Many small business owners offering this benefit are eager to participate in the benefit as well. While offering a reimbursement benefit is primarily about providing value to employees, federal tax code does allow some business owners to participate. This is determined primarily by whether the owner is considered an employee—which is determined by the business’s filing status.

Check out this blog post for a helpful infographic.

C-corporation owners

Because C-corporations are legal entities entirely separate from the owner, owners are considered common-law employees of the corporation and are eligible to participate in this benefit. As with all employees, this eligibility extends to the C-corp owner’s family as well. All reimbursements paid to the C-corp owner and the owner’s family are tax-free to the C-corp and the owner.

Sole proprietors

A sole proprietorship is an unincorporated business owned and run by one individual. There isn't a distinction between the business and owner, meaning the owner isn't an employee. This prevents sole proprietors from participating.

However, if the owner of the sole proprietorship is married to a W-2 employee of the business, the owner could gain access through their spouse’s allowance as a dependent. All reimbursements would be tax-free to both the sole proprietorship and the owner’s spouse.

Partners

A partnership is a pass-through entity, which means the company isn't subject to income tax. Instead, the partners are directly taxed individually. This means partners in a partnership are not employees, but self-employed individuals, and thus are not eligible to participate in a reimbursement benefit.

Similar to sole proprietors, partners can gain access to the benefit if they are married to a W-2 employee of the business. The partner’s spouse can't also be a business partner.

S-corporation owners

An S-corporation is a pass-through entity, meaning the company isn’t subject to income tax. Instead, shareholders (i.e., owners who own 2 percent or more of the company’s shares) are directly taxed individually. This means shareholders aren’t considered employees and aren’t eligible to participate in a reimbursement benefit.

This attribution applies to family members (spouses, parents, grandchildren, and children, but not siblings), meaning family members are also considered shareholders and are unable to participate in this benefit. 

However, S-corporation shareholders don’t need to participate in a reimbursement benefit because they’re already allowed many of the benefit’s tax advantages. 

If the shareholder purchases health insurance in their own name but the S-corporation reimburses the shareholder for the health insurance and includes the premium reimbursement in the shareholder’s W-2, the shareholder would be allowed an above-the-line deduction on line 29 of the shareholder’s 1040 without the use of a reimbursement benefit.

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