Health insurance can be a big expense and is an important item to consider as a self-employed individual. Did you know there’s a way to get it tax-deductible? Let’s dive in and learn how to deduct health insurance as an S corp owner.
1. Be an eligible S corp owner
Only certain individuals are eligible to deduct health insurance as an S corp owner. To be eligible, you must meet the following criteria:
– You must be a more-than-2% shareholder of an S corporation. (Own more than 2% of the company)
– You must be an employee of the S corporation and receive wages from the S corporation. It is required that any S Corp owner working in the business receive a salary.
– The health insurance policy must be in your name, or in the name of your spouse or dependent, or if you have employees, it can also be in the name of the company.
If you meet these criteria, you may be eligible to deduct your health insurance premiums as a business expense.
Your health insurance can cover you, a spouse, and any dependents as a more than 2% owner. It can also include the cost of dental insurance.
There’s one other thing to consider here. It’s important!
You and your spouse must not have access to employer-subsidized health insurance.
You cannot take the self-employed insurance deduction if you or your spouse is eligible for employer-subsidized health insurance. Thus, if your spouse can get family health insurance as a tax-advantaged benefit through their employer, you lose your eligibility for this deduction. This applies even if your spouse chooses to not accept the employer-sponsored insurance.
2. Health insurance premiums on your W-2
To take advantage of the health insurance deduction, your health insurance premiums must be included in your W-2 as taxable income. This means that your S corporation must report the amount of your health insurance premiums paid on your behalf as taxable income on your W-2. This will include your health insurance as an S Corp owner.
Your health insurance premium will be included in Line 1 of your W-2 and Line 14 should show S Corp Med with the total. Make sure you’re handling this through your payroll provider so it shows up correctly.
Remember, your S Corp needs to be paying you reasonable compensation. This is a fancy term for making sure are receiving a salary for the work and time you put into your business.
3. Calculate the deduction
Once you have included your health insurance premiums in your W-2, you can calculate the deduction on your personal tax return. The deduction is taken on Form 1040 Schedule 1 as an adjustment to income. You can deduct the amount of your health insurance premiums paid during the year, up to the amount of your earned income from the S corporation.
For example, if your S corporation paid $10,000 in health insurance premiums on your behalf, and you earned $50,000 in wages from the S corporation, you can deduct $10,000 on your personal tax return as an adjustment to income.
Typically, this is an easy deduction to calculate because it will show in Box 14 of your W-2 as S Corp Med. The number reported here should match your total cost. Again, make sure you are including the health insurance costs as part of your payroll.
4. Report the deduction
To report the health insurance deduction on your personal tax return, you must file Form 1040 and include Schedule 1, which is used to report adjustments to income. On Schedule 1, you will report the health insurance deduction as part of “self-employed health insurance”.
Yes. You are considered self-employed as a more than 2% owner of an S Corp. Think about it like this. You are an employee and employer and therefore, able to deduct health insurance as an S Corp owner
This should be an easy deduction since the number should show on your W-2. If it doesn’t make sure to get your W-2 corrected. Without the number on the W-2, the self-employed health insurance deduction is not allowed.
5. Keep accurate records
It’s important to keep accurate records of your health insurance premiums and related expenses. This includes receipts, invoices, and other documentation that shows the amount of your health insurance premiums and the payments made by your S corporation. This will allow you to be able to deduct health insurance as an S Corp owner.
If you have the company directly pay for the premium, then make sure to save the bills or invoices from the insurance company wherever you keep digital records. For example, keep a copy in DropBox or Google Drive or even attach it to the expense in your bookkeeping software.
6. Who pays for this health insurance?
I get this question often. Do you pay for it yourself or does the company pay for it?
The S Corp can either pay for it directly out of a business account OR it can reimburse you, the owner, for the cost of the health insurance.
I recommend having the company pay the health insurance company directly. That way the records are clear about the exact cost and it will show up on the books without any reimbursement necessary. Make sure to save the invoices or bills for the health insurance as part of your record-keeping process.
You are the sole owner of your S Corp, you buy health insurance policy in your name, and you pay the premiums for the policy. The S Corp makes no payments for this health insurance nor does it reimburse you for this expense.
Because the S Corp did not pay for or reimburse you for the premiums, you are not entitled to the self-employed health insurance deduction.
You are 100% owner of your S Corp and you buy health insurance policy in your name. You pay the premium payments for the policy AND you submit proof of the payments to your S Corp. The S Corp then timely reimburses you for the payments and reports the amount of the reimbursements as wages on your W-2.
In this example, the S Corp paid for the health insurance, and you qualify (providing no other employer health insurance is available to you or your spouse) to deduct the insurance premiums included on your W-2 as self-employed health insurance on Schedule 1 of your Form 1040.
In conclusion, deducting health insurance for a more than 2% S corp owner can provide tax savings. However, it’s important to meet the eligibility criteria, include your premiums in your W-2 income in Box 1, calculate the deduction correctly, report it on your personal tax return, and keep accurate records. If you have any questions or need further guidance, consult with a tax professional or accountant.