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Navigating S-Corp Health Insurance Deductions

Updated: Feb 16, 2023

Many small businesses are established as an S-Corporation so the owners can receive tax benefits, limited liability, and avoid double taxation. As a business owner, deciding how to set up your personal and employee health insurance coverage can be confusing when it involves taxes. There are several ways to potentially set up this type of coverage. We will go over the options and explain the way to set up health insurance coverage for a business to receive the best tax deductions.

Depending on the State, an S-Corporation may or may not have to provide health insurance to its employees based on the number of individuals it employs.

Corporations also have their own policies which will determine if health premiums are taxable to the individual or not. There are two policies an S-Corporation can follow:

  • To Discriminate. When the S-Corporation discriminates, or does not provide health insurance to all of it’s eligible employees, health insurance premiums paid by the corporation are subject to both Social Security and Medicare taxes.

  • To Not Discriminate. When the S-Corporation does not discriminate, and provides health insurance to it’s employees, the health insurance premiums are reported on the employees W-2 but are exempt from all taxes. Health Insurance premiums paid by the corporation for 2% or more shareholder owners are reported on the W-2 and are subject to income tax as a taxable fringe benefit. Shareholder owners are then able to report this premium amount on their 1040 as self employed health insurance thereby reducing their adjusted gross income.

Employees of S-Corps that pay a portion of the premium themselves report the premium they pay on a schedule A and are subject to a 10% limitation before anything can be deducted (for most people, this ends up as a zero deduction).

The same limitation applies to a business owner that pays their health insurance and a reimbursement is not submitted to the S-Corporation, the health insurance becomes an itemized deduction. Done this way, the health insurance deduction is subject to a 10% adjusted gross income floor and a phase-out of itemized deductions. This means after adding all health insurance expenses, if that total is less than 10% of adjusted gross income, no health insurance expenses can be deducted. If that total is greater than 10% of your adjusted gross income, you can deduct any amount in excess of that 10%.

Generally, taking the W-2 option through the S-Corporation is the best choice for the health insurance deduction for most business owners. At the end of the year, the S-Corporation will report the total amount paid for health insurance premiums on the W-2 as either subject to or exempt from Social Security and Medicare; depending on whether it discriminates. Because the health insurance is reported on the W-2, the owner can claim the self-employed health insurance deduction for their premiums paid on their individual tax return. The health insurance premium costs become a wage to the S-Corporation employees which lowers the owner’s tax liability.

Navigating a successful road map for your S-Corporation can be complicated. ATBS takes that burden off your plate by handling your accounting / bookkeeping, preparing your S-Corporation taxes and quarterly tax estimates. For more information on the best way to handle health insurance costs and tax deductions for your business contact your ATBS accountant.

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