Health insurance for 2% shareholder-employees of an S corporation
The S corporation deducts the premiums as wages, the owner reports them as income, and then the owner deducts them on the personal return. The steps must be done in the right order, or the deduction can be lost.
Prepared by Prem Tax and Accounting Corp. Last checked against official sources on October 21, 2026.
How it works in four steps
The S corporation pays
The S corporation pays the premiums, or reimburses the shareholder who bought the policy in their own name and gives proof of payment. This must happen in the same year as the coverage.
The S corporation reports wages
The S corporation deducts the cost as officer compensation and includes the premiums in the shareholder's Form W-2: in Box 1, not in Boxes 3 and 5, and as an information item in Box 14.
The shareholder reports and deducts
The shareholder reports the W-2 wages as income, and then deducts the premiums on Schedule 1 (Form 1040), line 17, on Form 7206 when required.
Keep the proof
Keep the premium statements, proof of payment or reimbursement, the payroll reports and the W-2.
Rules to get the deduction
- The S corporation must "establish" the plan. The policy can be in the name of the S corporation or in the shareholder's own name, but the S corporation must pay the premiums or reimburse them, and include them in W-2 wages for that year. If the shareholder pays personally and is not reimbursed, no deduction.
- Earned income limit. The deduction cannot be more than the earned income from the S corporation, which is the shareholder-employee's wages from it.
- No other subsidized plan. You cannot deduct premiums for any month you or your spouse could have joined an employer-subsidized health plan, even if you did not join. The same applies to a dependent's or a child under 27's employer plan.
- Who is covered. You, your spouse and your dependents, and a child under age 27 at the end of the year, even if not a dependent.
- What counts. Medical, dental and vision insurance, qualified long-term care insurance (with age limits) and Medicare premiums you voluntarily pay.
- Not both. You cannot also deduct the same premiums as itemized medical expenses.
- Marketplace plans. If the policy is through the Marketplace and you get advance premium tax credit payments, see Pub. 974 and Rev. Proc. 2014-41 for how to figure the deduction and the credit together.
Long-term care premiums: 2026 limits
Qualified long-term care premiums count only up to a limit based on age at the end of the year. For 2026:
| Age at the end of the year | Most you can include for each person |
|---|---|
| 40 or younger | $500 |
| 41 to 50 | $930 |
| 51 to 60 | $1,860 |
| 61 to 70 | $4,960 |
| 71 or older | $6,200 |
What does not work
- Paying the premiums yourself with no reimbursement: no deduction under the S corporation rules.
- A cafeteria plan, FSA, HRA or QSEHRA for a 2% shareholder-employee: not available. See 2% shareholder rules.
- Pre-tax HSA contributions through salary reduction: not available to a 2% shareholder.
- Reimbursing individual premiums for several employees: can trigger the ACA market-rule excise tax. IRS Notice 2015-17 says the tax will not be asserted for a 2% shareholder-employee healthcare arrangement, and the S corporation need not file Form 8928 because of it. A plan that also covers employees who are not 2% shareholders is a different matter.
Example (numbers made up)
An S corporation pays $12,000 of health insurance premiums in 2026 for an owner-employee whose salary is $80,000.
| Item | Amount |
|---|---|
| Form W-2, Box 1 (wages) | $92,000 |
| Form W-2, Boxes 3 and 5 (Social Security and Medicare wages) | $80,000 |
| Form W-2, Box 14 (information item) | $12,000 |
| Officer compensation deducted by the S corporation | $92,000 |
| Deduction on Schedule 1 (Form 1040), line 17 | $12,000 |
For income tax the $12,000 is income on the W-2 and a deduction on the return, so it nets out, and it avoids Social Security and Medicare tax. This assumes the owner has no access to a subsidized plan elsewhere and the earned income limit is met.
Compliance checklist
Before the year starts
Decide who buys the policy and how the S corporation will pay or reimburse. Set up payroll to include the premiums as taxable for income tax but not for Social Security and Medicare.
During the year
Pay the premiums through the S corporation or reimburse them promptly with proof of payment.
Before W-2s go out
Confirm Box 1 includes the premiums, Boxes 3 and 5 do not, and Box 14 shows the amount.
For the personal return
Give your preparer the premium statements and the W-2. Tell us if you or your spouse had access to an employer plan.
Marketplace coverage
Tell us if you received advance premium tax credit payments, so the deduction and credit are figured together.
Common questions
Can I just pay my health insurance myself and deduct it?
Not if you are a more-than-2% shareholder of an S corporation and you want the deduction. The S corporation must pay the premiums, or reimburse you for them, and report them as wages on your Form W-2 for the same year. If you pay personally and nothing is reimbursed, you do not get the deduction under the S corporation rules.
Does the S corporation get a deduction?
Yes. The premiums are deductible by the S corporation as compensation and reported as wages on the shareholder's Form W-2.
Are the premiums subject to Social Security and Medicare tax?
Not when they are paid under a plan for employees. They are in Box 1 (income tax wages) but not in Boxes 3 and 5. Income tax withholding does apply.
What if my premiums are higher than my salary?
The deduction cannot be more than your earned income from the S corporation, which for a shareholder-employee is the W-2 wages from it. Any excess may be an itemized medical expense.
Can the S corporation reimburse employees' individual premiums?
Be careful. A plan that reimburses individual premiums can be treated as a group health plan that fails the ACA market rules, with an excise tax of $100 per day per person. IRS Notice 2015-17 gives relief for 2% shareholder arrangements. Ask us before you set one up.
Official sources
- IRS: S corporation compensation and medical insurance issues
- IRS Notice 2008-1: health insurance costs of 2-percent shareholder-employees
- IRS Notice 2015-17: transition relief for 2-percent shareholder arrangements
- IRS: Instructions for Form 7206 (self-employed health insurance deduction)
- IRS: Instructions for Form 1120-S
- IRS Publication 974: Premium tax credit
- IRS Rev. Proc. 2025-32: 2026 inflation adjustments (cash method gross receipts test, long-term care limits)
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