Health Insurance Deductions for S Corporation and LLC Owners

Can my S corporation pay for my health insurance?

Yes. An S corporation can pay or reimburse a shareholder-employee's medical insurance premiums and deduct the payment, but premiums for an owner above the 2% ownership threshold must be included in that owner's taxable wages. The owner may then qualify for a separate deduction on the individual return (IRS: S corporation health insurance).

The policy can be in the corporation's or the shareholder's name. For a shareholder's own policy, give the corporation proof of payment and have it reimburse the premiums during the same tax year. The corporation must report the paid or reimbursed amount on that year's W-2. Paying a personal premium without reimbursement does not establish the plan under the S corporation (IRS: Notice 2008-1).

Who counts as a 2% shareholder?

An employee counts if they directly or indirectly own more than 2% of the S corporation's shares or voting power on any day of its tax year. Exactly 2% is below this rule's threshold (26 USC 1372).

Ownership attributed from a spouse, child, grandchild, or parent can put an employee over the threshold even when that employee owns no shares directly. A spouse legally separated under a divorce or separate-maintenance decree is excluded from the spouse attribution rule. If an owner's spouse or child works for the corporation and attributed shares put them over the threshold, premiums paid for that employee go in that employee's W-2 box 1 (26 USC 318; IRS: S corporation health insurance).

How does the S corporation report premiums on Form W-2?

For a shareholder above the 2% threshold, the S corporation adds paid or reimbursed premiums to W-2 box 1. When paid under a plan covering all employees or a class of employees, the premiums generally stay out of Social Security and Medicare wages in boxes 3 and 5, and out of federal unemployment wages (IRS: S corporation health insurance; IRS: Publication 15-B).

Box 14a does not replace box 1. If a filed W-2 omitted premiums from box 1, review a corrected W-2 before claiming the deduction; merely writing an amount on the individual return does not meet the IRS reporting rule. The W-2 instructions allow box 14a for labeled information.

Where do I deduct the premiums, and what limits the amount?

An eligible S corporation shareholder claims the self-employed health insurance deduction on Schedule 1 of Form 1040, line 17. The deduction reduces adjusted gross income; it is separate from the S corporation's expense and cannot duplicate a Schedule A medical deduction. Form 7206 is required if you have multiple sources of income subject to self-employment tax, file Form 2555, or include qualified long-term care premiums; otherwise, the Form 1040 instructions' worksheet generally applies (IRS: Form 7206 instructions).

What if I paid the premiums personally?

An S corporation shareholder who paid a policy personally can still qualify if the corporation reimburses the amount during the same tax year, keeps proof of payment, and includes the reimbursement in W-2 box 1. Without corporate payment or reimbursement, the self-employed health insurance deduction is unavailable for that S corporation plan (IRS: Notice 2008-1).

Keep premium invoices, proof of payment, the reimbursement record, payroll reports, and the W-2. For a missed year, the payment date and original wage reporting matter; a later bookkeeping entry cannot by itself establish a timely reimbursement.

How do partners and LLC members deduct health insurance?

A partner, including a member of an LLC taxed as a partnership, can claim the individual deduction for a plan established under the partnership. Partnership-paid premiums, or reimbursement of a partner's own policy, are reported as a guaranteed payment on the partner's Schedule K-1 and included in the partner's income (IRS: Form 7206 instructions; Publication 541).

The partner also needs qualifying net earnings from self-employment from that partnership. For partners and sole proprietors, Form 7206 reduces the business earnings limit by the allocable deductible part of self-employment tax, any self-employed retirement-plan deduction tied to that business, and any attributable Form 2555 exclusion (Form 7206). See How partnerships are taxed for Form 1065 and K-1 reporting, and Paying yourself from an LLC for draws and guaranteed payments.

What if I am a sole proprietor or own a single-member LLC?

A sole proprietor, including a single-member LLC owner taxed as a sole proprietor, can establish the policy in either the business's or the owner's name. With qualifying Schedule C or Schedule F net profit, the owner claims the same individual deduction subject to the earnings and employer-plan limits; there is no W-2 or partnership reimbursement step for the owner (IRS: Form 7206 instructions).

Does the deduction lower self-employment tax?

No. The self-employed health insurance deduction reduces income used to calculate income tax, but a partner or sole proprietor cannot subtract it when calculating net earnings for self-employment tax (IRS: Form 7206 instructions). An S corporation shareholder's qualifying premium is generally outside Social Security and Medicare wages under the separate payroll rule above; that is distinct from deducting it on the shareholder's return.

Can I include Medicare premiums and family coverage?

Yes, qualifying medical, dental, vision, and certain long-term care premiums can cover you, your spouse, and dependents. Coverage for a child under age 27 at year-end may count even if the child is not your dependent. Voluntary Medicare premiums for coverage in your name similar to qualifying private health insurance may also count (IRS: Form 7206 instructions).

The same business-payment and income limits still apply. Qualified long-term care premiums have separate age-based limits, so calculate them under Form 7206 rather than treating every premium as fully deductible.

Can my S corporation fund an HSA, HRA, or QSEHRA for me?

For a shareholder above the 2% threshold, the accounts have different rules:

An HSA payment for services goes in the shareholder's W-2 box 1 wages and is generally subject to Social Security and Medicare tax unless the health-plan exclusion applies. A payment treated as a distribution follows the separate S corporation distribution rules. An eligible shareholder may claim an HSA deduction on Form 8889; Medicare enrollment bars new contributions. HSA contributions are separate from insurance premiums (IRS: Notice 2005-8; Publication 15-B; Publication 969; IRS: S corporation health insurance).

Do not extend the shareholder reimbursement rule to other employees without checking the plan. Reimbursing employees' individual policies outside a compliant arrangement can trigger a section 4980D excise tax of $100 per affected employee, per day, per violation. The IRS describes separate relief for shareholder-only arrangements and a narrow one-current-employee exception (IRS: S corporation health insurance).

What if I received a Marketplace premium tax credit?

A Marketplace policy can still be a business-established plan if the applicable S corporation or partnership payment and reporting steps are met. If the same premiums may qualify for both the self-employed health insurance deduction and a premium tax credit, calculate them together: the deduction changes household income, while the credit changes how much premium remains deductible (IRS: Publication 974).

Use Form 1095-A, Form 8962 and Publication 974, not the Form 1040 worksheet, to figure the deduction (Form 1040 instructions). Publication 974 offers optional simplified and iterative methods to coordinate the deduction and credit. Do not deduct a premium amount already covered by the final credit. Advance credits may differ from the final credit, so the monthly bills alone are not enough.

Example

Illustrative US dollars. An S corporation pays its owner's $8,000 annual health insurance premium and pays the owner $50,000 in regular wages. The owner has no months of eligibility for a subsidized employer plan. Payroll reports $58,000 in W-2 box 1 ($50,000 wages plus $8,000 premium), $50,000 in box 5 under a qualifying plan, and labels the premium in optional box 14a. With no other business income, long-term care premiums, Form 2555 or Marketplace credit, Form 7206 is not required: the Form 1040 instructions' worksheet compares the $8,000 premium with the $50,000 box 5 wage limit, so the owner may deduct $8,000 on Schedule 1, line 17 if the other requirements hold. The premium itself does not increase that limit.

Different for you?

• You need to set an S corporation salary or took only distributions: S corporation owner salary covers the wage rule; gather payroll reports and prior W-2s.
• You are weighing an S election: compare the broader tax consequences in Should you elect S corporation status?.
• Your S corporation's return or K-1 is the issue: see How S corporations are taxed.
• You have a partnership return or guaranteed-payment issue: see How partnerships are taxed or Paying yourself from an LLC.
• You want to review other business deductions: see Lowering your business tax.
• Your W-2 missed premiums, the business reimburses other employees, or several benefit accounts overlap: bring premium statements, proof of who paid, payroll reports, W-2s, K-1s, and any Form 1095-A to bookkeeping for a review of the records and reporting.