Question: Can a S-Corp owner deduct his or her health insurance as business expense?
Answer: Yes or No!
The answer is YES if you do the following properly:
1. S-Corp pays for the health insurance either by group plan or reimbursement to the owner’s individual plan. Accordingly, the tax benefit will be recognized at S-Corp level by deducting as expense.
2. Report the health insurance premium in owner’s paycheck by increasing the gross income. However, such increase in gross income is not subject to Social security and Medicare. The will ultimately reflect in W-2. This is an important step but a lot of S-Corp owner might overlook it.
3. You may now doubt what tax benefit we are talking about as you see the deduction in S-Corp tax return but the taxable income has been increased in W-2. However, you do not only report the additional taxable income from W-2. You can also deduct it in form 1040 as adjustment to income. In short, the reporting in the owner’s personal tax return is a wash. The tax benefit is still taken from S-Corp level.
If you follow the above steps properly, you can secure the deduction in health insurance to S-Corp owner. Otherwise, the premium is not tax deductible in S-Corp.
(note: it is disallowed to reimburse employee’s individual health insurance except for owner. Other employees’ health insurance have to be through group plan. We are not discussing the health insurance to other employees other than to the owner in this article.)
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