When you’re establishing your business, one of the first things you need to decide is what kind of “company structure” you want to adopt. The Small Business Administration shares on its website that small business owners and founders can choose from several types:

• sole proprietorship
• partnership
• Limited Liability Company (LLC)
• or Corporation (C Corporation, S Corporation, Close Corporation, nonprofit, or cooperative).

If you choose an S Corp, you can avoid the double taxation often associated with a C Corp. An S Corp allows direct pass-through of profits – and some losses – to owners. Income is not subject to corporate tax rates. For more information on S Corp taxation, visit the S Corporation page on the IRS website.

According to CourseSidekick.com, in the U.S., corporations account for about 18% of all business entities. About 10% are partnerships. Sole proprietorships account for the largest percentage of businesses: 72%.

If you incorporate as an S Corp, there are some considerations. These could affect employee benefits and health insurance for you – and your employees.

Health benefits deductibility

S Corporations can provide insurance to employees as a corporate benefit. They can also deduct the cost of health insurance as a normal business expense. Coverage can be for employees individually. Or, it can be family coverage – for employees, spouses, dependents, and eligible nondependent children through age 26.

If an employee is a shareholder, the cost must be included in that employee’s taxes. It gets listed in Box 1 of the shareholder’s federal W-2 wage and tax statements. The cost is not included in Boxes 3 and 5 of the W-2.

For non-owner employees, health insurance is considered a tax-free fringe benefit. The employee is not taxed for it, and the organization can deduct contributions on its corporate tax return.

According to TurboTax, S Corporation employee-shareholders may be able to use the Self-Employed Health Insurance (SEHI) deduction. The SEHI deduction offers a greater advantage than a “regular” itemized tax deduction.

An S Corporation 2% shareholder-employee is eligible for an above-the-line deduction. That reduces his/her/their adjusted Gross Income (AGI), so long as other self-employed medical insurance deduction requirements are met.

An above-the-line deduction is not available if the shareholder or shareholder’s spouse is eligible to participate in any subsidized health care plan.

Additional information and resources

For additional guidance on S Corporations, refer to the IRS website. You may also want to review the Wolters Kluwer article online, S corp (s corporation) advantages and disadvantages.

We encourage you to talk with a tax professional for guidance about your specific tax situation.