Health insurance for S corp owners (2% shareholders)

A regular employee gets health insurance from work tax-free. An S corp owner with more than 2% of the stock doesn't. The premiums count as taxable pay, and you get the tax back through a separate deduction on your own return. Done right, it comes out close to tax-free. Done wrong, you lose the deduction entirely.

Who counts as a 2% shareholder

Notice 2008-1 defines it: anyone who owns more than 2% of the stock, or more than 2% of the voting power, on any day of the S corp's tax year. So almost every owner of a small S corp is one.

Stock you are "considered as owning" counts too. Under section 318 you are treated as owning stock held by your spouse, children, grandchildren and parents. Put your spouse on payroll in a company you own 100% of and the same rules apply to their coverage.

For fringe benefits the S corp is treated like a partnership and the 2% shareholder like a partner. That is why the normal employee exclusion in section 106 doesn't apply to you.

How the S corp reports the premiums

The IRS page on S corp compensation and medical insurance sets it out:

The premiums are wages for income tax withholding. They are not subject to Social Security, Medicare or federal unemployment tax, as long as the plan covers all employees or a class of them. The S corp deducts the premiums as a business expense.

The deduction on your return

You then take the self-employed health insurance deduction. It is an above-the-line deduction under section 162(l), so you get it whether you itemize or not. You figure it on Form 7206 and report it on Schedule 1 (Form 1040), line 17 on the 2025 form.

The net result: the premium shows up in box 1 and comes back out on Schedule 1. No income tax, and no payroll tax either.

Notice 2008-1: the plan must be the S corp's

Owners trip on this one. The deduction only works if the plan is "established by the S corporation." Notice 2008-1 says that happens in one of two ways in the current year:

• The S corp pays the premiums directly, or
• You pay them, give the S corp proof, and the S corp reimburses you.

The policy can be in your own name. What matters is who ends up paying. The S corp must report the amount as W-2 wages that same year, and you must report it as income on your Form 1040.

The notice gives an example of an owner who buys a policy and pays it personally, with no reimbursement. That owner gets no 162(l) deduction. The most you can do then is count the premiums as a medical expense on Schedule A if you itemize, which the Form 7206 instructions allow.

The fix is cheap. Have the company pay the insurer, or reimburse yourself before year end and run it through payroll so it lands in box 1.

Example

An owner takes a $60,000 salary. The S corp also pays $18,000 a year for a family health plan.

Social Security and Medicare are 6.2% and 1.45% for each of employer and employee in 2026, per Topic 751. The $18,000 adds nothing to that bill. Income tax on it is cancelled by the $18,000 deduction.

Compare a sole proprietor with the same premium. They get the same income tax deduction, but the instructions say it can't reduce net earnings for self-employment tax. So the premium still carries self-employment tax.

Limits that cut the deduction

Earned income cap. For an S corp owner the deduction can't exceed your Medicare wages from that S corp, box 5. A $10,000 salary caps the deduction at $10,000, whatever the premiums were. One more reason a token salary backfires (see reasonable salary).

Other coverage. You lose the deduction for any month you were eligible for a subsidized plan through your own or your spouse's employer, even if you didn't enroll. Eligible is enough. This catches a lot of couples where one spouse has a corporate job.

Long-term care. Qualified long-term care premiums count, but only up to an age-based amount per person. For 2026, Rev. Proc. 2025-32 sets these:

The coverage can include your spouse, your dependents, and a child under 27 at year end even if they aren't your dependent.

Practical setup

Tell your payroll provider the premiums before the last payroll of the year, so box 1 includes them and boxes 3 and 5 don't. Notice 2008-1 also says these payments are not distributions for the single class of stock rule, so paying one owner's premiums won't break your S election. The cost of running payroll in the first place is in S corp payroll costs, and the S corp savings calculator shows whether the whole setup is worth it at your profit.