courts considered factors such as, training and experience, Duties and responsibilities, Time and effort devoted to the business (This would be a big component for all you single officer S-Corporations out there), Dividend history, Payments to non-shareholder employees, Timing and manner of paying bonuses to key people, What comparable businesses pay for similar services (Industry comparison form your Census forms), & Compensation agreements.

When in doubt, consider it salary up to the amount you received as distributions. This may sound as a very conservative approach, but the IRS has been investigating companies who are under reporting wages, look at your corporate return, there is a line for officer salaries. It isnt much of a stretch to figure out if you took an appropriate wage last year.

Last Minute Tax Planning for Individuals & Businesses

Last Minute Tax Planning for Individuals

First, Sell off those losing positions in your investment portfolio before December 31st. Investment losses can be deducted up to $3000 or offset against investment gains in the same taxable year.

Second, Make that charitable donation or contribution before December 31st. Looking to get rid of that old sofa, donate it to your local salvation army. Just be sure to get a receipt.

Third, as a cash basis taxpayer, be sure and pay your outstanding bills before December 31st. Putting off that bill until next year also puts off that expense for tax purposes until the following year.

Fourth, the IRS treats credit card charges the same as cash. So don't be afraid and charge those last minute business shopping trips for your tax year before December 31st. Just keep in mind that the items need to be placed in service, so you cant buy a computer printer on December 31st from an online store, you need to go to the store.

Fifth, If you were looking for a new piece of equipment or vehicle, complete the deal and place it in service before December 31st and take advantage of the Section 179 deduction available to you. The limitations for 2008 are $250,000 out of which, $25,000 can be used in your business for SUV's over 6000 pounds and under 14,000.

Deductible Vehicle Expenses

Deductible Vehicle Expenses
Auto Mileage Rates For 2009

The IRS (Internal Revenue Service) has announced the standard rate for business miles will be 55.0 cents for 2009.

The standard mileage rate for use of a auto for medical reasons will be 24 cents a mile.
The standard mileage rate to use when computing deductible moving expenses will also be 24 cents a mile.
The standard mileage rate for the use of a auto when providing services for a charitable organization remains at 14 cents a mile.

Depreciation Update

Depreciation Update for 2008.

Sec 179 Limitaions before phase out for income s $250,000.
Suv's weiging between 6000 and 14000 pounds are limited to $25,000 Sec. 179 Depreciation limitation.

Looking to Buy or Lease that New Auto? Read This First

Looking to buy or lease a new auto or truck? If you own a business, you should definitely complete that transaction BEFORE the end of your taxable year. This will allow your business to take full advantage of your purchase. Whether you finance or buy your new vehicle, you can take advantage of the IRS Sec. 179 deduction (Depreciation) which could be substantial in the case of heavy trucks or heavy SUVs.
Don't trust your auto dealer, they will tell you that "leasing" a heavy truck has tax advantages, not so. In fact, there are luxury auto add backs that you should be making on your tax return. Good luck auto shopping.

Year End Bonuses For Small Businesses

Looking to give yourself a bonus for the end of the year for your small business? Unsure of the payroll tax consuequences? Your bonus may not be fully taxable, be sure to check the limitations so you do not overpay. Dont worry if you do, you can receive the excess via refund from the IRS. For 2008, the FICA limitations are set at $102,000. There is no limit for medicare. Do not overpay Fica, check your payroll to date before your bonus and calculate the applicable amount of tax. For a small business this could mean a potential overpayment of 12.4% (6.2% for the employee & 6.2% for the company match). If you have any questions, contact David C. Egan, CPA of Goldenthal & Suss CPA's & Consultants, P.C.

New York Certified Public Accountant

David C Egan, CPA a New York State Certified Public Accountant ( CPA ) is currently a Partner at Goldenthal & Suss CPA's & Consultants, P.C. 465 Belfield Avenue, Staten Island, NY 10312. David C Egan, CPA can be reached at 718-227-6035 at his office Monday - Friday 9am to 5pm.