Key Takeaways

  • S Corp shareholders owning more than 2% must follow special IRS rules to deduct health insurance premiums.
  • Premiums must be paid or reimbursed by the S Corp, reported on the shareholder’s W-2, and are subject to income tax but not Social Security or Medicare tax.
  • Unlike C Corps, S Corps cannot offer tax-free employer health benefits to 2%+ shareholders, but those shareholders may still qualify for the self-employed health insurance deduction.
  • Coverage can include dental, vision, Medicare premiums, and children up to age 27, even if they’re not dependents.
  • S Corps can explore Health Reimbursement Arrangements (HRAs), stipends, and group health plans, but each has specific compliance requirements.
  • Business insurance for S Corps should also include protections like workers’ compensation, general liability, and property insurance.

S corp medical insurance is an important issue due to the way shareholders are taxed. The way a corporation pays for any shareholder/employee medical insurance is a complex and interesting issue.

Reporting of Health Insurance Premiums for S Corps

If a shareholder owns more than 2 percent of an S corporation and they receive medical benefits from the company, then it must be reported properly. You run the risk of limiting or eliminating the deduction on medical benefits if steps are missed. Medical benefits deduction is one of the few downsides of a S corp election. If someone is self-employed, then they enjoy the ability to deduct their health insurance premiums from their taxable income. S corporation shareholders are not technically self-employed. The IRS has a requirement that if a shareholder owns more than 2 percent of an S corp, then they are able to take the deduction. Otherwise, they are not.

Eligibility and Coverage Scope

For an S Corp shareholder to qualify for health insurance deductions, they must:

  • Own more than 2% of the S corporation.
  • Have premiums paid directly by the S Corp or reimbursed to them under an accountable plan.
  • Ensure the policy is established in their name or the corporation’s name.

Coverage may include:

  • Medical, dental, and vision plans.
  • Medicare Part A, B, C, and D premiums for eligible shareholders.
  • Insurance for children up to age 27, regardless of dependent status.

The policy can cover the shareholder’s spouse and dependents, but they are also treated as 2% shareholders for IRS purposes.

Steps to Reporting S Corporation Premiums

There are specific steps to ensure that you receive the substantial tax savings for medical benefits.

  1. Shareholders who own more than 2 percent of an S corp should have their premiums tracked separately. These premiums (for health, dental and vision) cannot be deducted by the S corp.
  2. The corporation must pay the premiums for the shareholder even if that payment is made as a reimbursement.
  3. Prior to the final payroll processing for the year, the total for vision, dental, health and other medical insurance premiums paid by the corporation must be given to the shareholder for their W-2.
  4. There is a special tax treatment for this payment of premiums. Federal and State withholding applies even though they are not subject to Medicare tax or Social Security.
  5. Premiums are recorded on the W-2.

If a shareholder (who owns more than 2 percent of the S corp) premiums are not reported on the shareholder’s W-2, then the IRS will not allow the self-employment deduction.

Using HRAs and Health Stipends

S Corps have limited options for offering tax-advantaged health benefits to 2% shareholders. Two common approaches include:

  • Qualified Small Employer Health Reimbursement Arrangement (QSEHRA): Can reimburse employees, including 2% shareholders, for individual insurance premiums. However, reimbursements for 2% shareholders are taxable and must be reported as income.
  • Taxable Health Stipends: The S Corp can provide a set monthly allowance for health coverage, which is treated as taxable wages. This option is simple to administer but does not reduce taxable income like traditional benefits.

Both options require careful documentation to maintain IRS compliance.

C Corp vs. S Corp

There are different rules for the regular C corporation (the default form of tax election). A regular C corporation can provide shareholder/employees with health insurance as a benefit. Then they can deduct the cost as a business expense. The shareholder/employee does not have to pay any tax on the premiums paid by the corporation.

That is not the way an S corporation reports the premiums, as discussed above, a 2 percent shareholder must include in their wages the cost of employee health benefits. Spouse and family members of 2 percent shareholders are considered 2 percent shareholders for the purposes of this reporting to the IRS.

Comparing Group Health Plans and Individual Coverage

S Corps can choose between offering a group health insurance plan or reimbursing for individual coverage:

  • Group Plans:
    • Available through insurance carriers or the Small Business Health Options Program (SHOP).
    • Typically allow pre-tax premium payments for employees who are not 2% shareholders.
    • For 2% shareholders, the employer contribution is taxable income.
  • Individual Coverage:
    • Shareholders purchase plans directly and may be reimbursed.
    • More flexibility in plan choice but requires W-2 income reporting for 2% shareholders.

The right choice depends on the number of employees, budget, and administrative capacity.

Offset as a Self-Employed Health Insurance Deduction

There is an offset available to an individual if the following apply:

The premium payments of a 2 percent shareholder is made by the S corporation or the payments are made by the 2 percent shareholder and the S corporation reimburses that shareholder

The W-2 of the shareholder reflects the premium payments as income. This is due to the fact that if you have more than 2 percent ownership in an S corporation, you are treated the same way as someone who is self employed in regards to health insurance premiums.

Medicare coverage premiums may also be deducted. The insurance may also cover your children up to the age of 27 even if they are not your dependents. Deductions are limited to the amount of wage you received from the S corp. Compliance with the rules as they relate to the 2 percent shareholders permit the deduction.

Other Essential Insurance for S Corps

Beyond health insurance, an S Corp should consider other policies to protect the business:

  • Workers’ Compensation Insurance: Often legally required if you have employees. Covers work-related injuries and illnesses.
  • General Liability Insurance: Protects against third-party claims for bodily injury or property damage.
  • Professional Liability (Errors & Omissions) Insurance: Covers mistakes or negligence in professional services.
  • Commercial Property Insurance: Protects buildings, equipment, and inventory.
  • Business Owner’s Policy (BOP): Combines general liability and property insurance at a reduced cost.

These policies safeguard the S Corp’s finances and ensure business continuity.

S Corp and the IRS

The Internal Revenue Service looks at two elements in determining who is eligible to receive the deduction:

  1. Who pays the premiums on a health insurance benefit
  2. How are premiums reported to the IRS

S corporations may deduct the amount of the premiums as compensation to the employee.

The shareholder must pay income tax on these premiums paid by the S corporation.

This kind of “income” is not subject to Medicare taxes or Social Security if you are the only employee of the S corp or if the corporation as other employees who are not shareholders and provides them with health insurance.

Common Compliance Mistakes to Avoid

S Corp owners frequently lose out on deductions due to reporting errors. Avoid these pitfalls:

  • Failing to include premiums on the shareholder’s W-2.
  • Paying premiums personally without reimbursement from the S Corp.
  • Misclassifying family members’ coverage as non-shareholder benefits.
  • Not keeping written records of premium payments and reimbursements.

By aligning payroll and tax filings with IRS requirements, S Corp shareholders can maximize deductions and avoid penalties.

Frequently Asked Questions

  1. Can an S Corp pay for a shareholder’s health insurance?
    Yes, but for 2%+ shareholders, premiums must be included on the W-2 as taxable income to qualify for the self-employed health insurance deduction.
  2. Are health insurance premiums for S Corp shareholders tax-deductible?
    Yes, if the S Corp pays or reimburses the premiums and reports them as income, subject to certain limits.
  3. Can S Corp owners use HRAs?
    Yes, but reimbursements for 2%+ shareholders are taxable. HRAs can still benefit employees who are not 2% shareholders.
  4. What other insurance should an S Corp consider?
    Common policies include workers’ compensation, general liability, professional liability, and commercial property insurance.
  5. What happens if I don’t report premiums on my W-2?
    The IRS may deny the self-employed health insurance deduction, increasing your taxable income.

If you need help with setting up an S corporation medical insurance or any other legal need, you can post your legal need on UpCounsel’s marketplace. Upcounsel is a marketplace of legal help for you and your business. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.