S Corp Owner Health Insurance: What to Do (and Deduct)

For S corp owners, navigating health insurance rules can feel like a time-consuming puzzle. You know you need coverage, and you’ve heard there’s a valuable tax deduction to help make costs more palatable, but the steps to connect the two aren’t always clear. 

• How do you pay for it? 

• Where does it go on your W-2, Wage and Tax Statement? 

• How do you make sure you get the full deduction you’re entitled to?

Getting this wrong can lead to missed tax savings, or worse, penalties and increased IRS scrutiny. However, when handled correctly the S corp structure offers a fantastic way to deduct your health and dental insurance premiums. It’s one of the most powerful benefits available to shareholder-employees.

This guide will walk you through exactly how to set up, pay for, and report S corp shareholder health insurance to ensure you qualify for the related deduction. If you need help or would like the process handled for you, schedule time to talk to a 1-80Accountant business expert about your current setup.

Key Highlights

• The Core Rule: Your S corp must pay for or reimburse your health insurance premiums, and you must include that amount in your W-2 wages (Box 1).

• The Big Deduction: You can then personally deduct the premiums on your IRS Form 1040, U.S. Individual Income Tax Return, which lowers your adjusted gross income (AGI).

• W-2 Reporting is Crucial: Premiums go in Box 1 (Wages) but are generally excluded from Boxes 3 & 5 (Social Security & Medicare wages). They do not go in Box 12 with Code DD.

• Eligibility is Key: You can't take the deduction if you or your spouse were eligible for a subsidized employer plan elsewhere.

• Excluded Benefits: As a >2% owner, you cannot participate in tax-free cafeteria plans, QSEHRAs, or other 2% shareholder health insurance with similar restrictions. 

What counts as a “more-than-2% shareholder” (and why it matters)

The special rules for health insurance apply to S corp owners who own more than 2% of the company's stock. If you are a majority owner, this is you.

But it's not just about the shares you personally own. The IRS uses "family attribution" rules, which means you may be treated as a >2% shareholder if your family members own stock in the company, including: 

• Spouse

• Children

• Grandchildren

• Parents

These family members can be treated as >2% owners to determine benefit eligibility. For example, if you own 1% of the stock and your spouse owns 2%, you are both treated as >2% shareholders. This is a crucial detail for family-run businesses to understand.

This matters because >2% shareholders are treated like partners for fringe benefit purposes, not like regular employees. This distinction is why the health insurance deduction has its own unique set of rules and why these owners are excluded from certain other tax-free benefits available to regular W-2 employees.

The Two Goals: (1) Get Coverage, (2) Get the Deduction

The entire process is designed to achieve two simple goals: get health insurance coverage for yourself and your family, and legally deduct the cost. To do this, you need to set up the plan correctly and then claim the deduction on your personal income tax return.

Setting Up Coverage the Right Way

For the S corp to deduct the premiums and for the shareholder to qualify for the personal deduction, the health insurance plan must be "established by the business." This sounds formal, but the IRS provides clear guidance on how to 'establish' the plan for your deduction.

This means the S corp must either:

1. Pay the premiums directly to the insurance company on behalf of the shareholder.

2. Reimburse the shareholder for premiums they paid personally.

The policy can be in the name of the S corporation or the shareholder's name. As long as the S corp either pays for it or reimburses the owner—and properly reports the amount—the plan is considered established by the business. A one-employee S corp where the owner has an individual policy can still qualify, provided the business reimburses the premium and reports it correctly.

The critical step is that the payment or reimbursement must be included in the shareholder’s W-2 wages.

When the Personal Deduction Is Allowed (and When It Isn't)

Once the S corp has paid the premiums and reported them on your W-2, you can claim the self-employed health insurance deduction (Form 7206) on your personal IRS Form 1040. This is an "above-the-line" deduction, meaning it lowers your AGI, which is a significant tax benefit.

However, there are two key limitations:

1. The Medicare Wage Limit: Your deduction cannot exceed the Medicare wages (Box 5) you received from your S corp. This is why setting a reasonable compensation is so important—your salary must be high enough to support the deduction.

2. Spouse's Employer Plan: You cannot claim the deduction if you or your spouse were eligible to participate in a subsidized health plan offered by another employer, even if you declined the coverage. This is a common disqualifier, so be sure to check your eligibility.

If you also qualify for the Premium Tax Credit (PTC) for a marketplace plan, there are special IRS methods for coordinating the §162(l) deduction with ACA premium credits. The S corp spouse marketplace credit deduction is typically worth pursuing. 

Payroll & W-2 Reporting for 2% Owners

Correctly reporting the premiums on your W-2 is the linchpin of this entire strategy. Here’s exactly how to do it.

Exactly Where to Put Premiums on the W-2

Timing & Documentation Checklist

Refer to this handy checklist for timing and documentation information. 

• Reimburse by Year-End: Ensure all reimbursements are made before December 31 so they can be included in that year's W-2.

• Keep Proof of Premiums: Maintain records of all premium payments or reimbursement requests.

• Document the Plan: Maintain a simple document stating that the S corp provides health insurance for a class of employees (which can be just the owner).

Fringe Benefit Caveats for S Corp Owners

While the health insurance deduction is an essential benefit, >2% shareholders are excluded from participating in other tax-advantaged plans.

Cafeteria plans, HRAs, and QSEHRAs

• Section 125 >2% shareholder Cafeteria Plans: A >2% shareholder cannot participate in a cafeteria plan. This means you cannot use a company plan to pay for premiums on a pre-tax basis like a regular employee.

• QSEHRA: A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a popular way for small businesses to reimburse for health expenses, but 2% shareholders aren't QSEHRA-eligible. For 2025, the S corp QSEHRA rules and limits are $6,350 for self-only and $12,800 for family coverage.

• Market-reform pitfalls: Employer reimbursement arrangements that cover multiple non-owner employees can trigger §4980D penalties unless they meet ACA rules. The “fewer than two current employees” exception applies to group health plans that cover one or two participants. 

HSAs for 2% shareholders

• HSAs for 2% Shareholders: An S corp can make contributions to a shareholder's Health Savings Account (HSA). However, these HSA contributions for 2% S corp owners are treated as taxable income on the W-2. The shareholder can then deduct the contribution on their Form 1040, making it tax-neutral. For 2025, the S corp HSA rules and contribution limits are $4,300 for self-only and $8,550 for a family.

Step-by-step: How to do this correctly (with numbers)

Example walkthrough

Let's put it all together with some numbers.

• Inputs:

  • Shareholder's reasonable salary: $80,000

  • Annual health insurance premiums paid by the S corp: $10,000

• How to report S corp owner health insurance on W-2:

  • S corp W-2 health insurance Box 1 (Wages): $90,000 ($80,000 salary + $10,000 premiums)

  • Box 3 (Social Security Wages): $80,000

  • Box 5 (Medicare Wages): $80,000

• Owner's Personal Tax Return (Form 1040):

  • The owner reports $90,000 in wages.

  • The owner then files the Self-Employed Health Insurance Deduction Form 7206 to claim the $10,000 self-employed health insurance deduction.

  • The deduction is allowed because the $10,000 in premiums is less than the $80,000 in Medicare wages.

The net result: The S corp deducts the premiums, the shareholder gets coverage, and the shareholder effectively removes the premium cost from their taxable income.

Special situations & FAQs

If the spouse’s employer offers coverage

If the owner or spouse is eligible for subsidized employer coverage, the §162(l) deduction is disallowed even if they've declined the subsidized coverage.  

One-employee S corps & policies in the owner’s name

States may require an individual policy. Reimbursement + W-2 inclusion still preserves the deduction if the S corp establishes the plan per Notice 2008-1. 

Family attribution traps

Families working in the business may be treated as >2% owners (benefit rules apply), but they can still claim §162(l) if other requirements are met. 

Do I add this amount to Box 12 Code DD?

No—“payment/reimbursement for 2% shareholder” appears in the Do not report column of the IRS chart. S corp Box 12 Code DD 2% shareholders can avoid penalties by adding the proper amount to the designated area. 

Common Mistakes to Avoid

Getting the process wrong can be costly. Here are the most common errors S corp owners make:

1. Forgetting to Add Premiums to W-2 Box 1. This is the most critical mistake. If the premiums are not included in your gross wages, the plan is not considered "established," and the entire personal deduction is disallowed.

2. Incorrectly Including Premiums in Boxes 3 & 5. Many payroll systems automatically add any income to all wage boxes. You must ensure the health insurance amount is excluded from Social Security and Medicare wages. If it's included, both you and the S corp will overpay FICA taxes.

3. Having the S corp Deduct Premiums as a Business Expense. The S corp should not deduct the premiums directly on its tax return (IRS Form 1120-S, U.S. Income Tax Return for an S Corporation) as a line-item expense. The deduction is taken by adding the premiums to the owner's salary, which is then deducted as officer compensation. The shareholder takes the final deduction on their personal return.

4. Missing the Year-End Cutoff. If you pay for premiums personally throughout the year but forget to get reimbursed by the S corp before December 31, you cannot include the amount on that year's W-2. This can lead to a permanent loss of the deduction for that year.

2025 key numbers (side box)

• QSEHRA max: $6,350 self-only / $12,800 family. 

• HSA limits: $4,300 self-only / $8,550 family (catch-up $1,000 age 55+). 

How 1-800Accountant Helps

Getting the payroll mapping, W-2 reporting, and personal deduction right is essential to maximizing your tax savings and staying compliant. This is where 1-800Accountant, America's leading virtual accounting firm, comes in. Our affordable, tax-deductible financial solutions and your designated team will:

• Set up your payroll and W-2 mapping to correctly account for health insurance premiums.

• Establish the owner's health plan documentation to satisfy IRS requirements.

• Prepare Form 7206 with your personal income tax return to ensure you maximize this deduction.

Don't leave money on the table or disrupt your operations by making a costly mistake. Book a free 30-minute consultation with a small business expert today, and let us tend to the financial health of your S corp.