Why health insurance for your S Corp shouldn’t just be a “personal cost”

Oct 22

If you run your business as an S corporation (an “S Corp”) and you’re also one of the owners (and possibly the only employee), you might think: “I’ll just buy health insurance myself and treat it like any other expense.” But the reality is, when you do this the right way, you can turn what feels like a personal cost into a smart tax strategy… while staying compliant with the rules.

Here’s what I mean: Your business (the S Corp) can deduct the health insurance premium payments, and you as the owner-employee can also claim the self-employed health insurance deduction on your personal return. But only if you follow the IRS rules carefully.

That means you don’t just pay the premium and leave it at that. Instead, you route it through your business in the right way, record it correctly on your W-2, and then you’re good to go.

How it works (step by step)

Here is the breakdown of how the system works… and where most people stumble.

1. Identify the “2% shareholder” rule

If you own more than 2% of the stock (or voting power) of your S Corp, for tax purposes you’re treated differently when it comes to health insurance coverage. The IRS calls you a “greater-than-2-percent shareholder-employee.” (Check it out on the IRS website)

This matters because many of the “non-taxable fringe benefit” rules that apply to regular employees do not apply to you in the same way.

2. The S Corp pays or reimburses the premium

The S Corp must either (a) purchase the policy in the corporation’s name or (b) reimburse you (the shareholder-employee) after you pay it. But either way, the payment must originate through the corporation for you to reap the full benefit.

3. The amount gets included on your W-2 as wages

Here’s a common stumbling block. Even though you’re buying insurance for yourself, the premium payment becomes wages (taxable income) on your W-2 (Box 1). So the firm deducts it like compensation; you report it as income. But - very importantly - it is not subject to Social Security or Medicare (FICA) wages if the rules are met.

4. You claim the self-employed health insurance deduction

Once the premium is paid/reimbursed by the S Corp and reported correctly on your W-2, you as the owner-employee may claim the deduction on your Form 1040 (via Schedule 1, line 17) for the amount you paid for yourself, your spouse, dependents, and children up to age 26/27 (depending). Caveats apply (see below).

5. Your business deduction happens too

Because the S Corp paid or reimbursed the premium, it deducts that expense as compensation or employee benefit expense. So you get the “double benefit”: corporation deducts + you get the personal above-the-line deduction (which helps reduce your adjusted gross income).

Why so many S Corp owners get tripped up

Let’s talk about the most common mistakes so you can avoid them.

Skipping the W-2 inclusion. If you pay the premium personally and never have the corporation reimburse it or include it on your W-2, then you likely lose the deduction. The IRS rule is clear: it must be paid by- or reimbursed through - the S Corp and included as wages.
Assuming FICA doesn’t apply. Yes, the additional wages (premium amount) for a > 2% shareholder are subject to income tax, but they are not subject to Social Security or Medicare taxes. Many folks incorrectly withhold or report.
Forgetting eligibility limits. Your deduction is limited by your earned income from the S Corp. If you have minimal wages, and your premium is large, you might not be able to deduct the full amount.
Ignoring eligibility for other employer-sponsored plans. If you (or spouse) are eligible for a subsidized employer plan elsewhere, the deduction may be disallowed.
Timing and records. The reimbursement and the W-2 inclusion must happen in the same tax year the premium is paid. And you must keep detailed documentation (policy, invoices, proof of payment, W-2s, etc.).

Example scenario

Let’s make it real: Suppose you own 100% of your S Corp and you pay $6,000/year (that’s $500/month) in health insurance premiums for yourself.

Your S Corp pays/reimburses the $6,000 (or $500 monthly / $250 biweekly depending on your wage payment schedule).
Your W-2 shows your regular salary + the $6,000 in Box 1 (but not in Boxes 3 or 5 if done correctly).
The S Corp deducts that $6,000 as part of wages/benefits.
On your personal tax return you claim the $6,000 self-employed health insurance deduction (subject to your wages and other limits).
The result: your business gets the deduction, and you reduce your personal taxable income. That’s how it becomes “insurance + tax strategy” rather than just “insurance cost.”

What kind of coverage paths exist for S Corp owners

Here are a few routes your business might take (depending on whether you have other employees, etc.):

Individual health insurance plan purchased by you then reimbursed by the S Corp. This is common when you’re the only employee. The S Corp makes the reimbursement and records it correctly.
Group health insurance plan from the business (if you have other non-owner employees). You (as owner) participate. But note: for you (a > 2% shareholder) the premium still ends up as wages. Bench+1
Health Reimbursement Arrangement (HRA) or allied vehicles – in some cases feasible, but more complex and often less straightforward for solo owners.
Self-insured or specialized plans – unique setups but require even more care with compliance.

My top take-aways for you

Don’t assume your premium is automatically deductible just because you’re the owner. The method matters.
Make sure your S Corp is the one paying or reimbursing the premium and that it shows up properly on your W-2.
Keep your salary (“reasonable compensation”) in mind—if you pay yourself very little, your deduction may be limited.
If you or your spouse have access to another employer-sponsored subsidized plan, you might run into a limitation.
Strong recordkeeping pays dividends. Show policy, payments, reimbursement, W-2 treatment—all stored.
Talk to your tax advisor early—preferably before the end of the tax year—so you don’t get caught with surprises.

Final thoughts

Running your health insurance correctly through your S Corp is one of those “small detail + big benefit” moves for solopreneurs and small-business owners. It doesn’t require massive complexity, but it does require you to follow the steps.

Your insurance isn’t just a cost. When you handle it right, it becomes a tax-efficient business expense + a personal deduction.

That’s smart business.

Gabbie Kelly