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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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I have an S corp. Can I put my mother on the payroll (with

Resolved Question:

I have an S corp. Can I put my mother on the payroll (with an actual job) and pay her long term care insurance through the company as an employee benefit? If so, is the entire premium deductible? And would it matter that the premium of $500/mo would be more than the part-time salary?

I did this for several years about 10 years ago (per an accountant) but am wondering if it is still okay to do.
Submitted: 4 years ago.
Category: Tax
Expert:  jgordosea replied 4 years ago.

Greetings,

 

Qualifying long term care insurance is part of the health insurance that can be excluded from employee wages and deducted by the corporation. See Accident and Health Benefits for details.

 

As you may know, benefits paid to more than 2% shareholders of the S corporation are generally not deductible by the corporation. See 2% Owners for more details.

 

Sec. 318. Constructive ownership of stock says:

"An individual shall be considered as owning the stock owned,
directly or indirectly, by or for -
(i) his spouse (other than a spouse who is legally
separated from the individual under a decree of divorce or
separate maintenance), and
(ii) his children, grandchildren, and parents."

 

So, your mother's benefits can not be deducted by the corporation and excluded from her wages (similar to yours) since she is considered as owning the shares that you, her child, own.

 

Of course, the corporation can pay the premium and include that as wages to your mother in order deduct those amounts the same as other wages paid to her. The only caution might be that her compensation for the work performed will have to remain "reasonable".

 

I hope this helps to know the rules for deducting benefits and the stock attribution rules; even though it may not be what you would have liked to hear.

 

Please ask if you need clarification. Thank you.

 

Customer: replied 4 years ago.
Wow. I have never heard that my mom owns my company's shares.

I pay myself a salary and include my health ins premiums as wages on my W-2, so I deduct them from the company. So I would have to also include my mom's premiums on her W-2 as well in order to deduct them. Are they then taxable wages to my mom? I include mine on my 1040 but then re-deduct them on the 1040. Can she do that if she owns my company?
Expert:  jgordosea replied 4 years ago.

Hello again,

 

Your parent is considered to own the shares for income tax purposes ( "For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable") Sec. 318. Constructive ownership of stock

She does not actually have any rights of ownership in your shares. She does not own your company; but is treated as if she did for tax accounting for her benefits.

 

Indeed, your mother will have to include the health insurance premiums as wage income (like you do).

 

She may be entitled to the self employed health insurance adjustment to income, as you are, if she meets all the other requirements (but not to the extent they exceed her salary).

For a more comprehensive article see Deducting Health Insurance Premiums for S Corporation Shareholders

If she can not use the self employed health insurance adjustment to income, she can still use the amount of premiums included in her income as a medical deduction in computing her itemized deductions.

 

I hope this helps to clarify for you.

Best regards.

 

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3007
Experience: I've prepared all types of taxes since 1987.
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