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For S-corporation owner-employees, health insurance premiums offer potential tax advantages, though the rules differ from other business structures. If you’re an S-corp shareholder who owns more than 2% of the company, here’s what you should know to make the most of your health insurance expenses.
As a reminder, the open enrollment period for health insurance launched November 1, 2024, and concludes January 15, 2025. You can enroll in, renew, or change your health insurance plans through the Affordable Care Act (ACA) marketplace or your state’s exchange after comparing plans for one that fits your needs best.
This is the third of a series of articles we are publishing regarding tax implications related to health insurance for individuals and small businesses.
- Deducting Health Insurance Premiums
S-corporation owner-employees can deduct health insurance premiums, but the process involves several steps. The S-corp must pay the premiums directly or reimburse the owner-employee, recording these payments as wages on the owner’s W-2. These wages are then subject to income tax but not to Social Security and Medicare taxes.
Once the health insurance premiums are reported as income, the owner-employee can take an “above-the-line” deduction on their personal tax return, which reduces adjusted gross income (AGI). This deduction is only available if the S-corp had a net profit, meaning the deduction can’t exceed business income.
- Health Insurance and Eligibility for Other Benefits
If you qualify for other tax-advantaged health benefits, such as Health Savings Account (HSA) contributions, keep in mind that health coverage from the S-corp must align with IRS requirements. For example, to contribute to an HSA, the S-corp owner-employee must have a high-deductible health plan (HDHP), as required for HSA eligibility.
- ACA Premium Tax Credit
Owner-employees may not qualify for the Premium Tax Credit (PTC) on health plans purchased through the Health Insurance Marketplace, as the S-corp health insurance deduction reduces the PTC. It’s essential to consider this when choosing a health insurance plan, especially if other family members are included on the policy.
- Spousal and Family Coverage
If an owner-employee’s spouse or family members work for the S-corp, their health insurance premiums may also be eligible for this deduction. The same rules apply: premiums must be paid by the S-corp and reported as wages to the employee-family member, and they must meet the AGI and net profit limitations.
Important Considerations
For S-corp owner-employees, balancing health insurance expenses with tax efficiency requires careful planning. Open enrollment is an ideal time to ensure your coverage aligns with these tax rules. Consulting a tax professional can provide personalized insights, especially for those balancing multiple tax considerations within the S-corp structure.