How 100% S-Corp Owners Can Deduct Their Health Insurance Premiums

As a 100% owner of an S-Corporation, you are allowed to deduct your health insurance premiums, but the IRS requires the process to be handled in a specific way to qualify for the deduction. If done correctly, you will be able to fully deduct their health insurance premiums with no payroll taxes and no out-of-pocket tax cost. Below is a simple overview of how it works and what steps you must follow.

1. The S-Corp Must Pay or Reimburse Your Premiums

To qualify, the corporation must either:

• Pay the health insurance premiums directly, or
• Reimburse you after you pay them personally.

You cannot treat your insurance as a “pre-tax payroll deduction.”

S-Corp owners are not eligible for pre-tax Section 125 cafeteria plans.

2. Premiums Must Be Added to Your W-2 (Box 1 Only)

The amount the S-Corp paid on your behalf must be reported on your Form W-2 as taxable wage income in Box 1. Most payroll systems have a special earning type labeled something like “S-Corp Owner Health Insurance” that handles this automatically. This reporting step is required so you can claim the deduction on your personal tax return.

3. You Claim the Deduction on Your 1040

Even though the premiums are added to your W-2 wages, they are then deducted on your individual tax return as a Self-Employed Health Insurance Deduction.

• Reported on Schedule 1, Line 17
• Reduces your adjusted gross income (AGI)
• Applies to premiums for you, your spouse, and your dependents

This creates the final tax benefit: the income is effectively not taxable, and you also avoid FICA.

5. Requirements to Qualify

To take the deduction:

• Your S-Corp must have positive net income (you cannot deduct premiums that exceed S-Corp profits).
• You must be a >2% shareholder—this includes 100% owners.
• The plan must be established by the S-Corp, which is satisfied when the S-Corp pays or reimburses the premiums and reports them properly on the W-2.
  • The S-Corp does NOT need to buy a group insurance plan. As long as your S corp directly pays the insurance or reimburses the shareholder for it, it is considered "sponsored" by the company.
• Under IRS rules, an S-Corp shareholder cannot take the Self-Employed Health Insurance deduction if the shareholder or the shareholder’s spouse is eligible to participate in a subsidized employer health plan—even if the shareholder chooses not to enroll in it.

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