Shareholders of an S-Corporation who work directly for (or operate) the corporation (aka, ‘Shareholder Employees’) can generally deduct the cost of health insurance premiums as a business expense. In order to be deductible, both of the following must occur prior to the end of the tax year (December 31, typically):
- The health insurance policy can be taken out in the name of the shareholder employee but the monthly premiums must be either directly paid for by the s-corporation or reimbursed by the s-corporation. The health insurance premium expense must ultimately be incurred by the s-corporation.
- The total annual amount of the health insurance premiums must be included and shown on the shareholder employee’s W-2 as salary/wage income (Box 1 of the W-2) (note: this will subsequently allow the s-corporation to deduct the health insurance premium as a wage expense on its P&L).