Tax

Have a tax question? Ask a tax Expert

Ask an Expert,
Get an Answer ASAP!

AFLAC---Two owners of (Owners) tell me that their Aflac medical…

Customer Question
AFLAC---Two owners of (Owners) tell...
AFLAC---Two owners of (Owners) tell me that their Aflac medical insurance deduction is tax free from all tax deductions. I have them set up in Intuit as after-tax, Intuit is not taxable Federal and State but is taxing S.S. and medicare. They say as owners they cannot have pre-tax.
Submitted: 9 years ago.Category: Tax
Show More
Show Less
Ask Your Own Tax Question
Answered in 4 minutes by:
1/19/2009
Tax Professional: jgordosea, Enrolled Agent replied 9 years ago
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
Verified

Hello,

 

Are these owners of an S corporation?

 

If not, what is the entity type and how is it taxed, if an LLC ?

 

The answer does depend on how the entity is taxed. Thanks.

Ask Your Own Tax Question
Customer reply replied 9 years ago
Yes Company is S-Corp.
Tax Professional: jgordosea, Enrolled Agent replied 9 years ago

Hello again,

 

Section 3121(a)(2)(8) excludes from wages subject to FICA and Medicare taxes the amounts paid by an employer to or on behalf of an employee (including amounts paid by an employer for insurance, annuities, or into a fund) for medical and hospitalization expenses in connection with sickness or accident disability. To apply, the payments must be made under a plan or system for employees and their dependents generally or for a class of employees and their dependents.

 

If the plan fits the requirements for the exclusion under section 3121(a)(2)(8) then the amounts paid by an S corporation for accident and health insurance covering a more than 2%-shareholder-employee are not wages for social security and Medicare tax purposes, even though the amounts must be included in wages for income tax withholding purposes on the 2%-shareholder-employee's Form W-2.

 

The shareholder includes hte amount as wages and can (if the other requirements are met) use the adjustment from gross income for self employed health insurance.

 

I hope this helps for correctly preparing the W-2 for a > 2% shareholder of an S corporation.

 

Best wishes.

 

 

Ask Your Own Tax Question
Customer reply replied 9 years ago

Sorry I guess I did not make myself clear, the owners being employees of the S-Corp. they are the ones paying the Aflac health insurance premiums, deducted from their wages weekly. I will include the email I receive from her, may help.

 

Email from owner:

. Taxability for Social Security and/or M/C is not correct. It is not taxable Aflac for both Frank and I are after tax, there is no taxability for Aflac deductions for Federal or State, nor is there any taxability for Social Security or M/C. The only way there would be any kind of tax is for short term disability, which we do not have in our Aflac plan.

Tax Professional: jgordosea, Enrolled Agent replied 9 years ago

Hello again,

 

As more than 2% owners the health insurance premiums ARE subject to income tax. The email is not correct. The >2% owners are treated differently than most employees.

 

Revenue Ruling 91-26 indicates that amounts paid by an S corporation for accident and health insurance covering a 2%-shareholder-employee must be reported as wages on his or her Form W-2, Wage and Tax Statement. See also IRC Sec. 1372 as referenced in Internal Revenue Bulletin - January 14, 2008 - Notice 2008-1

 

Accident and health insurance premiums paid or furnished by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered are treated for income tax purposes like partnership guaranteed payments under § 707(c) of the Code. Rev. Rul. 91-26, 1991-1 C.B. 184. An S corporation is entitled to deduct the cost of such employee fringe benefits under § 162(a) if the requirements of that section are satisfied (taking into account the rules of § 263). The premium payments are included in wages for income tax withholding purposes on the shareholder-employee's Form W-2, Wage and Tax Statement, but are not wages subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied. See § 3121(a)(2)(B); Ann. 92-16, 1992-5 I.R.B. 53. The 2-percent shareholder is required to include the amount of the accident and health insurance premiums in gross income under § 61(a).

 

Section 106 provides an exclusion from the gross income of an employee for employer-provided coverage under an accident and health plan. A 2-percent shareholder is not an employee for purposes of §106. Treas. Reg. §1.106-1; section 1372(a). Accordingly, the premiums are not excludible from the 2-percent shareholder-employee's gross income under §106.

 

(bolding added to above quote)

 

As shown above, insurance payments paid through a plan are not subject to FICA and Medicare but are subject to income tax for a >2% owner.

 

I hope this helps to clarify for you.

 

 

Ask Your Own Tax Question
Customer reply replied 9 years ago

Sorry:

You still referred to S-Corp. providing and paying these health insurance premiums for the employee. Wrong---the two employees pay the premiums, the premiums are deducted from their wages weekly.

Of course then the Corp. forwards the payment to Aflac--- but is employees money.

 

There are as of right now the 2 owners of the S-Corp. (Ownership 50/50) husband and wife. Paid as employees, it is they that pay the premiums through payroll deduction from wages weekly.

 

For me to answer them so they will understand, could you please state separately:

For the employee:

Taxable for Federal/State (Yes-No)

Taxable to SS & M/C (yes-No)

Tax Professional: jgordosea, Enrolled Agent replied 9 years ago

Hello again,

 

You wrote: the Corp. forwards the payment to Aflac--- but is employees money.

There is no reason for the corporation to pay the premium if it is "employees money".

 

There are reasons for the corporation NOT to pay the premium if it is "employees money". This is not proper accounting. If it is a corporate expense then the corporation should pay and deduct it. If this is a group plan formed under the corporation the corporation should pay for it.

 

If it is a personal expense (and personal ploicy) then the person should pay and deduct it. There are possible consequences of paying owner's personal expenses that can rise to invalidating the corporate existence ( aka "piercing the corporate veil").

 

Again, from Notice 2008-1 (underlining and bolding added) :

 

Accident and health insurance premiums paid or furnished by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered ...are included in wages for income tax withholding purposes on the shareholder-employee's Form W-2, Wage and Tax Statement, but are not wages subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied.

 

The proper accounting for >2% shareholders of an S corporation health insurance plan payments (and the code section does read "by or on behalf of employees") is to include the premium as wages taxable to the employee and deductible by the corporation for incoem taxes.

So, the taxable for federal/state income tax (with some state exceptions) is = Yes.

 

These payments are not subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied.

So, the taxable for FICA/Medicare taxes = No.

 

For example, the shareholder has a salary of $1000 per pay period and $90 for premium in that period. The wages subject to income tax are $1090 and the wages subject to Fica/Medicare are $1000 for the pay period. Presuming no income tax withheld, the check stub has 1,090 gross less 90 premium less 62.00 for FICA and 14.50 for Medicare for a net check of 923.50.

The corporation reports 1090 wages paid, of which 1000 were subject to FICA/Medicare and 76.50 collected from employees for the pay period on the payroll tax reports.

The corporation reports 1090 wages paid per pay period and 76.50 payroll tax (after it is paid by the employer) on the corporate tax return.

 

The >2% shareholder reports 1090 wages and can potentially deduct the 90 as self employed health insurance as an adjustment to income if otherwise qualified.

 

It is not clear how the payroll tax reports (or corporate books) have been prepared for the premiums paid through the course of the year. Not all S corporation shareholders know how to prepare these reports.

I have seen insurance premiums treated as a distribution to the shareholder and not deducted by the corporation (which appears to be what has been attempted in your case). If the premiums have not been included in the payroll reports you may wnat to consider that to avoid amending payroll reports; but it is not the technically correct reporting.

 

I hope this helps to clarify further for you.

 

Best regards.

 

 

 

 

 

Ask Your Own Tax Question
Customer reply replied 9 years ago

I.m sorry but I am not getting it.

Maybe I can say this another way.

The S Corp actually has nothing to do with paying the premiums.

The Aflac premiums are deducted from wages weekly, the Corp, simply then forwards their payment to Aflac at the end of the month, same as would be done with a Friend of Court deduction.

They are telling me that with their plan, the premium deduction from their wages are not taxable for any payroll tax's. Totally non-taxable.

It is a health insurance policy only which pays them if they are off work for medical reason.

BJ

Customer reply replied 9 years ago
Hey John, are you through trying to answer my question
Tax Professional: jgordosea, Enrolled Agent replied 9 years ago

Hello again,

 

I have explained the proper treatment for a health insurance plan premium that is paid by a corporation for a more than 2% shareholder. I have given you references to the code and an IRS Notice that apply.

It is not permitted to have a health insurance premium furnished by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered not be subject to income tax to a more than 2% shareholder; as can be seen from the cited sources.

 

What they are telling you is not a proper treatment for a more than 2% shareholder as it would be for a non-owner employee.

 

As I mentioned, some shareholders use the corporate account to pay personal expenses. In that case, you would not report the premiums as a deduction from taxable wages. If it is like a Friend of Court deduction then, as in that case, the total gross wages before the deduction are subject to income taxes and FICA/Medicare.

 

You will have to work with your client to decide how to treat the premiums paid - as the cited sources dictate or as they have told you.

 

I hope this helps you see the difference in the cited sources and what they told you.

Ask Your Own Tax Question
Was this answer helpful?

How JustAnswer works

step-image
Describe your issueThe assistant will guide you
step-image
Chat 1:1 with a tax professionalLicensed Experts are available 24/7
step-image
100% satisfaction guaranteeGet all the answers you need
Ask jgordosea Your Own Question
jgordosea
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
3,161 Satisfied Customers
Experience: I've prepared all types of taxes since 1987.

jgordosea is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,338 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,512 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

PhillipsEsq.

PhillipsEsq.

Attorney-at-Law

59 satisfied customers

B.A., M.B.A, J.D.

Robin D.

Robin D.

Senior Tax Advisor 4

15,569 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,655 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

3,161 satisfied customers

I've prepared all types of taxes since 1987.

< Previous | Next >

Related Tax Questions
Robin. I have some employees that participates on Aflac
I have some employees that participates on Aflac pretax , how do I report this on their W-2, also should I deduct these contributions from their Gross Wages on Box 1? … read more
Mark D
Mark D
Enrolled Agent
Master's Degree
1,338 satisfied customers
I had a critical illness benefit of $50,000 paid to me after
I had a critical illness benefit of $50,000 paid to me after multiple stroke. My insurance was taken out pretax. How much is taxed as ordinary income? … read more
emc011075
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
HRA and S-corp/C-corp, * Corporation is owned 100% by one
HRA and S-corp/C-corp,* Corporation is owned 100% by one shareholder. * Corporation only has one employee who is the shareholder. * Shareholder is covered under spouse's medical insurance (pre-tax ded… read more
Lane
Lane
JD, MBA, CFP, CRPS
Doctoral Degree
47 satisfied customers
I am an employer, 30 employers, fine dine restaurant,
I am an employer, 30 employers, fine dine restaurant, thinking about Aflac. Restaurant would pay 50% of … read more
Lane
Lane
JD, MBA, CFP, CRPS
Doctoral Degree
47 satisfied customers
Doing w2's for my employees. 2 have Aflac that they pay on
Doing w2's for my employees. 2 have Aflac that they pay on their own but I deduct from each pay check. Corey Corey … read more
Mark Taylor
Mark Taylor
Certified Public Accountant
Masters
2,328 satisfied customers
My employer has started Aflac insurance premiums deductions
My employer has started Aflac insurance premiums deductions in 2015. I now owe $825 in federal taxes when in previous years I had a refund How can I make sure they've reported my W2 correctl … read more
Lev
Lev
Retired
Bachelor\u0027s Degree Equivalent
27,134 satisfied customers
How can I tell from a paystub or W-2 if my health insurance
How can I tell from a paystub or W-2 if my health insurance premiums are pre-tax or post-tax?… read more
Lev
Lev
Retired
Bachelor\u0027s Degree Equivalent
27,134 satisfied customers
On W-2 is the pre tax AFLAC premium deductible from total income
On W-2 is the pre tax AFLAC premium deductible from total income related to withholding tax or just the Fica… read more
Lev
Lev
Retired
Bachelor\u0027s Degree Equivalent
27,134 satisfied customers
im working on w-2s and my wags, tips or not the true employee
im working on w-2s and my wags, tips or not the true employee wages because of Aflac we have after tax Aflac and pre tax Aflac where on my w-2 do I put the amount of Aflac also do I override my wages … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,569 satisfied customers
Reimbursement for health insurance premiums vs. paying expenses
Reimbursement for health insurance premiums vs. paying expenses under HRA. I am an owner of S-corp. The corporation has two employee-owners: me and my partner, and one straight employee. In my state h… read more
Lev
Lev
Retired
Bachelor\u0027s Degree Equivalent
27,134 satisfied customers
business payroll tax - form 941 line # XXXXX? What figures are
business payroll tax - form 941 line # XXXXX? What figures are entered at this line, would it be the gross payroll for the quarter or an adjusted gross figure that would be gross that is adjusted by t… read more
Stephanie B.
Stephanie B.
Accountant
Master's Degree
451 satisfied customers
I am receiving payment from AFLAC for a medical policy. 100%
I am receiving payment from AFLAC for a medical policy. 100% of the premium is paid by me through my paycheck and is pretax. The entire premium is then paid by my employer to AFLAC. Is the money I rec… read more
Lane
Lane
JD, MBA, CFP, CRPS
Doctoral Degree
47 satisfied customers
my wife is a 7% shareholder in an s-corp. company has 30 employees.
my wife is a 7% shareholder in an s-corp. company has 30 employees. she receives a salary. company offers health insurance to all. company pays 1/2, employee pays 1/2. w-2 reflects the $5000 (1/2 comp… read more
socrateaser
socrateaser
1,452 satisfied customers
If AFLAC benefits from a supplemental health insurance plan
If AFLAC benefits from a supplemental health insurance plan are offered and paid for 100% by employees on a Section 125 pre tax basis, are the benefits received from these policies taxable as income (… read more
Anne
Anne
Master Tax Preparer
1,328 satisfied customers
Does benefit from an Aflac policy count as a medical reimbursement?
I received a benefit from an Aflac policy. I know I don't have to pay taxes on it because the premiums were paid with post tax dollars, but does that money count as a medical reimbursement? The money … read more
W. Reed
W. Reed
Master Tax Advisor Enrolled Agent
Master\u0027s Degree
10 satisfied customers
What can be deducted from wages on a w-2 ie health insurance
What can be deducted from wages on a w-2 ie health insurance simple iras etc and can anything be duducted for medicare wages.… read more
Merlo
Merlo
Tax Consultant
558 satisfied customers
I am currently on disability collecting from both ssi and private
I am currently on disability collecting from both ssi and private companies ( Metlife and Aflac) could you please tell me if I am going to pay income tax, will it be to both state and federal and the … read more
Merlo
Merlo
Tax Consultant
558 satisfied customers
Can a small business owner (a home builder) use the ...
Can a small business owner (a home builder) use the insurance benefits that the business pays for the employees (6 total); be a total tax write off for the business. State: Indiana. Type of insurance … read more
MequonCPA
MequonCPA
CPA Firm Owner
Master's Degree
2,165 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x