S-corporation owners who own more than 2% of the company’s stock can deduct their health insurance premiums, but the process differs from how regular employees receive this tax-free benefit. To qualify for the health insurance deduction, S-corp owners must follow specific steps:
- The S-corporation, not the individual owner, must establish the health insurance policy.
- The company must pay the owner’s insurance premiums, either directly to the insurer or as a reimbursement to the owner.
- The premium payments must be included as part of the owner’s taxable wages on their Form W-2.
When set up correctly, the health insurance deduction for S-corp owners works as follows:
- The premium amount is included in the owner’s taxable income and reported on their W-2.
- The owner can then take a personal income tax deduction for the premiums on Form 1040, which is an “above-the-line” deduction that reduces their adjusted gross income (AGI).
The deduction can cover health, dental, long-term care, and Medicare insurance premiums, but it is limited to the amount of wages paid to the owner by the S-corporation each year. Family members of the S-corp owner are also treated as owners for health insurance purposes, even if they don’t directly own stock.
It’s important for S-corp owners to work with a qualified tax professional to ensure proper implementation and reporting of these health insurance premium deductions.