Section 199A Health Insurance Comparison
By Jason Watson, CPA
Posted Wednesday, October 20, 2021
Same situation as before, but with $10,000 in health insurance premiums (Line 8).
|ln||No S||S Corp||No S||S Corp|
|2||less W-2 Wages inc. SEHI, HSA, etc.||0||35,000||0||35,000|
|3||less Payroll Taxes||0||2,678||0||1,913|
|4||Net Business Income Section 199A||100,000||62,323||100,000||63,088|
|5||Adjustments to 1040 / NBI|
|6||less Social Security Tax||5,726||0||5,726||0|
|7||less Medicare Tax||1,339||0||1,339||0|
|8||less SEHI, HSA, etc.||0||0||10,000||10,000|
|9||Other Taxable Income||0||0||0||0|
|10||Adjusted Gross Income*||92,935||97,323||82,935||88,088|
|11||Itemized / Std Deductions||24,000||24,000||24,000||24,000|
|12||Taxable Income Before Section 199A||68,935||73,323||58,935||64,088|
|13||Section 199A Net Biz Income||20,000||12,465||20,000||12,618|
|14||Section 199A W-2 Wage Limit||0||17,500||0||17,500|
|15||Section 199A Taxable Income Limit||13,787||14,665||11,787||12,818|
|16||Section 199A Benefit||13,787||12,465||11,787||12,618|
|17||Marginal Income Tax Rate||12%||12%||12%||12%|
|18||Income Tax Benefit from Section 199A||-1,654||-1,496||-1,414||-1,514|
|19||plus Self-Employment Tax||14,130||0||14,130||0|
|20||plus Tax on Line 12 Delta (above)||0||526||0||618|
|21||plus Payroll Tax||0||5,355||0||3,825|
|22||Net Tax After Section 199A Benefit||12,475||4,386||12,715||2,929|
|23||Net S Corp Benefit $||8,089||9,786|
*includes the S Corp W-2
There are several notables, takeaways and explanations-
Assumptions are $100,000 in business income prior to $35,000 in reasonable shareholder salary. Married taxpayer with $24,000 as a standard deduction (Line 11) and no additional taxable income.
$10,000 has been added as self-employed health insurance premiums. This could easily be $7,000 in health insurance premiums and $3,000 in health savings account (HSA) contributions too. Both are considered a taxable fringe benefit when paid by the business (but later deducted $1 for $1 on your individual tax return).
Note the decrease in payroll taxes on Line 3. This is because less wages are being subjected to Social Security and Medicare taxes when considering health insurance, HSA, etc. as a form of Officer Compensation (reasonable shareholder salary). As a result, Box 1 of the W-2 will show $35,000 but Box 3 and Box 5 will only show $25,000. Form 1120S, Line 7, Officer Compensation will also show $35,000.
In this example, having the S corporation pay for self-employed health insurance increases the savings by approximately $1,800. Recall the language from IRS Fact Sheet 2008-25-
The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2.
If this is blowing your mind, please read our chapter dedicated to reasonable shareholder salary for further explanations of how self-employed health insurance and HSA contributions reduce Social Security and Medicare taxes.
Note that the Section 199A benefit (Line 16) is higher with an S corporation versus a non-S Corp by leveraging the self-employed health insurance / HSA aspect of an S Corp.
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