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Can I Use an S Corp to Pay for Health Insurance?

Lettuce : Nov 20, 2025

S Corp Benefits & Formation

Can I Use an S Corp to Pay for Health Insurance?

S Corp owners can deduct health insurance premiums through proper payroll and W-2 reporting, saving on taxes while staying compliant effortlessly.

Running your own business as a solopreneur means every dollar matters. Yet many S Corporation owners miss one of the easiest ways to lower their tax bill by having their S Corp pay for health insurance. When done correctly through payroll and reported on your W-2, those premiums can shift from a personal expense to a legitimate business deduction, often leading to significant annual tax savings.

In fact, S Corp owners holding more than 2 percent of company shares can have their corporation pay or reimburse their health insurance premiums. The business gets a deduction, and you can claim a personal one if the setup follows proper reporting rules. Too often, solopreneurs lose this benefit by skipping payroll steps or misreporting premiums. This guide shows how to make your S Corp work for you.

You’ll learn how to set up compliant premium payments, add them correctly to your W-2, and claim the personal deduction you deserve. Lettuce automates every part of the process, from payroll to reporting, so solopreneurs can focus on growing their business while staying fully compliant and tax-efficient.

Why Solopreneurs Should Use an S Corp to Pay for Health Insurance

Your health insurance premiums don’t have to stay a personal expense that shrinks your take-home pay. When you elect S Corp status, you gain access to a smart tax strategy that lets your business cover your health insurance while keeping you compliant with IRS rules.

Here’s why it matters: if you own more than 2 percent of your S Corporation, the company can pay or reimburse your health insurance premiums. The business deducts those payments, and when they’re reported correctly on your W-2, you can claim a personal deduction too. That creates a dual benefit, lowering both your corporate income and your personal tax burden.

To qualify, the plan must be established under your S Corp, the premiums must appear in Box 1 of your W-2, and you can’t claim the deduction for any month you or your spouse were eligible for employer-subsidized coverage.

This setup isn’t just about savings; it’s about simplicity. Once your S Corp handles premium payments through payroll and reports them properly, you can claim the self-employed health insurance deduction on your personal return (up to your earned income from the business). That means fewer compliance worries, cleaner records, and more time to focus on running your business and serving your clients.

How to Set Up Your S Corp to Pay for Health Insurance (the Right Way)

So, you’re ready to make your S Corporation pull its weight and help cover your health insurance. Great call. For solopreneurs who own more than 2 percent of their S Corp, the IRS allows you to turn those premiums into a legitimate, deductible business expense if you follow a few specific steps.

Here’s how to do it right, from start to finish.

1. Choose how your plan will be set up

Before you can deduct anything, the IRS says your S Corporation must first “establish” a health-insurance plan for you as a more-than-2 percent shareholder. That can happen in one of two ways, both perfectly legitimate under IRS Notice 2008-1.

Option A – Policy in your S Corp’s name

Your company buys the policy directly and pays the premiums from its business bank account. This is the cleanest method because the plan is automatically treated as being established under the S Corp.

Option B – Reimbursement arrangement

You purchase the health-insurance policy in your own name and pay the premiums personally. Then your S Corp reimburses you within the same tax year and includes the total amount in Box 1 of your W-2.

To keep it compliant, set this up through an accountable plan (a written reimbursement policy that documents the payment and its business purpose).

Once either setup is in place, the plan is considered established under the business, meeting the IRS’s requirement for deductibility. The company can now legitimately deduct the premiums, and you’ll be positioned to claim your personal deduction later on.

2. Run payroll and include premiums on your W-2

This step is where many solopreneurs slip up. The IRS requires S Corporations to treat health-insurance premiums for any shareholder who owns more than 2 percent of the company as part of that person’s Form W-2 wages. Doing this correctly ensures you qualify for the personal deduction later on.

Here’s what compliance looks like:

Include premiums in W-2 Box 1 (Wages, tips, other compensation). The total amount your S Corp paid or reimbursed for your health insurance goes here.
Exclude them from Boxes 3 and 5 (Social Security and Medicare wages). When reported properly, these premiums are not subject to FICA or FUTA taxes.
Optionally note them in Box 14. Many payroll systems use the label “2% SH Health Ins.” so your accountant sees exactly what was included.
Withholding rules. The premiums included in Box 1 are subject to federal and state income-tax withholding but not Social Security, Medicare, or FUTA withholding. This distinction matters—if you withhold FICA by mistake, you’ll have to fix it through a payroll correction.

This W-2 inclusion step isn’t a suggestion; it’s what unlocks your personal deduction. If you skip it, the IRS treats your premiums as a nondeductible personal expense, even if the business paid for them.

Once the amounts are reported accurately, your payroll records serve as the official link between your S Corp’s deduction and your own self-employed health-insurance deduction. That’s the kind of clean paper trail the IRS likes to see.

3. Claim the personal deduction on your tax return

Once your S Corp has handled payroll correctly, you can take the next step on your personal return.

The IRS lets more-than-2 percent S Corp shareholders claim a self-employed health insurance deduction, but only when the premiums were properly included in your W-2 (Box 1).

Here’s how to do it right:

Use Form 7206 (Health Insurance Deduction for Self-Employed Individuals). This form calculates the amount you can deduct and then flows directly to Schedule 1 (Form 1040), line 17, reducing your adjusted gross income (AGI).
Know your limits.
- Your deduction cannot exceed your earned income from the S Corp. If your wages from the company are $50,000, that’s your cap for this deduction. Any amount above the cap can be deducted as an itemized deduction.
- You can’t claim the deduction for any month when you or your spouse were eligible to participate in an employer-subsidized health plan, even if you chose not to enroll.
- If you bought coverage through the Health Insurance Marketplace and received premium tax credits, you’ll need to coordinate both benefits using Form 7206 so you don’t double-dip.
Apply it as an “above-the-line” deduction. This means it lowers your AGI directly; there is no need to itemize. Lower AGI can also improve eligibility for other deductions and credits, giving you a double boost.

When this step is done right, your health-insurance costs officially move from “personal expense” territory into “tax-smart deduction” territory. That’s money kept in your pocket, exactly as Congress intended when it designed the S Corp rules for owner-employees.

4. Keep solid documentation

Hold onto every proof of payment:

Premium invoices and receipts
Reimbursement records and an accountable plan (if applicable).
Payroll reports showing the W-2 inclusion
Tax filings and copies of Form 7206

If the IRS ever asks, you’ll have the paperwork ready to show that the plan was properly established under the S Corp.

5. Stay consistent with payroll

Your S Corp must run payroll to treat these premiums as part of employee compensation. Irregular or “on-the-fly” payments can raise red flags and invalidate the deduction. Keep a reasonable salary under IRS §162(a) and maintain steady payroll records.

6. Automate and double-check reporting

Tools like Lettuce can help track premiums automatically, calculate the W-2 Box 1 inclusion, and keep your reimbursements in sync with payroll. That means fewer manual errors, no missed deductions, and less time spent wrestling with forms.

Follow these steps, and your S Corp health-insurance setup will stay clean, compliant, and tax-efficient. The business gets its deduction, you get yours, and the IRS gets exactly what it wants — clear records. That’s the kind of teamwork any solopreneur can appreciate.

Frequently Asked Questions About S Corp & Health Insurance Deductions

You've got questions about making your S Corp work for your health insurance, and we've got answers. These are the real-world scenarios and IRS rules that matter most when you're ready to turn your health premiums into tax savings.

Is S Corp health insurance tax-deductible for solo owners?

Absolutely. Your S Corp can deduct health insurance premiums as a business expense, and you can claim the self-employed health insurance deduction on your personal return. The key is following the IRS requirements: your S Corp pays or reimburses the premiums, reports them as wages on your W-2, then you deduct them on Form 1040 Schedule 1.

Do I need to run payroll to claim the deduction?

Yes, payroll is non-negotiable for this deduction to work. The IRS requires that health insurance premiums for more-than-2% S Corp shareholders be reported as wages on your W-2 before you can claim the personal deduction. Without proper payroll reporting, you lose the deduction entirely, no exceptions.

What if I pay for insurance personally—can my S Corp still reimburse me?

Your S Corp can reimburse you, but only if it reports those reimbursements as wages on your W-2. According to IRS rules, if the policy is in your name and you pay personally, your S Corp must reimburse you and include those amounts in Box 1 of your W-2 for the plan to be considered "established under your business." Miss this step, and the IRS won't allow the deduction.

Are there limits or pitfalls to watch out for with S Corp health insurance?

The biggest pitfall is paying premiums personally without running them through payroll; this kills your deduction. You also can't claim the deduction for any month you were eligible for employer-subsidized coverage (including your spouse's plan). Watch out for compliance issues with employer payment arrangements that could trigger IRS penalties of $100 per day per employee.

How does Lettuce make S Corp health insurance deductions effortless for solopreneurs?

Lettuce automates the entire process, from calculating your reasonable salary to processing payroll with correct W-2 reporting for health premiums. Our system tracks your premiums, ensures proper reporting, and maximizes your S Corp tax benefits without the manual math or compliance headaches. You focus on your business while Lettuce handles the IRS requirements automatically.

Take Control: Automate S Corp Health Insurance and Taxes with Lettuce

Your S Corp can pay for your health insurance, and when it’s handled correctly, those premiums turn into real tax savings. The challenge isn’t knowing the rule; it’s following it precisely: tracking premiums, reporting them on your W-2, running payroll, and staying IRS-compliant.

That’s where Lettuce comes in. Lettuce automates every moving piece, reasonable-salary setup, monthly payroll, W-2 reporting, and health-insurance deduction tracking so you never miss a step or a deduction. You get transparent reporting, accurate filings, and the confidence that your S Corp is running by the book.

Stop overpaying and start automating.

Let Lettuce handle the compliance details while you focus on growing your business and keeping more of what you earn. See how much you could save.