Small business owners frequently have legal concerns about operating their companies, particularly whether their S corporation can cover their health insurance costs. Yes, S corporations can cover the costs of their owner-employees’ health insurance; however, there are a few guidelines to follow to assure legal compliance.
The first thing to keep in mind is that S corporations are required to offer group health insurance to all of their employees who put in 30 or more hours each week. This indicates that the owner-employee is qualified for health insurance coverage under the group policy if they are the only employee employed full-time.
Furthermore, the owner-employee’s W-2 pay must reflect the health insurance costs that the S corp paid. This indicates that federal income tax, Social Security, and Medicare withholdings are applicable to the premiums.
S corps are prohibited from using per diem to cover the cost of health insurance premiums. Employees are paid a daily payment known as a per diem to help pay for their meals, accommodation, and other miscellaneous costs while traveling for work. It cannot be used to cover the cost of health insurance.
There are several ways to pay yourself when running your own business. Taking a pay as an employee of the S corp is one typical strategy. Payroll taxes apply to this salary, which also needs to be fair considering the services received. Taking distributions from the S corp’s profits, which are not subject to payroll taxes but might be liable to income taxes, is an alternative strategy.
Owner’s draws, which are cash withdrawals from the company for personal use, are another option available to small business owners. Owner’s draws may be subject to income taxes even though they are not subject to payroll taxes.
In conclusion, S corporations can pay the health insurance premiums for their owner-employees, but only if they do so through a group policy and the premiums are deducted from the owner-employee’s W-2 salary. Small business owners have several alternatives for paying themselves, including taking a salary, distributions, or owner’s draws. Per diem cannot be used to pay for health insurance costs. To ensure legal compliance, it is crucial to speak with a tax expert.
Retained earnings, commonly referred to as leftover funds in a S corporation, can be utilized for a variety of commercial activities, including capital expenditures, debt repayment, and distribution of profits to stockholders. It is crucial to remember that shareholders may incur additional taxes as a result of receiving profits in the form of a dividend. To decide what to do with the company’s retained earnings, it is advised that you speak with a tax expert.