S Corp Owner Health Insurance | Kathryn Meyer Law PC

Through the corporation and the owner's W-2. When an owner holds more than 2 percent of an S corporation, the corporation pays or reimburses the health insurance premiums, deducts them, and adds them to box 1 wages on the owner's Form W-2. The owner reports that income and can then claim the self-employed health insurance deduction under section 162(l) of the Internal Revenue Code, unless eligible for a subsidized employer plan.

The order of those steps matters: if the corporation never pays or reimburses the premiums and reports them, the IRS treats the plan as not established by the corporation and the deduction is lost. Getting owner benefits right is part of Kathryn Meyer's work on tax planning for law firms.

Why S corporation owners are treated differently

For fringe benefit purposes, section 1372 treats an S corporation as a partnership and treats any 2-percent shareholder as a partner. Notice 2008-1 defines a 2-percent shareholder as a person who owns, or is considered to own under the attribution rules of section 318, more than 2 percent of the stock or of the voting power on any day during the corporation's tax year. Publication 15-B (2026) applies the same definition. If your firm has not yet elected S status, Tax-Smart Lawyering explains when the election tends to make sense.

The result is that the ordinary exclusion that lets employees receive employer-paid health coverage tax-free under section 106 does not apply to the owner. Notice 2008-1 explains that the premiums are instead treated much like a partner's guaranteed payment: the corporation deducts them, and the owner includes them in income. For an owner who also takes a salary, this sits alongside how much salary an S corporation owner should take.

How the premiums flow through payroll, step by step

Establish the plan through the corporation. Under Notice 2008-1, the plan is established by the S corporation if the corporation pays the premiums, or if the owner pays them, gives the corporation proof of payment, and the corporation reimburses the owner in the same tax year.
The corporation deducts the premiums. Notice 2008-1 treats the cost as a deductible business expense of the S corporation, subject to the usual requirements of section 162(a); the broader rules are covered in which law firm expenses are deductible.
Add the premiums to box 1 of the owner's W-2. The General Instructions for Forms W-2 and W-3 (2026) list the cost of accident and health insurance premiums for 2%-or-more shareholder-employees paid by an S corporation as box 1 wages.
Leave them out of boxes 3 and 5 when the plan covers employees generally. The IRS says the premiums are not subject to Social Security, Medicare or FUTA tax if paid under a plan or system for all employees or a class of employees.
Treat them as wages for income tax withholding. Publication 15 says the value of health insurance benefits must be included in a 2% shareholder's wages for income tax withholding. The tax withheld is then deposited on the firm's schedule, explained in when a small law firm has to deposit payroll taxes.
The owner reports the income and claims the deduction. The deduction goes on Schedule 1 (Form 1040), line 17, figured on Form 7206 or the worksheet in the Form 1040 instructions.

Whose name is on the policy, and who pays

Many small firms cannot buy a group policy for a single employee. The IRS notes that state insurance law sometimes requires a sole shareholder-employee to buy coverage in the individual's own name, and Notice 2008-1 addresses exactly that. The table summarizes the four situations the IRS describes.

Policy in the name of	Who pays the premiums	Premiums on the owner's W-2?	Section 162(l) deduction?
The S corporation	The S corporation	Yes, box 1	Allowed, if other requirements are met
The owner	The S corporation pays the insurer directly	Yes, box 1	Allowed, if other requirements are met
The owner	The owner, and the S corporation reimburses in the same year	Yes, box 1	Allowed, if other requirements are met
The owner	The owner, with no reimbursement	No	Not allowed

The IRS sums it up in one line: to claim the deduction, the premiums must ultimately be paid by the S corporation and reported as taxable compensation on the owner's W-2. A reimbursement for the owner's premiums should go through the firm's books with the same paper trail as any other reimbursement; see how a law firm should reimburse expenses under an accountable plan.

How the W-2 boxes compare

Benefit	Box 1 (income tax)	Boxes 3 and 5 (Social Security and Medicare)	Source
Health premiums for a more-than-2% owner, under a plan for employees	Included	Excluded	IRS S corporation page; Pub. 15
Health premiums for an employee who is not a 2% shareholder	Excluded	Excluded	Pub. 15
Group-term life insurance for a 2% shareholder	Included	Included	Pub. 15-B

What changes the answer

Eligibility for a subsidized plan. No deduction is allowed for any month the owner is eligible to participate in a subsidized health plan of the owner's or the spouse's employer, or of an employer of a dependent or of a child under 27 (section 162(l)(2)(B); Instructions for Form 7206). Eligibility is enough; you do not have to enroll.
The wage limit. The deduction cannot exceed earned income from the business that established the plan, and for an S corporation owner that means wages from the S corporation (section 162(l)(2)(A) and (l)(5)(A)). An owner on a very small salary can lose part of the deduction.
Family ownership. Ownership is counted under section 318, so a family member who works at the firm can be treated as a 2-percent shareholder through the owner's shares (Notice 2008-1).
Other account-based plans. The IRS says a 2-percent shareholder cannot participate in a QSEHRA, a flexible spending arrangement under a cafeteria plan, or an HRA, and Publication 15-B says 2% shareholders cannot make pre-tax salary reduction contributions to an HSA.
Reimbursing staff as well as the owner. Reimbursing individual policies for several employees can run into the Affordable Care Act market reforms and the $100 per day excise tax under section 4980D. Notice 2015-17 relief covers 2-percent shareholder arrangements, and plans covering fewer than two current employees are outside the market reforms (IRS S corporation page).
Marketplace coverage. If the policy came through the Marketplace with advance premium tax credit payments, the Instructions for Form 7206 point to Publication 974, and Rev. Proc. 2014-41 governs how the deduction and the credit interact.

For example: a solo owner with an individual policy

For example, imagine a lawyer who owns all of her S corporation's stock and is its only employee. Her state does not let the firm buy a group policy for one person, so she buys an individual policy in her own name for $1,000 a month. Each month she sends the invoice and proof of payment to the firm, which reimburses her. Her salary is $100,000, so her W-2 shows $112,000 in box 1 and $100,000 in boxes 3 and 5. She reports the $112,000 and claims a $12,000 deduction on Schedule 1, line 17, because her wages exceed the premiums and neither she nor her spouse was eligible for a subsidized employer plan. If her spouse had been eligible for subsidized coverage at work from July on, only January through June would count. This is a hypothetical, not a real case.

Common mistakes with owner health insurance

Paying personally and never running it through the firm. Without payment or reimbursement by the corporation and W-2 reporting, the plan is not established by the corporation and Notice 2008-1 denies the deduction.
Treating the premiums as a distribution. They belong in box 1 wages, not on the K-1 as a distribution.
Adding the premiums to boxes 3 and 5. That overstates Social Security and Medicare wages and overpays payroll tax when the plan qualifies for the exclusion.
Reimbursing the next year. Notice 2008-1 looks for payment or reimbursement in the current tax year.
Missing the spouse's plan. Eligibility for a subsidized plan through a spouse's employer blocks the deduction for those months.
Putting the owner in an HRA or cafeteria plan. The IRS says 2-percent shareholders cannot participate in those arrangements as employees.

What to do this week

Confirm whose name is on each health, dental and vision policy and who paid each premium this year.
If you paid personally, gather the invoices and proof of payment and have the firm reimburse you before year-end.
Tell your payroll provider the year's premium total so it reaches box 1 of your W-2, and not boxes 3 and 5.
Check whether you or your spouse were eligible for any subsidized employer plan, month by month.
Compare the premiums with your S corporation wages, since the deduction cannot exceed them.
If prior years were handled the wrong way, list them before deciding how to correct them.

Frequently asked questions

Can the S corporation deduct the premiums?

Yes. Notice 2008-1 treats premiums paid for a 2-percent shareholder-employee in consideration for services as deductible by the corporation under section 162(a), with the premiums then included in the shareholder's wages.

Does the deduction reduce self-employment or payroll tax?

No. Wages from the S corporation carry Social Security and Medicare tax through payroll, and the premiums are already left out of those wages when the plan qualifies. The section 162(l) deduction is an income tax deduction.

Do dental, vision and long-term care premiums count?

The Instructions for Form 7206 include medical, dental and vision insurance and qualified long-term care insurance, with age-based limits on the long-term care premiums that can be counted. The same rule applies: the plan has to be established through the corporation.

Can Medicare premiums be included?

The Instructions for Form 7206 say Medicare premiums you voluntarily pay for insurance in your name can be used to figure the deduction. For a more-than-2% shareholder, the corporation still has to pay or reimburse them and report them on the W-2.

What about employees who are not owners?

For ordinary employees, Publication 15 says employer payments for an accident or health plan are not wages and are not subject to income tax withholding or payroll taxes. Only the owner's coverage goes through box 1.

Do premiums change my estimated tax payments?

They add to box 1 income and to income tax withholding, so they can change the numbers behind quarterly estimated taxes for a law firm owner.

What if we did this wrong in earlier years?

Corrections can involve both the firm's payroll reporting and the owner's individual returns. The choices are explained in how to correct a past tax mistake.

Setting up owner benefits the right way

Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel and helps law firm owners structure compensation and benefits so the return matches the rules. A detailed review of total owner benefits is the first-quarter topic of the Quarterly Tax Health Checkup. Contact the firm or call (571) 560-8674.

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