2% Shareholder Health Insurance for S Corps Explained

Generally, a person who owns more than 2% of the S-corp's stock — directly or by attribution — at any time during the year. For most solo S-corp owners, this is you.

• The S-corp pays the health insurance premiums for the more-than-2% shareholder.
• Premiums are typically included in W-2 Box 1 wages.
• When set up properly, they are usually excluded from Social Security and Medicare wages.
• The owner may deduct premiums as self-employed health insurance on the personal return, subject to limits.

Health insurance handling affects gross W-2 wages, which can affect how you think about how much to pay yourself. Many owners confuse total W-2 Box 1 wages with their reasonable salary; the 2% shareholder health treatment is one common reason those numbers differ.

Suppose your S-corp pays $9,000 of health premiums for you during the year, and your cash salary is $60,000. Your W-2 Box 1 wages may be reported around $69,000, while Social Security and Medicare wages may stay around $60,000 if the premiums are properly excluded. You'd then look at the self-employed health insurance deduction on your personal return.

• Forgetting to include premiums on the W-2 at year-end.
• Treating premiums as a normal employee benefit (subject to all payroll taxes) by accident.
• Assuming the personal deduction is automatic — it's subject to specific rules.
• Mixing this up with HRA or QSEHRA arrangements, which have their own rules.

The S-corp salary calculator focuses on cash salary and distribution planning. Health insurance handling is typically layered in by your payroll provider and CPA at year-end.