For many self-employed individuals—locum tenens, CRNAs, independent contractors, or small business owners, electing an S corporation is a smart move bringing in benefits to their business particularly when it comes to lowering their self-employment taxes. However, deducting health insurance premiums for S corp owners can be complicated since there are certain IRS rules and limitations that must be followed. 

Here is a 3-step plan to claim the health insurance deduction if you are an S-Corp owner: 

Step 1: The S Corporation Pays for Your Health Insurance 

One of the IRS requirements for this deduction is that your S corporation must pay for your health insurance. This can happen in two ways: 

1. The S corporation obtains and pays the insurance premium. 

2. You pay the premiums yourself and the S corporation reimburses you. 

The key point here is that your S corporation must be the one to shoulder the payments for your health insurance premiums.  

Step 2: Claim as a Business Deduction and Report as the S Corp Owner’s Wage Income 

Yes, you read it right. Health insurance premiums paid on behalf of the S corp owners are business deductions to the S corporation but is treated as part of the S corp owner’s W-2 income (Box 1) that is subject to tax. Unfortunately, it is not a tax-free benefit for an S corp owner. 

Unlike sole proprietors, S corp owners are employees of their own businesses making the health insurance payments by their S corporation an employee fringe benefit. 

Note that this “extra income” is not subject to self-employment taxes, so it should not appear in Boxes 3 and 5 of your W-2. 

But this should not be a red flag for electing an S corporation status. There is a way for S corp owners to counter the effect of it being part of their W-2 income. Check out Step 3. 

Step 3: Deduct the Premiums on Your Personal Tax Return 

Here’s the fun part—S corp owners get to deduct the health insurance premiums on their personal tax returns!  

S corp owners are considered self-employed individuals who are allowed to claim health insurance deduction on their personal returns. (Read our dedicated blog for this topic) 

It is an above-the-line deduction that reduces your AGI (adjusted gross income) effectively lowering your taxable income. Plus, you do not have to itemize your deductions on your personal return, you can claim this deduction even if you take the standard deduction. 

IRS Limitations 

There are a few IRS limitations that you need to know before you take this deduction on your personal return. 

• You can only deduct health insurance premiums up to your S corporation’s taxable income. You can’t take this deduction if your S corporation suffered a loss during the year. 

• The deduction is limited to your W-2 wages from the S Corporation. If you pay yourself nothing during the year, you can’t take this deduction. 

• If you or your spouse qualifies for an employer-sponsored plan you cannot take the self-employed health insurance deduction even if you chose not to participate in any of the employer-sponsored plans.   

Important Reminders: 

• Make sure the S corporation ultimately pays for the health insurance premiums. If you personally pay the health insurance premiums, make the S corporation reimburse you for the costs. 

• Premium payments shouldered by the S corporation must be included in your W-2 form (Box 1 only), subject to taxes. 

• Health insurance premiums also cover accidents and dental insurance. However, the costs of routine check-ups are excluded from this deduction. Only insurance premiums qualify. 

• The health insurance deduction may also cover your spouse and dependents subject to the same IRS rules and limitations. 

Want to learn more?  

You may want to consult and work with 1099 Accountant – We offer online bookkeeping, online advisory services and online tax and accounting services. We offer reasonable rates. We only work with independent contractors, freelancers, and one-person business. We work with locum tenens from California to New York City and everywhere in between. Yes, even Hawaii!  

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