“Can my S-Corp pay my health insurance?” Yes. But there’s a specific way to do it.
The rules are unusual: You add it to income, then deduct it back. Sounds pointless, but it’s not.
Get this wrong and you miss the deduction entirely. Get it right and your health insurance becomes effectively pre-tax, just like a regular employee’s.
Key Takeaways
- S-Corp can pay health insurance premiums for >2% shareholder-employees
- Premiums must be added to shareholder’s W-2 (Box 1 only, NOT Box 3/5)
- Shareholder then deducts premiums as self-employed health insurance on Form 1040
- Net effect: Health insurance is effectively pre-tax (like a regular employee)
- Applies to coverage for: shareholder, spouse, dependents, and children under 27
- Company can pay directly OR reimburse shareholder – both work
- 2% shareholders cannot participate in QSEHRA or ICHRA arrangements
- If S-Corp doesn’t pay/reimburse, shareholder can still deduct as self-employed health insurance
Table of Contents
The >2% Shareholder Rule
The health insurance rules apply specifically to shareholders who own more than 2% of the S-Corp. This covers most S-Corp owners.
What is a 2% Shareholder?
You’re a >2% shareholder if you:
- Own more than 2% of S-Corp stock, OR
- Own more than 2% of voting power
- On any day during the tax year
“More than 2%” means 2.01% or higher. Exactly 2% doesn’t count.
Family Attribution Rules
Here’s where it gets tricky. Stock owned by certain family members is attributed to you:
Family includes:
- Spouse
- Parents
- Grandparents
- Children
- Grandchildren
Example: Your spouse owns 3% of the S-Corp. You own 0%. You’re treated as a >2% shareholder because your spouse’s shares are attributed to you.
Why Different Rules?
Why doesn’t S-Corp health insurance work like regular employee coverage?
Regular employees: Health insurance premiums paid by the employer are a tax-free fringe benefit. No income, no tax.
>2% shareholders: Treated more like self-employed individuals. Congress didn’t want S-Corp owners getting better treatment than sole proprietors.
The result is a hybrid approach: You include it in income, but get to deduct it personally.
What This Means Practically
Health insurance for >2% shareholders isn’t a tax-free fringe benefit in the traditional sense. But there’s a workaround that achieves similar results. You just have to follow specific reporting requirements.
How S-Corp Health Insurance Works
The process involves three steps. All three must happen correctly.
Step 1: S-Corp Pays or Reimburses Premiums
The S-Corp can either:
Option A: Pay the insurance company directly
- S-Corp is the policyholder or pays premiums
- Premium paid as business expense
Option B: Reimburse the shareholder
- Shareholder pays premium personally
- S-Corp reimburses shareholder
- Same tax treatment as Option A
Either method works. Choose whichever is more convenient for your situation.
Step 2: Add to W-2 (Box 1 Only)
This is the critical step most people mess up.
The premium amount must be included in the shareholder’s W-2 wages:
- Goes in Box 1: Wages, tips, other compensation
- Does NOT go in Box 3: Social Security wages
- Does NOT go in Box 5: Medicare wages
Why this matters: Including it in Box 1 (but not Box 3/5) means:
- It’s part of your taxable wages (for income tax purposes)
- It’s NOT subject to Social Security or Medicare tax
- No FICA taxes on the health insurance premium
Step 3: Deduct on Personal Return
The shareholder claims the self-employed health insurance deduction:
- Form 1040, Schedule 1, Line 17
- “Self-employed health insurance deduction”
- This is an adjustment to income (above-the-line deduction)
- Reduces AGI dollar-for-dollar
The Net Effect
| Without Proper Handling | With Proper Handling |
|---|---|
| Premium paid, no deduction | Premium added to W-2 Box 1 |
| Full income tax on wages | Deducted on Form 1040 |
| Net: Pay for insurance after-tax | Net: Pay for insurance pre-tax |
Example
Health insurance premium: $12,000/year
| Step | Amount |
|---|---|
| Added to W-2 Box 1 | +$12,000 |
| Deducted on Form 1040 | -$12,000 |
| Net additional taxable income | $0 |
| FICA on premium | $0 (not in Box 3/5) |
Result: Effectively pre-tax health insurance, just like a regular employee gets.
W-2 Reporting Requirements
Getting the W-2 right is essential. Mistakes here cost you the benefit.
What Goes Where
| W-2 Box | Include Premium? | Why |
|---|---|---|
| Box 1 (Wages) | YES | Compensation for income tax purposes |
| Box 3 (SS Wages) | NO | Exempt from Social Security tax |
| Box 5 (Medicare Wages) | NO | Exempt from Medicare tax |
| Box 14 (Other) | Optional | Can note “SEHI” for clarity |
Box 14 notation is optional but helpful. It clearly identifies the self-employed health insurance amount for the shareholder’s reference.
When to Include
You have two options for timing:
Throughout the year: Add premium amounts to each paycheck as you pay them. This is cleaner and spreads the reporting evenly.
Year-end adjustment: Add the full year’s premiums to the final paycheck or W-2. More common but creates a larger adjustment.
Either way, the premium must be on the W-2 by January 31 (W-2 deadline). See our year-end payroll checklist for all year-end requirements.
Year-End Catch-Up
If premiums weren’t included during the year:
- Add to final paycheck or as a year-end adjustment
- Gross-up so shareholder receives correct net amount
- Document the adjustment clearly in payroll records
Common Reporting Mistakes
Including in Box 3/5: This creates unnecessary FICA tax (15.3% wasted).
Not including in Box 1: The shareholder loses the ability to take the deduction.
Forgetting to report at all: The biggest mistake. No W-2 inclusion = no personal deduction eligibility.
Pro Tip: Set up payroll to handle this automatically each pay period. Don’t leave it as a year-end scramble. Our payroll services can help manage this correctly.
The Self-Employed Health Insurance Deduction
Understanding the personal deduction side completes the picture.
Where It Goes
The self-employed health insurance deduction goes on:
- Form 1040
- Schedule 1
- Line 17
It’s an adjustment to income (above-the-line deduction). You don’t need to itemize to claim it.
Requirements for the Deduction
To claim the self-employed health insurance deduction:
- Must be self-employed (>2% S-Corp shareholder qualifies)
- Cannot be eligible for employer-sponsored plan (through spouse’s job, etc.)
- Coverage must be established under the S-Corp (or in shareholder’s name with S-Corp paying/reimbursing)
- Cannot exceed net self-employment income (limited by your S-Corp wages)
Coverage That Qualifies
These types of coverage qualify:
- Medical insurance (major medical, ACA marketplace plans)
- Dental insurance
- Vision insurance
- Long-term care insurance (with age-based limitations)
- Medicare premiums (Part A, B, D, and Medigap)
Who Can Be Covered
The deduction covers insurance for:
- The shareholder
- Spouse
- Dependents
- Children under age 27 (even if not dependents)
The Spouse’s Employer Plan Issue
If your spouse has access to employer-sponsored coverage, your deduction may be limited:
- For any month you were eligible for coverage under a spouse’s (or your own) subsidized employer plan, you can’t deduct that month’s premium
- Check eligibility for each month separately
- This is complex and fact-specific
If your spouse has employer coverage available that covers you, consult with your tax professional about the impact.
S-Corp Reasonable Compensation Guide
Company Pays vs Shareholder Reimburses
Both approaches work. Here’s how to choose.
Option 1: S-Corp Pays Insurer Directly
The S-Corp is the policyholder or makes payments directly to the insurance company.
Advantages:
- Cleaner paper trail
- S-Corp expense clearly documented
- Simpler tracking
How it works:
- S-Corp pays insurance company
- Premium added to shareholder W-2 Box 1
- Shareholder deducts on personal return
Option 2: Shareholder Pays, S-Corp Reimburses
The shareholder pays premiums personally, then gets reimbursed.
Advantages:
- Shareholder chooses their own plan
- More flexibility in coverage selection
- Easier for individually-purchased ACA plans
How it works:
- Shareholder pays premium personally
- S-Corp reimburses shareholder
- Reimbursement added to shareholder W-2 Box 1
- Shareholder deducts on personal return
Both Methods
Regardless of which method you use:
- Must be documented
- Must be included on W-2
- Achieve the same tax result
Which Is Better?
Choose direct payment if:
- S-Corp has group health plan
- Simpler record-keeping is priority
- Multiple shareholders on same plan
Choose reimbursement if:
- Shareholder has individual/ACA plan
- Different shareholders want different coverage
- More flexibility needed
Tax result is identical either way.
Documentation for Reimbursement
If using the reimbursement method, keep:
- Receipts or statements showing premiums paid
- Record of reimbursement (via payroll or separate check)
- Clear documentation that reimbursement is for health insurance
What >2% Shareholders CANNOT Do
Some health benefit arrangements don’t work for S-Corp shareholder-employees.
No QSEHRA Participation
Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) allow small employers to reimburse employees for health insurance tax-free.
But: >2% shareholders are excluded from participating. The S-Corp can offer QSEHRA to other employees, but not to >2% shareholder-employees.
No ICHRA Participation
Individual Coverage Health Reimbursement Arrangements (ICHRAs) work similarly to QSEHRAs.
Same rule: >2% shareholders cannot participate. ICHRAs are designed for regular employees only.
No Tax-Free HRA Reimbursements
General Health Reimbursement Arrangements cannot provide tax-free benefits to >2% shareholders.
The shareholder-employee must use the W-2 inclusion method instead.
Why These Exclusions?
These arrangements provide tax-free benefits to employees. >2% shareholders already have their own workaround (W-2 inclusion + personal deduction). Congress wanted to prevent double benefits.
Alternative: Use the W-2 inclusion method described above. It achieves similar tax treatment for shareholder-employees.
Common Mistakes
Avoid these errors that cost S-Corp owners money.
Mistake 1: Not Including Premiums on W-2
The problem: S-Corp pays premium, but nothing appears on shareholder’s W-2.
The consequence: Shareholder can’t claim the self-employed health insurance deduction. Lost tax benefit.
The fix: Ensure premiums are added to W-2 Box 1 every year.
Mistake 2: Including in FICA Wages
The problem: Premium included in Box 1, Box 3, AND Box 5.
The consequence: Unnecessary payroll taxes paid. 15.3% wasted.
The fix: Include in Box 1 only. Not Box 3 or 5.
Mistake 3: Missing Year-End W-2 Deadline
The problem: Premiums paid during year, but forgotten when W-2 is prepared.
The consequence: Must correct W-2 or lose deduction.
The fix: Track health insurance premiums throughout the year. Add to W-2 before January 31 deadline.
Mistake 4: Double Deduction
The problem: S-Corp deducts premium as expense AND shareholder deducts on Form 1040.
The consequence: IRS will catch this on review.
The clarification: S-Corp deduction is via salary expense (the W-2 amount includes the premium). Shareholder deducts on personal return. This is not a double deduction when done correctly.
Mistake 5: Trying to Use HRA/QSEHRA
The problem: Setting up HRA or QSEHRA and including >2% shareholders.
The consequence: >2% shareholders don’t qualify for tax-free treatment under these arrangements.
The fix: Use the W-2 inclusion method instead.
Frequently Asked Questions
Can my S-Corp pay my health insurance?
Yes. The S-Corp pays or reimburses premiums, includes the amount in your W-2 Box 1 (not Boxes 3/5), and you deduct it on your Form 1040 as self-employed health insurance. Net effect: pre-tax health insurance.
How do I report S-Corp health insurance on W-2?
Include the premium amount in Box 1 (Wages). Do NOT include in Box 3 (Social Security wages) or Box 5 (Medicare wages). This avoids FICA taxes on the premium while allowing the personal deduction.
Where do I deduct the health insurance?
Form 1040, Schedule 1, Line 17 as “Self-employed health insurance deduction.” This is an adjustment to income (above-the-line deduction) that reduces your AGI.
Does health insurance count for payroll taxes?
No. When properly reported (Box 1 only, not Box 3/5), health insurance premiums for >2% shareholders are exempt from Social Security and Medicare taxes.
Can I include my family’s coverage?
Yes. Coverage for spouse, dependents, and children under 27 all qualify for this treatment.
What if my S-Corp doesn’t pay the premiums?
You can still claim the self-employed health insurance deduction if you pay premiums yourself, as long as the coverage is in your name or the S-Corp’s name and you’re a >2% shareholder.
Can I be in the company’s group plan?
Yes, but you won’t get tax-free treatment like other employees. The premiums must be included in your W-2 Box 1, then you deduct on your personal return.
What about HRA or QSEHRA arrangements?
2% shareholders cannot participate in QSEHRA, ICHRA, or HRA arrangements for tax-free benefits. Use the W-2 inclusion method instead.
Next Steps
Get Your Health Insurance Tax Treatment Right:
- Determine your ownership: >2% triggers these special rules
- Set up proper payroll coding: Box 1 yes, Box 3/5 no
- Document premiums paid: Keep records of all health insurance expenses
- Claim the deduction: Form 1040 Schedule 1 Line 17
Proper S-Corp health insurance handling saves both income tax and payroll taxes. The steps aren’t complicated, but they must be followed precisely. Get it wrong and you pay more than you should.
If you’re unsure about your current health insurance setup or want to verify you’re handling the W-2 reporting correctly, professional review can identify missed deductions and prevent costly mistakes.