We wrote last year about some of the payroll reporting issues you can run into switching from one payroll provider to another. Here we want to look indepth at some things your current payroll service provider may not know about your situation. This is part one in a short series regarding what things you should inform your payroll service of that they might not know.
Normally we purchase services to make our lives easier and to ensure that the experts are handling areas that may either be weaknesses to us or may be things we simply don’t have the time to deal with. Payroll services certainly make our lives easier, provide us with real time preparation and figures, and save us time and money. But like any other financial service industry, payroll companies only know what you tell them. What you aren’t telling them or don’t know to tell them can be costing you money.
The biggest one we have run across is S Corporation Shareholder Health Insurance. Greater than 2% shareholders in an S Corporation can generally pay their health insurance costs out of the business, but those costs must be reported on your W-2 as a fringe benefit. This includes payments for your spouse unless your spouse is or could be covered under a separate plan through their employer. By reporting these payments on the W-2, you can take the payments as an “above the line” deduction on your personal tax return instead of having to deduct them as health costs on Schedule A.
So what’s the difference? For Schedule A itemized health deductions, you can only take a deduction for the amount that is over 7.5% of your adjusted gross income. In other words, let’s say you made $50,000 this last year and had $4,000 in health insurance costs paid by your S Corp. If you take your health insurance on Schedule A you will get a deduction of $500 if you can itemize ($4,000 – 7.5% of $50,000). On the other hand, if your shareholder health insurance is reported properly on your W-2, you will get the deduction for the entire $4,000.
The problem is that most payroll service providers aren’t attending your corporate meetings or reviewing your general ledger each year. Most don’t know if your shareholders’ health insurance is being paid by the company. In fact, we have seen some cases where shareholders are having portions of their paycheck withheld as part of their insurance plan and their service still did not realize that they were dealing with shareholder health insurance. In another case, the client informed their service that they had shareholder health insurance that needed to be reported and after filling out complicated forms provided to them by their service it still wasn’t reported properly. If you have a shareholder health insurance situation and want to make sure that you are getting the maximum tax benefit possible, please don’t hesitate to contact us to set up an appointment to review your payroll situation.