Friday, August 6, 2010

If your business is organized as an S-Corporation and it pays for your health insurance you could have a problem.

A corporation that has elected to have its profits or losses passed through to its shareholders, rather than paying its taxes directly, is an S-Corporation. If your corporation pays for your health insurance, you are required to add the value of any company paid premiums to the gross wages on your W-2 form.

For example, if your wages are $100,000 and you pay health insurance premiums for yourself of $12,000 (you wish they were that low) your gross wages on the W-2 form should be $112,000. These premiums are not subject to Social Security or Medicare Taxes.

There is some good news. After going through these gyrations you are allowed to deduct the health insurance premiums on the face of your personal federal tax return and Massachusetts tax return. In effect, it does not cost any additional taxes when you follow these rules.

If it has no effect, why do it? First, it’s the law. Second, if you do not put the premiums on your W-2, you are not allowed to deduct them on your corporate tax return. Third, they become an itemized deduction on your personal return that is subject to a floor of 7.5% of your gross income. So you would not get the full benefit of deducting the health insurance premiums.

Please note that this applies only to 2% or more shareholders. It does not apply to any employee who is not an owner.

Please pay attention to this problem. The IRS is getting more and more active in reviewing these transactions and assessing penalties if you fail to follow them.

Monday, August 2, 2010

Question of the Day

A client called to ask if the State of Massachusetts was willing to forgive penalties on sales taxes that were paid late.

Here is one of the unfortunate facts about sales taxes. No matter what the business structure, the owner of the business is personally liable for sales taxes plus the penalties and interest on them. So the corporate structure will not shield the owner from paying these taxes out of personal funds.

There is a possibility that the state will abate penalties if it is the first time they have been imposed and the person can give a good reason for not paying them on time. This abatement is requested using form CA-6. Here is a website where you can find the forms.

It will take the state a minimum of two months to process the request, they will continue to bill you, and you will still accrue the penalties and interest on the balance due.

The best policy is to pay your taxes on time.