S-Corp Health Insurance: The Complete Tax Guide

What makes health insurance different for S-Corps?

Let me start with the good news: If you're running an S-Corporation, you're in one of the best positions when it comes to deducting health insurance. But the rules work a bit differently than they do for regular employees or sole proprietors.

Think of an S-Corp like this: It's a special type of company that gives you the liability protection of a corporation but lets you avoid the dreaded "double taxation" that regular corporations deal with. Your business profits flow straight through to your personal tax return, which is great. But when it comes to health insurance, you're in this unique middle ground. You’re not quite a regular employee, and not quite self-employed.

Here's why S-Corps are awesome for health insurance: Unlike a sole proprietor who pays self-employment tax (15.3%) on everything, you get to skip those taxes on your health insurance premiums. That alone can save you thousands every year.

Let’s break this down with an example. As an S-Corp:

• Your company pays for your health insurance (let’s say that’s ~$20,000/yr)
• That amount gets added to your paycheck, but you don’t pay Medicare or Social Security taxes on it.
• Then, when you file your taxes you get to deduct that entire $20,000. Phew! That’s thousands in tax savings!

Beware the 2% rule

Okay, let's talk about this "2% shareholder rule". Don't let it intimidate you. It's actually pretty straightforward.

If you own more than 2% of your S-Corp, you can't just get health insurance like a regular employee (where it's completely tax-free). Instead, you have to jump through a few hoops. But trust me, it's worth it because you end up in an even better spot than regular employees in many ways.

First, determine if you’re a 2% shareholder. Obviously, if you own more than 2% of the company… that’s you. But there are other things to consider:

• Your family members' ownership counts toward yours. This catches a lot of people off guard. If you own 1.5% and your spouse owns 1%, congratulations! You're both 2% shareholders (1.5% + 1% = 2.5%).
• Family includes more than you might think. The IRS counts your spouse, kids, parents, and grandparents!

So what does it mean if you're a 2% shareholder? You can't:

• Get health insurance as a completely tax-free benefit (like regular employees can)
• Participate in a "cafeteria plan" (also called a Section 125 plan) for health insurance
• Have the company pay your premiums and just forget about it

But don't worry. The alternative is actually better from a tax perspective, which we’ll get to in a second.

What to do if you own >2% of your company

Alright, here's where the magic happens in 3 simple steps.

Step 1: Your S-Corp pays your health insurance premiums in 1 of 2 ways:

• Direct payment: The company pays the insurance company directly each month
• Reimbursement: You pay the premiums personally, then submit a request and the company reimburses you

The company treats this as a normal business expense and deducts it. So if you pay $2,000/month in premiums, that's $24,000 less in taxable income for the S-Corp.

Step 2: Add the premiums to your W-2 (but only in Box 1!)

The health insurance amount gets added to your W-2 form, but ONLY in Box 1 (wages). It does NOT get added to:

• Box 3 (Social Security wages)
• Box 5 (Medicare wages)

Why? Because you don't pay the 15.3% payroll tax (Social Security + Medicare) on your health insurance premiums. On $20,000 in premiums, that's $3,060 you DON'T pay in payroll taxes. That's real money staying in your pocket.

Step 3: Deduct it on your personal tax return

When you file your personal taxes (Form 1040), you claim something called the "self-employed health insurance deduction." You put it on Schedule 1, Line 17.

This is what's called an "above-the-line" deduction, which is tax-speak for "really good." It means you get to subtract it from your income BEFORE calculating most other stuff. You don't have to itemize, and it lowers your adjusted gross income (which can help you qualify for other tax breaks too).

TA-DA! Your health insurance is basically tax-free. Let's walk through what actually happens with $20,000 in annual premiums:

• Your S-Corp pays $20,000 → saves the company about $5,000 in taxes (assuming 25% tax rate)
• Gets added to your W-2, but you DON'T pay the $3,060 in payroll taxes
• You deduct $20,000 on your personal return → saves you about $5,000 in income tax
• Total tax savings: About $8,000-$10,000 compared to just paying premiums with after-tax dollars

Let’s see what this means for Carl

Carl’s situation:

• Owns 100% of his S-Corp consulting business
• Business profit: $150,000/year
• Family health insurance: $22,000/year

If Carl were a sole proprietor:

• Would pay self-employment tax on the full $150,000
• Could deduct health insurance, but still pays self-employment tax first
• Self-employment tax: about $21,000

As an S-Corp owner:

• Takes $80,000 as salary (including the $22,000 health insurance in Box 1)
• Pays payroll taxes only on $58,000 actual wages = $8,874
• Remaining $70,000 comes as distributions (no payroll tax)
• Deducts the $22,000 health insurance on personal return

Carl’s total savings: About $12,000 per year

My health insurance is an above-the-line deduction. What does that mean?

• You don't have to itemize. Most people take the standard deduction these days. With above-the-line deductions, you get the health insurance deduction AND the standard deduction.
• It lowers your AGI. Your adjusted gross income affects other things like whether you qualify for certain tax credits, student loan payments, and more.
• No percentage threshold. Regular medical expenses only count if they exceed 7.5% of your income. The self-employed health insurance deduction has no such limit.

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What about Health Savings Accounts (HSAs)?

HSAs are awesome, but they work a bit differently for S-Corp owners. Here's the deal: Regular employees can have their employer put money into their HSA pre-tax. S-Corp 2% shareholders can't do that. Instead, you contribute to your HSA personally and deduct it on your own tax return.

For 2026, you can contribute:

• $4,300 if you have individual coverage
• $8,550 if you have family coverage
• Plus an extra $1,000 if you're 55 or older

The combo of a high-deductible health plan (required for an HSA) plus maximizing your HSA contributions can create some serious tax savings.

How to make sure you’ve set everything up correctly

Okay, you're sold on the benefits. Now let's make sure you actually do this right so you get those tax savings and don't have problems down the road.

Step 1: Create a written plan

The IRS wants to see that your S-Corp has formally adopted a health insurance plan. This doesn't have to be complicated, but it needs to be documented.

What to do: Have a board meeting (even if it's just you in your home office) and write up a simple resolution. Something like:

Step 2: Choose how to handle the insurance

You've got two main options:

Option A: Put the policy in your personal name

• You shop for insurance and buy it yourself
• You pay the premiums monthly
• You submit receipts to your S-Corp for reimbursement
• The company reimburses you and adds that amount to your next paycheck

Option B: Put the policy in the company's name

• The S-Corp is the policyholder
• The company pays premiums directly to the insurance company
• The company adds those premium amounts to your W-2 wages

Step 3: Set up your payroll correctly

If your payroll is set up wrong and the health insurance IS going into your Social Security and Medicare boxes, you're paying about 15% extra in taxes for no reason. Pro tip: Check an old paystub. If you see the health insurance amount in those boxes, fix it ASAP and talk to your tax person about getting refunds for past quarters.

If you use payroll software (Gusto, ADP, etc.), look for something like:

• "S-Corp health insurance"
• "2% shareholder health insurance"
• "Health insurance - non-FICA"

Most payroll systems have this built in. You want to create a special pay type that:

• ✓ Adds to Box 1 (wages)
• ✓ Has federal income tax withheld
• ✗ Does NOT add to Social Security wages
• ✗ Does NOT add to Medicare wages

Step 4: Make sure your salary is high enough

Here's a rule that catches people: You can only deduct health insurance up to the amount of wages you receive from your S-Corp, so make sure your W-2 wages are at least as much as your health insurance premiums.

Speaking of W-2 wages, make sure you’re paying yourself a “reasonable salary” - it’s an actual IRS requirement! If you need help determining how much to pay yourself, check out our reasonable salary guide.

Let's say your health insurance is $25,000/year, but you only pay yourself a $20,000 salary from the S-Corp. You can only deduct $20,000 of the insurance. The extra $5,000 doesn't count.

Step 5: Keep good records

Save everything:

• Your corporate resolution approving the health plan
• Insurance policy documents
• Payment confirmations (credit card statements, checks, bank transfers)
• Reimbursement requests if you're using that method
• Payroll records showing the insurance in your wages

Keep these for at least 7 years. If the IRS ever questions your deduction, you'll have everything you need to back it up.

FAQs

Do I need employees to do this, or can I be a one-person S-Corp?

You can absolutely be a solo S-Corp with no other employees. The health insurance deduction works the same way. In fact, many consultants, freelancers, and solo professionals use this exact setup.

What if I forgot to include health insurance on my W-2 from last year?

Don't panic, but do fix it. You'll need to file a corrected W-2 (called a W-2c). If you've already filed your tax return, you might need to amend it. Talk to your tax person about the best way to correct it. The good news is that fixing it voluntarily is way better than waiting for the IRS to find it.

Can I deduct health insurance if my S-Corp didn't make any money this year?

Unfortunately, no. Your health insurance deduction is limited to the income you earned from the S-Corp. If the business broke even or lost money, you can't use this deduction. (Though you might be able to claim some of it as a regular itemized medical expense if it's high enough.)

My spouse has insurance available through their job. Should I use that instead?

It depends on the cost. If your spouse's employer covers most of the premium, that might be cheaper overall. But run the numbers. With the tax savings from the S-Corp method, paying for your own insurance might actually be the better financial move. Compare the total after-tax cost of both options.

What if I have multiple businesses? Can I split the health insurance between them?

You can only deduct health insurance premiums from the business that actually pays them. If you have two S-Corps, one of them pays the premiums and that's where you claim the deduction. You can't split one premium across multiple businesses.

Do I need to offer health insurance to my other employees if I cover myself?

Nope! There's no requirement to offer health insurance to anyone else just because you're covering yourself. If you do offer it to other employees, there are some non-discrimination rules to follow, but you're not required to offer it at all.

What happens if I sell my S-Corp or close the business?

You can keep your health insurance policy (it's yours personally), but you lose the tax benefits once you're no longer receiving wages from the S-Corp. You might be eligible for COBRA from the S-Corp for up to 18 months, or you'll need to shop for individual coverage. Your health insurance deduction stops once you stop earning income from the S-Corp.

Can I backdate this if I just learned about it?

Sort of. You can't change past years, but you can start doing it correctly right now. For this year, if you haven't been including health insurance in your W-2 wages but your company has been paying the premiums, you might be able to correct your payroll for the rest of the year. Talk to your payroll person or accountant about how to handle the transition.