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).

		Vanilla			Health Insurance
ln		No S	S Corp		No S	S Corp
1	Business Income	100,000	100,000		100,000	100,000
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.