Health Insurance for S Corporations

published May, 2009

As an S Corporation owner-operator, you may qualify to deduct your health insurance premium “off the front” of your personal 1040 as “Self-Employed Health Insurance” deduction. That’s even better than being able to deduct it from Schedule A as a medical deduction.

Does your S Corporation pay your health insurance?

If you own more than 2% of an S Corporation and you’re drawing wage as an officer of the corporation, your health insurance should go on your W-2. As an officer, you are an employee and should be on payroll per statute (i.e. written law on the books). 

Here’s the crazy circle that winds up with the same deduction if you were a sole-proprietor filing Schedule C: The corporation 1.) reduces its income by the benefit but 2.) increases the W-2 reported to the shareholder-employee who 3.) decreases their taxable income by the benefit amount.

If this will appear at year end on your W-2, it should also go on your quarterly payroll tax filings.

Health insurance is “wage income” but it is not subject to Social Security and Medicare tax, so it isn’t part of the wage base for those taxes on Form 941. If you’ve filed your first quarter 941 and DE-6 without including your health insurance, you should amend both forms. This does not change the amount of tax due, so there shouldn’t be a penalty. You want your four quarters to match up to the annual filings, so now is the time to correct first quarter and start reporting correctly.

Non-shareholder employees (<2% owners) are treated ‘normally:’ the health insurance is a non-taxable benefit to the employee and is a deduction to the corporation.

There are some limitations on deductibility for self employed health insurance. For example if you have no income, you can’t take the deduction, but if that’s the case, what do you care, you’re not paying tax anyway. Make sure your wage is reasonable.