S-Corp/Medical Expenses Question

Check with the CPA you work with. However, I've certainly seen it as an employee benefit, provided the owner takes a salary.

I agree with you. I said I've seen it quite a few times. I don't do it. It is a personal expense of the shareholder.

If his spouse is an employee of the company, he can deduct the premiums paid for the insurance coverage as an employee benefit expense even if that coverage includes himself. But, otherwise, I'm not aware of anything allowing him to deduct personal copays and medical expenses for himself, his spouse or his dependents. I'm a CPA and have prepared corporate and individual taxes for 8 years and never seen this be allowed. I've always shown personal medical expenses as a draw. Now, there are special medical reimbursements plans you can set up but it's pretty involved and it doesn't sound to me like he has one. I read an article on the Intuit website the other day. If I can find it again, I'll post a link. Keep in mind the CPA and the owner are the ones responsible for reporting it correctly on the tax return. Just make sure you put it an obvious place so it's easily recognizable and not buried with other expenses. I'd set up a subitem under the Draw account and let the CPA move it at year end if he wants to. Then they can't come back and say they missed it since you had posted it in the wrong place. If he's adamant you bury it as a Benefit it seems fishy to me. Something else to consider is if he's trying to take deductions he shouldn't here - chances are he's running other personal expenses through the books too...

I appreciate all of the EA's and CPA's helping with this information.

I have a similar question for a new client that is either a C-Corp or an S-Corp (I haven't seen the tax return yet).

The corporation is paying the medical insurance premiums for the owner and his family, and the medical co-pays.

Since the owner has a CPA who prepares the taxes, should I just track these expenses as if they were appropriate corporate expenses (in accounts that are clearly marked). Or should I look into the question of whether this is OK?

I have been leaning towards doing the record keeping and leaving the question of legalities to the tax professional, but I don't know if I am potentially missing something.

I would look at the tax return and figure out how those 'expenses' were dealt with by their CPA. . .or get that info from the CPA. . .it doesn't make sense to enter it in a way that the CPA will have to adjust it at year end. . .

If you can't get the info, then I would make sure those expenses were clearly marked as you mentioned. . .

Even if you look into whether or not this is 'ok', you know that the CPA may deal with it differently. . .and, in my opinion, when there is a CPA involved, they have the final say. . .even if I don't agree. . .

I have requested a copy of the 2004 tax return because 2005 isn't finished. I suspect that these expenses were not in the company in 2004. I think the wife had coverage through her work.

"The CPA is always right" is a motto I live by.

So, I think I will continue to show the medical expenditures as expenses until I receive the 2005 tax return. Then I can reclassify them based on the CPA's treatment.

Thank you.

Although I am a CPA(and an attorney), I prefer the saying "The CPA or attorney is always the one whose reputation and license is on the line and who has more to lose than the bookkeeper," so if the CPA says to do it her way, let her take the responsibility off of your shoulders.

In an S corporation context, you can't get around the fringe benefit rules by providing the benefits to one's spouse who is not an owner. The family attribution rules of section 318 treat a person AS IF that person owned the stock of one's spouse. [See section 1372(b).] Therefore, the spouse would also be treated as a more-than-2% owner, and the health insurance premiums would be included in wages.

The attribution rules also apply to parents and children.

The same rules would apply to a medical reimbursement plan.

If the spouse is an employee, on p/r, I guess you can give her an employee benefit of the copays. However, I doubt that there are 2 separate health ins policies for the husband and a separate one for the spouse and children. This would be more expensive that a family policy. I wouldn't allow the health ins to be deducted.

There is no way to get around the attribution rules in S-corp for medical expenses. If they are married you can't pay employee benefits for medical expenses, because they are considered shareholders of the S-Corp under the Attribution rules.

I didn't consider the wife a shareholder for my answer. But I guess you're correct.

So the conclusion is that the payments should be reported as compensation on the shareholder's W-2 form. Is there any way to "fix" this after the 941s and W-2s have gone out the door by way of the K-1 and pass the income through that way?? I'm always intrigued by comments that "the CPA will fix it at year-end" because I can't see how to record the compensation properly without going through payroll, 941s and the W-2. Even the Sleeter Group's website recommends that "you could just handle this on the K-1 and pass the "income" through to the stockholder's 1040" rather than putting it through payroll. HOW??

That's the reason that the W-2s are due the end of Jan to the employees, but due to the SSA the end of Feb. If there are errors, you can make the change easily.

Why was the 4thq 941 and quarterly returns sent already when you have until the end of the month.

You should have checked with your tax professional first.

SE health ins does NOT go on the K-1. That is wrong. No! NEVER!

Call the IRS and ask how to make the correction on the 941 now that the everything was mailed and an error was found.

The W-2c CORRECTS THE W-2 AND THAT GETS SUBMITTED WITH a W-3C

941s get amended and you submit a corrected 941 with the word 'amended' across the top.

I always put the s/e health insurance as a footnote on the K-1 so the 1040 preparer has it handy. But OF COURSE it is not on an S corp K-1.

I agree that it is wrong to put the SE Health Ins on the K-1 instead of the W-2, but I have seen this number of times. I think mainly, because most people don't know how to handle it and they bring their tax return information in so late.

The ones we do we always make sure it is on the W-2.

Thanks for all the info! Actually, the client did their own payroll this year and I'm the tax professional trying to fix it that they should have checked with first! I just wanted to make sure there wasn't an easier fix than the 941c. Thanks!

I suppose they are speaking of treating the expenses as a distribution to the shareholder, which does get put on the K-1. And having the shareholder report self-employed health insurance, IF they had w-2 wages from this entity.
I'm not agreeing to this treatment but have seen it a hundred times.

If it is after the fact, you can put it on each shareholders K'1 as other income. This is the work around that we have used in the past, but it definetly is not clean.

The health insurance payments are not subject to social security taxes or unemployment. They are just subject to Federal W/H and State W/H.

The correct way to report se health ins for the 2% shareholder of an s corp is to put it on the W-2. Any other treatment is incorrect.

It is not subject to fica/medicare or fit. It gets deducted as an adj on pg1 of the 1040.

Distributions can only come from the accumulated earnings acct, if there is a credit balance. When the distribution is made, it is not taxed.

If the shareholder pays personal expenses from the business, it can be applied against the shareholder loan acct, as a return of princ.

If se health ins found after the W-2s are issued and mailed to the SSA, you have to correct the W-2.

It is not subject to fica/medicare or fit. It is 100% deductible on page 1 of the 1040.

Use W-2C, W-3C and 941C. It does not belong on the K-1.

I've had a situation where the owner did not take p/r because of a loss, however, he paid for the se health ins.

I filed a W-2 with just the se health ins amt and no taxes deducted. The IRS sent a letter to question it. I responded to their inquiry and they said ok!