As we approach the end of the 2025 tax year, we want to remind S-corporation owners of the important rules that apply to health insurance benefits for shareholders who own more than 2% of the corporation. Proper payment, reporting, and timing are essential to ensure the deduction is allowed.
Important Deadline Reminder
To qualify for the 2025 health insurance deduction, all premiums must be paid or reimbursed by the S corporation no later than December 31, 2025, and properly included in the shareholder-employee’s 2025 Form W-2. Payments or reimbursements made after year-end generally will not qualify for the 2025 deduction.
Please contact our office as soon as possible if you need assistance reviewing your health insurance payments, reimbursements, or payroll setup before year-end. We are happy to help ensure everything is handled correctly.
Rules for >2% Shareholders
Treatment of More Than 2% Shareholders
For fringe benefit purposes, the IRS treats an S corporation as a partnership. Any shareholder owning more than 2% of the corporation is treated as a partner. As a result, health insurance premiums paid on behalf of these shareholders must be included as taxable wages on Form W-2, but they are not subject to Social Security or Medicare (FICA) taxes.
Payment and Reimbursement Requirements
The S corporation must either:
- Pay the health insurance premiums directly during the tax year, or
- Reimburse the shareholder-employee during the same tax year after proof of payment is provided.
If the premiums are not paid or reimbursed by the S corporation and included in the shareholder’s Form W-2, the health insurance deduction will not be allowed.
Self-Employed Health Insurance Deduction
More than 2% shareholder-employees may take an above-the-line self-employed health insurance deduction on their individual tax return, even if the policy is in the shareholder’s name. The deduction is limited to the lesser of:
- Eligible health insurance premiums, or
- The shareholder’s net income from the S corporation, generally the Medicare wages reported in Box 5 of Form W-2.
Reporting Requirements
The amount of health insurance premiums eligible for the self-employed health insurance deduction should be reported in Box 14 of the shareholder-employee’s Form W-2. The shareholder then deducts this amount as an adjustment to income on Form 1040.
Impact on Other Benefits
Because health insurance premiums are included in taxable wages, they also increase compensation for purposes of calculating employer contributions to retirement plans, such as SIMPLE IRAs.
Types of Premiums Eligible for the 2% Shareholder Health Insurance Deduction
Eligible premiums generally include:
- Medical insurance (individual or family coverage)
- Dental insurance
- Vision insurance
- Qualified long-term care insurance (subject to IRS limits)
- Medicare premiums (Parts A, B, C, and D), if applicable