Health Insurance Premiums And Reasonable Compensation

Lana Dolyna, EA  Tax Consultant

Your S corporation has to pay you reasonable compensation for the services you provide to the corporation. If your corporation pays your health insurance premiums, does that change the salary amount you need to pay yourself?

The law requires that as an S corporation owner-employee, you pay yourself reasonable compensation for the services you perform for the corporation.

Your reasonable compensation is the total value of remuneration you receive from your corporation, including both cash salary and benefits.

Reduce the Salary and Realize Two Benefits

Say that your health insurance cost is $10,000. If you reduce your cash salary by the $10,000 (versus increasing it by $10,000), you have two good tax outcomes:

1. You’ll save 15.3 percent in FICA taxes on the $10,000 decrease in cash wages (assuming your salary is less than $128,700).

2. You’ll increase your possible Section 199A deduction by up to $2,000 (20 percent of $10,000) by avoiding the additional wage expense that would otherwise reduce your qualified business income. 

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