For those who have wondered how the long-term care insurance self-employed tax deduction works for owners of S-Corporations, this straightforward explanation clears it up. Greater than 2% shareholders of S-Corporations can lower the cost of long-term care insurance with this tax deduction when you think it through.
The entire premium paid by the S-corp employer on greater than 2% shareholders should be included in the shareholder’s Form W-2 as taxable wages, but not subject to Social Security, Medicare (FICA), or Unemployment (FUTA) taxes (see below). Then you deduct the age-based amount on Line 29 of Form 1040 as part of your self-employed health insurance deduction. Here is the age-based table for 2021. These numbers usually grow each January.
| Attained age before the close of the taxable year | Amount that counts as part of self-employed health insurance deduction in 2021 |
| 40 and younger | $450 |
| 41-50 | $850 |
| 51-60 | $1,690 |
| 61-70 | $4,520 |
| 71 and older | $5,640 |
If you pay the premium out of your personal checking account, the age-based amounts are deductible on Schedule A as medical expenses but as you know, you have to have medical expenses in excess of 7.5% of your adjusted gross income to enjoy that deduction.
Here’s the total explanation that I have in my agent training materials in case you find it helpful, plus you can refer to S Corporation Compensation and Medical Insurance Issues.
S-Corporations: That IRS section says that greater than 2% shareholder/employees of an S-corporation are entitled to this deduction if the premium is paid by the S-Corporation and added to the shareholder/employee’s gross income. The premium payments are included in wages for income-tax withholding on W-2 but are generally not subject to Social Security, Medicare (FICA), or Unemployment (FUTA) taxes. The net result is the LTC insurance premium amount lowers adjusted gross income. Some greater than 2% shareholders of S-corporations do this as they want the business to pay the premium for cash-flow purposes, rather than pay it out of their personal checking account. Plus, their salary is reported as “Compensation of Officers” on Line 7 of Form 1120S, which lowers their taxable business income.
Rule of Spousal Attribution: Some think if the greater than 2% shareholder’s spouse is an employee of the S-Corporation and doesn’t own any shares, 100% of all eligible health insurance including 100% of the LTC insurance premium (not the age-based amount) can be deducted on Schedule C as a business expense. This is not true. IRC Section 1372(b) treats the spouse of a more than 2% shareholder as also owning the shares owned by the more than 2% shareholder spouse. In other words, both spouses are treated as a greater than 2% shareholder even if all the shares are directly owned by only one spouse.
Disclaimer: This is in no way intended to impart tax advice and you should ultimately seek the advice of a competent tax professional.
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My accountant told me one of these 2 ways to do it:
1- Put my 2% S-Corp owners LTC premiums as an Expense, and have my tax preparer exclude it out of company Expenses when doing the tax return which would basically pass it thru to me with the rest of the earnings at the end of the year. (This doesn’t seem right to me)
Or
2 Put it on the Balance sheet as a “Owners Draw-LTC Premiums”. Then its taxable, but no SE Tax and it stands out for tax preparation.
Are either of these correct or must it be added in with my health insurance premiums on the W2? If so, I’m not sure how Quick Books Online payroll would distinguish the Health vs the LTC premiums (which would need to be broke out for the Age based reduction calculation).
Thanks for any advice..
Author
Hi Robert – this section from the IRS tells the tax preparer exactly how to do it, except as you pointed out, LTC insurance is age-based:
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
Treating Medical Insurance Premiums as Wages
Health and accident insurance premiums paid on behalf of a greater than 2-percent S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee’s Form W-2, subject to income tax withholding. (A 2-percent shareholder is someone who owns more than 2 percent of the outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all stock of the corporation.)
However, these additional wages are not subject to Social Security, or Medicare (FICA), or Unemployment (FUTA) taxes if the payments of premiums are made to or on behalf of an employee under a plan or system that makes provision for all or a class of employees (or employees and their dependents). Therefore, the additional compensation is included in the shareholder-employee’s Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2.
A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements. If, however, the shareholder or the shareholder’s spouse was eligible to participate in any subsidized health care plan, then the shareholder is not entitled to the above-the-line deduction. IRC § 162(l). (An above-the-line deduction is a deduction the IRS allows you to subtract from your annual gross income in order to arrive at your “adjusted gross income”.)
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That last part just says you can’t do it if you or your spouse is eligible to participate in a long-term care insurance plan for which an employer pays part or all of the premium.
My payroll company, Paychex, is asking which box in my W-2 do they put Long Term Care Insurance payments of premiums? They will add it to the gross income – like you all explain above. But do not know which box it goes in??? Box 10 maybe – Dependent Care benefits? Have asked my accountant but she’s not sure. Hoping you can help here. We are talking to Renee C. as well -and she does not know either.
THX
Author
It goes in with health insurance premium Barb. That used to be line 29 (self-employed health insurance).
You are a wonderful resource! Thank you so much for this specific information!! I hope you are doing well.
Author
You are so welcome Celine! Let us know if we can help you any other way.
I never knew this about long term care premiums. Thanks for the information!
Author
So glad you found it helpful Rebecca! Plus the age-based amounts increase each January.