![]() ![]() If, however, the shareholder or the shareholder's spouse was eligible to participate in any subsidized health care plan, then the shareholder is not entitled to the above-the-line deduction. 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.Ī 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. 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). (A 2-percent shareholder is someone who owns more than 2 percent of the outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all stock of the corporation.) 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. Treating Medical Insurance Premiums as Wages The use of a formula to determine compensation.What comparable businesses pay for similar services.Timing and manner of paying bonuses to key people.Time and effort devoted to the business.Some factors in determining reasonable compensation: For example, a manager may not directly produce gross receipts, but he assists the other employees or assets which are producing the day-to-day gross receipts. In addition to gross receipts generated directly by the shareholder-employee, the shareholder-employee should also be subject to wage treatment for administrative work performed by him for the other income-producing employees or assets. To the extent gross receipts are generated by services of non-shareholder employees and capital and equipment, payments to the shareholder would properly be treated as non-wage distributions that are not subject to employment taxes.īut to the extent gross receipts are generated by the shareholder's personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes. Services of non-shareholder employees or.The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation by looking to the source of the S corporation's gross receipts. Reasonable Reimbursement for Services Performedĭavid E. Reinforced Employment Status of Shareholders Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes. The IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation." ![]() The instructions to the Form 1120-S, U.S. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly. S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. Health Reimbursement Arrangements and other account-based group health plans.Failure to Satisfy the Requirements to be a QSEHRA.Limitations on QSEHRA participation for 2-percent S Corporation shareholder-employees.Qualified Small Employer Health Reimbursement Arrangements for Eligible Small Employers (QSEHRAs).Fewer Than Two Participants Who Are Current Employees Exception. ![]()
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