Health insurance for S corporation owners: getting it onto the W-2

When a private practice is taxed as an S corporation, the owner’s own health insurance does not work the way it does for the rest of the staff. The practice can still pay the premiums, and the owner can still end up with a deduction for them, but only if the premiums pass through the owner’s Form W-2 for the year they are paid. That makes this a year-end item. Once the 2026 W-2s are issued, the simple way to get it right has passed.

Who counts as a more-than-2-percent shareholder

The special treatment comes from section 1372 of the Internal Revenue Code. For the income tax rules on employee fringe benefits, an S corporation is treated as a partnership and any 2-percent shareholder is treated as a partner. Section 1372(b) defines that shareholder as anyone who owns, or is considered as owning under section 318, more than 2 percent of the outstanding stock or of the combined voting power on any day during the corporation’s tax year. Anyone who owns a practice outright or with a partner or two is well over that line, and because the test looks at any single day, selling down below 2 percent partway through a year does not change the treatment for that year.

The section 318 reference is what reaches family members. Under section 318(a)(1), an individual is treated as owning the stock owned by their spouse (unless legally separated under a decree of divorce or separate maintenance), children, grandchildren, and parents. If you own all of the practice and your spouse works in it on payroll, your spouse is a more-than-2-percent shareholder for these rules without owning a share, and the same goes for a child or parent on payroll. Brothers and sisters are not on the statutory list. In Chief Counsel Advice 201912001, the IRS concluded that a family member who is a 2-percent shareholder only by attribution is entitled to the self-employed health insurance deduction for premiums the corporation pays under a group health plan for all employees and includes in that person’s income, if the other requirements are met. Chief Counsel Advice cannot be cited as precedent, and this one addressed only that group plan situation.

How the premiums are treated

As IRS Notice 2008-1 summarizes Revenue Ruling 91-26, accident and health insurance premiums an S corporation pays for a 2-percent shareholder in return for services are treated for income tax purposes like a partnership’s guaranteed payments. The corporation can deduct them under section 162(a), they are included in the shareholder’s wages for income tax withholding purposes on Form W-2, and the shareholder includes them in gross income. Because a 2-percent shareholder is not an employee for purposes of section 106, the usual exclusion for employer-provided health coverage does not apply.

The premiums are not wages for Social Security and Medicare tax, however, if the requirements of section 3121(a)(2)(B) are met. That provision excludes payments for medical or hospitalization expenses made under a plan or system the employer establishes for its employees generally, or for a class or classes of its employees, and their dependents. IRS Publication 15-B says the same benefits can be excluded from federal unemployment (FUTA) wages. In W-2 terms, the premiums go into box 1 but stay out of box 3 (Social Security wages) and box 5 (Medicare wages) when that condition is satisfied. We document the arrangement in writing, including the class of employees it covers, so the condition is visible on paper rather than inferred.

On the corporation’s return, the 2025 Instructions for Form 1120-S place fringe benefits for more-than-2-percent shareholders on line 7 (compensation of officers) or line 8 (salaries and wages), whichever applies, rather than on line 18 with employee benefit programs. The same instructions ask the corporation to show the premiums as an information item in box 14 of the shareholder’s W-2. Box 14 has been split on the 2026 W-2, and the IRS says information formerly reported in box 14 now goes in box 14a.

A policy in the owner’s own name

Some practice owners buy individual coverage in their own name rather than through the practice, and the IRS notes that insurance laws in some states do not allow a corporation to buy group coverage when it has only one employee. Notice 2008-1 allows the deduction in that case as long as the plan is established by the S corporation, and it gives two ways for that to happen. Either the corporation makes the premium payments for the policy covering the shareholder (and spouse or dependents, if applicable) in the current tax year, or the shareholder makes the payments, furnishes proof of payment to the corporation, and the corporation reimburses the shareholder in the current tax year. If the premiums are not paid or reimbursed by the corporation and included in the shareholder’s income, the plan is not established by the corporation and the deduction is not allowed. The notice’s first example is an owner who buys a policy and pays for it personally with no reimbursement, and the deduction is denied.

The timing is part of the rule, since the payment or reimbursement has to happen in the current tax year, and Notice 2008-1 says the corporation must report the premiums as wages on the W-2 in that same year. For a calendar-year S corporation, premiums for 2026 need to be paid or reimbursed by December 31, 2026, and reported on the 2026 W-2.

Medicare premiums can count toward the deduction as well. The Form 7206 instructions say Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure it, and in Chief Counsel Advice 201228037, also not precedent, the IRS said a 2-percent shareholder may pay Medicare premiums and be reimbursed by the corporation, or have the corporation pay them, with the premiums reported as W-2 wages either way.

The owner’s deduction under section 162(l)

Section 162(l) allows a deduction for amounts paid for insurance that constitutes medical care for the taxpayer, the taxpayer’s spouse and dependents, and a child who has not reached age 27 by the end of the year. Section 162(l)(5) applies it to a shareholder treated as a partner under section 1372, with the shareholder’s wages from the S corporation treated as earned income. The Form 7206 instructions describe the covered insurance as including medical, dental, and vision insurance and qualified long-term care insurance. The deduction is figured on Form 7206 (or on a worksheet in the Form 1040 instructions, except when long-term care premiums are included or in the other cases those instructions list) and claimed on Schedule 1 of Form 1040, so it reduces adjusted gross income rather than depending on itemized deductions.

Section 162(l)(2)(A) limits the deduction to earned income from the business that established the plan, which for an S corporation shareholder means wages from that corporation. Line 11 of the 2025 Form 7206, and the worksheet in the 2025 Form 1040 instructions, measure it with the Medicare wages in box 5 of the W-2 from the S corporation. When the premiums are kept out of box 5, the cap is measured by the owner’s salary and any other Medicare wages, not by the premiums. An owner who takes a small salary can find the deduction cut back to it, and an owner who takes no salary has no wages from the corporation to deduct against.

Section 162(l)(2)(B) adds a second limit, for other coverage. No deduction is allowed for any calendar month in which the taxpayer is eligible to participate in a subsidized health plan maintained by any employer of the taxpayer or of the taxpayer’s spouse, a dependent, or a child under 27. The Form 7206 instructions add that this applies even if you did not actually participate, and that eligibility at any time during a month affects that month. The rule is applied separately to long-term care coverage and to other health coverage. A spouse’s job that offers subsidized family coverage is the situation to watch for. Coverage under a QSEHRA counts too, since Notice 2017-67 (Q&A-56) says the deduction is not available for a month in which a family member is provided a QSEHRA that would pay or reimburse the taxpayer’s premiums or other medical expenses. The Form 7206 instructions say premiums for months that fail this test can still be included as medical expenses on Schedule A by an owner who itemizes, and section 213(a) allows medical expenses only to the extent they exceed 7.5 percent of adjusted gross income.

Qualified long-term care insurance has its own cap under section 162(l)(2)(C), which counts only eligible long-term care premiums as defined in section 213(d)(10), and those are limited per person by age. Rev. Proc. 2025-32 sets the 2026 limits at $500 for a person whose age before the close of the year is 40 or less, $930 for over 40 through 50, $1,860 for over 50 through 60, $4,960 for over 60 through 70, and $6,200 for over 70. The 2026 draft of Form 7206 prints these same amounts; the lower figures on the 2025 form do not apply to 2026.

An owner who buys coverage through the Marketplace and receives advance payments of the premium tax credit, or claims the credit on the return, has an additional computation. The Form 7206 instructions point to Publication 974, and the IRS cites Rev. Proc. 2014-41 for computing the deduction and the credit together.

A worked example

Take a hypothetical therapist who owns all of an S corporation practice, takes a salary of $90,000 for 2026, and buys a family policy in their own name for $1,200 a month, or $14,400 for the year. The therapist gives the corporation proof of each payment, the corporation reimburses every month, and there are no retirement deferrals or other pre-tax items. Assuming the plan or system condition is met, the 2026 W-2 shows $104,400 in box 1 and $90,000 in boxes 3 and 5. The earned income limit is the $90,000 in box 5, which is more than the premiums, so the deduction is the full $14,400 if no one in the family was eligible for subsidized employer coverage during the year.

Now suppose the therapist’s spouse becomes eligible on September 1 for subsidized family coverage through a new job, and the therapist keeps the individual policy. September through December are disqualified months whether or not the spouse enrolls. Box 1 still shows $104,400, because all $14,400 was reimbursed, but the deduction drops to the eight months from January through August, or $9,600. The other $4,800 can be counted only as an itemized medical expense, subject to the 7.5 percent floor.

HSA contributions for the owner

An owner covered by a high deductible health plan can have the practice contribute to a health savings account, and Notice 2005-8 governs the result. The corporation’s contribution for a 2-percent shareholder-employee in consideration for services is treated as a guaranteed payment. The corporation deducts it, the owner includes it in gross income, and the section 106(d) exclusion that keeps an ordinary employee’s HSA contributions out of income does not apply. If the section 3121(a)(2)(B) requirements are met, the contribution is not subject to Social Security and Medicare tax, even though it must be included in wages for income tax withholding on the W-2. The owner then deducts the contribution on their own return as an adjustment to gross income under section 223, if they are an eligible individual. Publication 15-B adds that 2-percent shareholders are not eligible for pre-tax salary reduction contributions to an HSA, so the cafeteria plan route that can work for other employees is closed to the owner.

For 2026, Rev. Proc. 2025-19 sets the HSA contribution limit at $4,400 for self-only coverage and $8,750 for family coverage, and defines a high deductible health plan as one with a deductible of at least $1,700 for self-only coverage or $3,400 for family coverage and out-of-pocket expenses of no more than $8,500 or $17,000. Section 223(b)(3) adds $1,000 for an individual who has reached age 55 by the end of the year. Because the owner deducts both the corporation’s contribution and anything contributed personally under section 223(a), the two together are subject to the same annual limit. For months beginning after December 31, 2025, section 223(c)(2)(H), added by P.L. 119-21, also treats a bronze or catastrophic plan that is available as individual coverage through an Exchange as a high deductible health plan, and Notice 2026-5 (Q&A-6) says the same plan bought off the Exchange qualifies too, which matters for owners who buy their own coverage.

QSEHRAs and individual coverage HRAs

A related question is whether the owner can be covered by a health reimbursement arrangement. Notice 2017-67 (Q&A-9) says a QSEHRA may only be provided to employees and that a 2-percent shareholder who is otherwise an employee is not an employee for purposes of a QSEHRA, citing section 1372. Because section 1372 counts attributed ownership, that also reaches a spouse, child, or parent on payroll who is a more-than-2-percent shareholder by attribution. The IRS page on S corporation compensation and medical insurance issues says more broadly that a 2-percent shareholder-employee is not able to participate in an HRA or other self-insured arrangement, because the exclusion under section 105(b) is limited to employees. An individual coverage HRA is an HRA integrated with individual coverage, and the preamble to the 2019 final rules that created it says a self-employed business owner cannot be provided a tax-favored individual coverage HRA.

None of this stops the owner’s premiums from being paid or reimbursed under Notice 2008-1, and Notice 2017-67 (Q&A-3) confirms that an S corporation does not fail to be an eligible employer for a QSEHRA because it separately reimburses a 2-percent shareholder’s premiums. A practice with fewer than 50 full-time and full-time-equivalent employees that offers no group health plan can provide a QSEHRA to eligible staff while it separately reimburses the owner’s own policy premiums through the W-2. What a practice should not do is reimburse staff members’ individual premiums informally the way it reimburses the owner. The IRS explains, drawing on Notice 2015-17, that reimbursement arrangements covering both 2-percent shareholders and other employees are treated as a group health plan that would generally fail the Affordable Care Act market reforms, which may trigger the section 4980D excise tax, $100 per day per employee per violation, for the employees who are not owners.

What to check before December 31

If you have paid your own premiums from a personal account all year and the practice has not reimbursed you, the first example in Notice 2008-1 describes your situation, and as things stand there is no section 162(l) deduction. The fix is a reimbursement from the corporation against proof of each payment, made by December 31 for a calendar-year corporation and added to your 2026 W-2 wages.

The reverse problem is a practice that pays the premiums from its own account, books them as an insurance or benefits expense, and never puts them in the owner’s wages. Notice 2008-1 conditions the deduction on reporting the premiums as wages on the W-2 for the same year, and the Form 1120-S instructions keep them off the employee benefit programs line. Caught before W-2s are produced, this is a reclassification in the books and an entry in payroll, best made in the last payroll of the year. Caught afterward, it means a Form W-2c, which the employer files with the Social Security Administration and furnishes to the owner, and Notice 2008-1 does not say whether a correction made after the year ends satisfies its requirement that the premiums be reported on the W-2 for the same year.

A W-2 is built from payroll records, so the year’s premium total, including the December premium and any premiums the practice paid directly, has to be entered in payroll before the W-2s are produced. The same goes for any HSA contribution the corporation made for the owner. For 2026, W-2s are due to employees and to the Social Security Administration by February 1, 2027, and your payroll provider’s deadline for year-end adjustments may come well before that.

Finally, go through 2026 month by month and ask whether you, your spouse, a dependent, or a child under 27 had an employer offering subsidized health coverage you were eligible for. Those months come out of the deduction even if nobody enrolled. The premiums for those months still belong on the W-2 if the corporation paid or reimbursed them, so the result is income without the matching deduction. A spouse or other family member on payroll who is a more-than-2-percent shareholder by attribution, and whose own coverage the practice pays or reimburses, has those premiums reported on their own W-2, and the same month-by-month test applies to their own deduction.

Where we help

For S corporation practices, we review how the owner’s health coverage is paid, confirm the premium and HSA figures that belong on each owner’s W-2, and figure the deduction and its monthly limits on the return. Our affiliated bookkeeping company, bookkeepz, LLC, handles the bookkeeping side, keeping the premiums coded correctly through the year and getting the annual figure to payroll before W-2s are produced. The premiums sit alongside the owner’s reasonable salary, which also caps the deduction, and they follow a different rule from the expenses an accountable plan reimburses. Other items to settle before December 31 are in our year-end tax planning post for practice owners, and the broader entity work is on our S corporation page and our page for therapy practices. If your practice has not been running the owner’s premiums through payroll, book a consultation before the final payroll of the year.

This post covers federal tax rules for 2026 as general information. It does not address state income tax treatment, and it is not advice for any particular practice.

• S corporation
• Health insurance
• Payroll