Turning your business entity into an S Corporation, or S Corp, has many benefits. One of the biggest advantages of an S Corp are tax deductions, which can save you a respectable amount of money each year. When it comes to S Corps, the two most important tax deductions are disability and life insurance.
What is a Disability Insurance Deductible?
Disability insurance is one of the most commonly overlooked deductions. In a lot of cases, disability insurance is paid for by the employer and will pay for part, or all, of an employee’s income if they are unable to work for a long period of time as a result of an accident, injury, or illness. Essentially, disability insurance provides supplemental income if you are employed and unable to to work.
Disability insurance is a critical aspect of financial planning because it protects your income. If you are in an accident or fall ill for an extended period of time, disability insurance works to make up for lost income. While individuals and business entities cannot deduct disability insurance premiums or payments, S Corps can (in certain circumstances). This saves money while making sure you and your employees are protected.
Disability deductions are complicated: How is disability insurance handled among businesses? Is disability insurance deductible for an S Corp? Will benefits keep pace with inflation? What type of disability insurance works best for my business? This is when a tax planner for S Corps comes in handy.
Is Disability Insurance Tax Deductible For Corporations?
Depending on the type of business entity you own and who paid the premium, there are some instances where you may be able to deduct disability insurance from your taxes. Sole proprietors cannot deduct disability premiums because, legally, the business is the same as the individual owner. In certain cases corporations, however, can deduct disability premiums from their taxes:
Limited liability companies (LLCs) can deduct disability premiums from their taxes. But how does this affect the employee? If the employer pays the premium, benefits may be taxable to the shareholder or employer. If the shareholder or employer pays the premium, the benefit is tax-free.
C Corporations can deduct disability premiums from their taxes if they pay the premium for employees. For the premium to be deducted, shareholders must be employees, so shareholders who are not employees do not qualify. If the premium is not included in the employee’s income, the benefit will be taxable if they collect on the policy.
S Corp employees or shareholders can deduct disability insurance premiums if they own 2 percent or more of the business. Or, if an S Corp is paying the premium on behalf of its employee the S Corp can deduct the premium from their taxes. However, employees cannot deduct the disability premium on their own taxes; if they collect on the policy, the benefit will be tax-free.
Even if the disability insurance is tax deductible with an S Corp, doing so may not be in your best interest. If you take the deduction, the benefits are taxable. If you do not take the deduction and choose to pay with after-tax dollars (the net amount of income available after taxes are applied) the benefits are tax-free during a claim.
It is important to keep in mind that since S Corps do not pay federal tax, the income or loss is passed on to shareholders.
How is Shareholder Life Insurance for S Corps Treated?
Another benefit to transitioning from a business entity to an S Corp is the availability of shareholder life insurance to employees: Employees do not have to include paid premiums on their behalf for the first $50,000 of coverage from group term life insurance (paid on behalf of a shareholder who owns at least 2 percent of the business, which is treated as taxable gross income). When the corporation is both the beneficiary and the owner, life insurance coverage is not included as income on the shareholder’s W-2 tax form. Additionally, there is no deduction for life insurance paid on the individual’s tax return and the cost of insurance is subject to FICA holding.
S Corps can deduct life insurance costs provided to their employees on the corporate tax return. Depending on the type of business entity and the role of the employee, employees who have 2 percent or more shares in the company can have their life insurance premium included in their gross income. The amount can be deducted from guaranteed payments, salaries and wages, or officer’s compensation. If life insurance premiums are not included in the employee’s income, deductions can be written off as an employee benefit program expense on the S Corp’s tax return.
Getting the Most Out of S Corp Deductions
If you have an S Corp and are looking to see what the legal and tax implications are, tools like Corvee’s tax planning software may help you quickly find the strategies available based on the different types of business entities and deductions.
Find other tax deductions for your S Corp by getting started with Corveetoday.
