Are You an S-Corp Shareholder? How You Pay for Your Health Insurance Matters
When veterinary practice owners establish their business, they must choose an appropriate business structure. For most privately owned veterinary practices, the designation S corporation (S-Corp) or LLC filing as an S-Corp offers the most flexibility and maximum tax advantages. S-Corps don’t file business taxes, but instead pass on all profits and losses to the business owners (i.e., shareholders) who report them on their income taxes.
S-Corps are popular not only for veterinarians but also for other small, non-publicly traded companies. The IRS estimates more than 5 million small businesses are classified as S-Corps, compared with fewer than 2 million C-Corps. Around 70% of VetBooks clients file as S-Corps because they’ve recognized the benefits—but many don’t take full advantage of the designation.
Our job at VetBooks is to accurately track your finances, so you and your tax accountant can use that information to plan for tax season. Although we aren’t tax accountants ourselves, we can spot some of the major bookkeeping issues that might become a tax problem. One of those mistakes may be hiding in your payroll deductions—for example, if your practice is an S-Corp and you’re paying for health insurance from your paycheck, you could be missing out on important tax benefits. Here, we explain the benefits of having the S-Corp pay for your health insurance.
A VetBooks tale
We commonly see this mistake, because most practice owners think they are doing the right thing by setting up their own health insurance like their employees. Take one of our clients, for example. This client discovered only a few weeks ago that they’d been paying unnecessarily for health insurance from their take-home pay. Over seven years, they’d paid more than $80,000 in health, dental, and vision insurance costs. Not only did this reduce their take-home pay, but also the business wasn’t able to take advantage of the shareholder health tax deduction. When we saw the error, we advised the client to contact his tax attorney and correct the situation. If this is confusing, keep reading.
Why S-Corps should pay for practice owner health insurance.
Operating as an S-Corp allows for the S-Corp itself to pay for the shareholders’ (i.e., practice owners’) health insurance premiums, instead of the shareholder paying through payroll deductions. Here’s why you should take advantage of this rule:
- Business tax deductions — Health insurance premiums paid by the S-Corps are considered a deductible business expense for the company, instead of trickling down to the shareholder. This can reduce the S-Corp’s taxable income.
- Payroll taxes — Health insurance premiums paid through payroll deductions are subject to payroll taxes, but these taxes don’t apply when the S-Corp pays for insurance. This means paying through payroll can increase your overall tax burden.
- Personal shareholder benefits — The S-Corp paying for health insurance premiums effectively reduces the shareholder’s taxable income while also increasing their take-home pay.
How to determine if you’re taking advantage of S-Corp shareholder health.
To determine if you are benefiting from this tax advantage, check the following:
- W-2 — If “shareholder health” is listed in box 14 of your W-2, your S-Corp is already paying your health insurance premiums.
- Paycheck — If your health insurance is payroll-deducted, you are not taking full advantage of the IRS shareholder health rules and could be paying unnecessarily.
- Accountant — When in doubt, always check with your tax accountant.
What to do if your health insurance is coming out of your paycheck
If you think you could mistakenly be paying for practice owner health insurance through personal payroll deductions, the first step is to call your tax accountant. They may already be accounting for this at the time of tax filing but, if not, they can help you change your elections to remedy the issue and, in some cases, refile for previous tax years.
Tax laws are confusing, and at VetBooks, we aren’t tax accountants. However, we do know that making this simple change in your elections can make a significant difference for your veterinary business. For questions regarding your taxes, contact your CPA. For help with bookkeeping and practice finances, book a meeting with our VetBooks team.
