If you operate your business as an S corporation, you may be able to claim the self-employed health insurance deduction. This is a deduction for determining your adjusted gross income. So it directly reduces your taxable income as opposed to claiming an itemized deduction for the cost of health insurance on Schedule A, where you are subject to the 10% of adjusted gross income threshold.
As indicated by the IRS, you can claim the self-employed health insurance deduction for premiums paid to cover you, your spouse and dependents if you are more than a 2% shareholder of the S corporation and you are paid wages for your services.
The IRS points out that you would not be eligible to claim the self-employed health insurance deduction if either you or your spouse was eligible to participate in another subsidized health insurance plan, such as through an employer other than the S corporation.
The health insurance plan must be established or considered to be established under your business. The premiums must be paid by the S corporation or by you as a shareholder. If you pay the premiums personally, the S corporation must reimburse you for the cost.
The health insurance premiums that are paid or reimbursed by the S corporation are reported as wages in box 1 and as an information item in box 14 on the Form W-2 that the S corporation issues to you as a shareholder employee. The health insurance premiums would not be subject to Social Security or Medicare or unemployment tax, but would be subject to federal income tax as wages.
On the S corporation’s income tax return (Form 1120S), the amount the S corporation paid or reimbursed for health insurance would be included in compensation of officers, along with the salary or wages the S corporation paid you as a 2% or more shareholder. In order to claim the self-employed health insurance deduction, the S corporation cannot report the cost of the health insurance premiums as insurance expense or employee benefits.
The net tax effect for you personally of including the health insurance premiums as taxable compensation is offset by claiming the self-employed health insurance deduction, which is an above-the line adjustment for determining adjusted gross income. But the S corporation can claim a deduction for the cost of the health insurance premium, which reduces the S corporation’s net income that passes through to you as the shareholder for tax purposes.
If you paid the health insurance premiums personally, instead of through the S corporation, you could only claim an itemized deduction. You could potentially lose all or a part of your deduction of the health insurance premiums as a medical expense depending on whether your total medical expenses are above or below the 10% threshold, and if above, by how much.
George Sanz, Health insurance deduction for S-corp, Bankrate
Publication 535, Business Expenses, IRS
S Corporation Owners – How To Treat Medical Insurance Premiums, Gary M. Kaplan, C.P.A., P.A.
S Corporation Compensation and Medical Insurance Issues, IRS