A taxpayer is a 10% shareholder in an S Corporation. The corporation paid $5,000 of health insurance premiums for the taxpayer. How is this reported?

Answer options:

Included in the shareholder's W-2 as wages; deductible by the shareholder as self-employed health insurance.

Excluded from the shareholder's income as a fringe benefit.

Included in W-2 wages; deductible only as an itemized medical expense.

Treated as a distribution.

How to approach this question

Rule for >2% S Corp Shareholders: Health insurance is WAGES (Subject to Income Tax, not FICA usually) and then DEDUCTIBLE (Adjustment). It's a wash for income tax.

Full Answer

A.Included in the shareholder's W-2 as wages; deductible by the shareholder as self-employed health insurance.✓ Correct

For more-than-2% shareholders of S Corporations, health insurance premiums paid by the corporation are included in the shareholder's W-2 wages (subject to income tax withholding but generally not FICA). The shareholder can then deduct the premiums as self-employed health insurance (adjustment to income).

Common mistakes

Thinking it's a tax-free fringe benefit (like for regular employees) or a distribution.

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