Is the health insurance premium paid to my mother-in-law taxable as compensation subject to self employment tax?

September 15, 2000

Date:  Wed, 16 Aug 2000
From:  Anonymous

An individual owns 100% of the stock in an s corporation. His mother-in-law provides some services and in lieu of compensation, the s corporation pays the her health insurance.

Question 1 - because the wife does not own any of the stock in the corporation - the attribution rules under 318 don't apply ?

Question 2 - if the attribution rules don't apply - is the health insurance premium paid for the mother in law taxable as compensation subject ot SE tax?

Questions 3 - if the 318 rules don't currently apply - should the shareholder's wife own some shares so that the 318 rules do apply to her mother - thus if she receives an S corporation fringe benefit of health insurance - it would be deductible by the corp. & taxable ot her, but not subject to SE tax ?

Answer

Date:  11 Sept 2000

Hello,

According to Section 318(a)(1), an individual is considered as owning the stock owned, directly or indirectly by or for his spouse, his children, grandchildren and parents.

A mother in law is not on the list.

However, since no compensation is being paid to the mother-in-law, it may be questioned whether she is an employee of the corporation, qualifying for an exclusion of health insurance benefits.

The taxpayer should pay her some salary. Also, the taxpayer is probably in violation of wage and hour laws.

Since the repeal of income limits for social security, there is less incentive for retired persons avoiding having income.

Self-employment tax doesn't apply to shareholders of S corporations.

Good luck!
Mike Gray

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