Step-by-Step Guide to Deducting S Corp Owner Health Insurance

Running an S corporation comes with numerous tax advantages, one of which is the ability to deduct health insurance premiums. However, the process can be a bit tricky and requires careful attention to IRS regulations. This step-by-step guide will walk you through the process to deduct S corp owner health insurance and ensure you maximize your tax benefits while remaining compliant.

Step 1: Be an Eligible S Corp Owner

Greater than 2% shareholder – The business owner must own at least 2% of the S corporation’s stock. This includes both direct ownership and indirect ownership through family members.
Receive wages – The business owner must be an employee of the S corporation and receive wages. To be eligible for the deduction, wages must be greater than the health insurance premiums.
No other eligible plan – Deductions cannot be taken during a month in which the shareholder has eligibility to participate in any subsidized health plan maintained by another employer or their spouse.

Step 2: Establish the Health Insurance Plan

Ensure that the S corporation has established a health insurance plan. This can be done in two primary ways:

(Simplest option) The S corporation pays the health insurance premiums directly.
The S corporation reimburses the shareholder-employee for premiums they paid. If your business goes this route, you should have an accountable plan set up for business-employee expense reimbursements. The health insurance plan can be in the name of the shareholder, however, it must be the shareholder’s or their business’ plan. Health insurance obtained via COBRA is not deductible as that is considered the former employer’s plan.

Deductible expenses include insurance for medical, dental, and vision.

Step 3: Include Premiums in Wages

For >2% shareholder-employees, the health insurance premiums must be included in their wages:

Add the amount of the health insurance premiums to the shareholder-employee’s W-2 as wages. This inclusion is subject to federal income tax withholding but is not subject to Social Security and Medicare taxes.
You should also include premiums paid to cover a spouse and dependents.

Instructions how to add this in Gusto:

Sign in to your Gusto admin account.
Go to the People section and select Team members.
Click on the employee’s name.
Under Employment Details, make sure the employee is designated as a 2% Shareholder.
Under Benefits, click Add Benefit.
Next to “Select a Benefit,” select Create New Benefit from the dropdown menu.
Enter a Benefit Name.
Next to Benefit Type, select Medical, Dental, or Vision.
Enter the Company Contribution Per Pay Period and Employee Deduction Per Pay Period. Here’s how they’ll be taxed:
Company contributions: Taxable at the employee level only, for both federal and state income tax.
Employee deductions: Fully taxable as wages at both the employee and employer level.
Click Save.

For most of my clients, especially single-owner S corps, company contributions would be the full amount of the premium paid and the employee deduction would be $0.

Step 4: Report the Premiums on the Shareholder-Employee’s W-2

Ensure that the health insurance premiums are properly reported on the W-2 form:

Box 1 (Wages, tips, other compensation): Include the health insurance premiums.
Box 14 (Other): Include a note about the health insurance premiums for the employee’s information.

In the example above, the owner-employee had $5,000 of health insurance premiums during 2024. Their W-2, Box 1, showed $5,000 of additional wages. Box 14 includes a note (SEHI) with $5,000 of S corp owner health insurance premiums.

Step 5: Deduct the S Corp Owner Health Insurance on Business Tax Return

According to the IRS instructions, health insurance premiums paid for 2% or more shareholder-employees should be included in the total amount reported as “Compensation of officers.” This amount is reported on Line 7 of Form 1120-S. For single-owner S corps, Line 7 agrees to Box 1 of the owner’s W-2.

In the example above, the owner-employee had $70,000 of reasonable salary wages and $5,000 of health insurance premiums for a total of $75,000. The full amount is deducted on Line 7 of Form 1120-S.

Step 6: Deduct S Corp Owner Health Insurance Premiums on the Personal Tax Return

The shareholder-employee then deducts the health insurance premiums on their individual tax return. Here’s how:

On Form 1040, Schedule 1, Line 17, the premiums are deducted as an “Adjustment to Income.” This deduction is an above-the-line deduction, reducing the adjusted gross income (AGI).

Congratulations! If you’ve made it to this step you have successfully deducted S corp owner health insurance premiums. In short, its a three-step process. First, deduct the expense on your business tax return. Next, add back premiums as income on your personal tax return via W-2 wages. Finally, deduct the expense as an above the line deduction on your personal tax return. Between the three steps, it nets to a tax deduction equal to your premiums.

Important Considerations

Proper Documentation: Keep detailed records of the health insurance payments and ensure they are accurately reported on tax forms.
Consult a Professional: Tax laws can be complex and subject to change. Consulting with a tax professional or CPA can help ensure compliance and maximize tax benefits.

Conclusion

Deducting health insurance premiums as an S corporation owner offers significant tax advantages, but it requires careful adherence to IRS rules. By following the steps outlined in this guide, you can take full advantage of these deductions and enjoy the benefits of lower taxable income. Remember, staying informed and consulting with a CPA can make the process smoother and more beneficial. S Corp Advantages can easily take care of the whole process for you.

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About the Author

Brett Rosenstein

Founder of S Corp Advantages
Certified Public Accountant

Brett is the founder and president of S Corp Advantages where he specializes in S corporations. He helps business owners understand if an S corporation election is right for their business. He also keeps current S corps in compliance with IRS regulations.

Brett received a Bachelor of Science in Business Administration from The Ohio State University. He is also a Certified Public Accountant.

When Brett is not working, he is running, biking, spending time with his wife and daughter, or trying new pizza places around Chicago.

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