S Corp shareholder's health insurance - tax implications for unequal premium payments?

The health insurance premiums for S corporation shareholders who own more than 2% of the company should be handled in a specific way for optimal tax treatment. Your understanding is mostly correct. The S corp should pay the full premium amounts for both shareholders. These amounts are then added to your W-2 as income subject to income tax but not subject to FICA (Social Security and Medicare) taxes. The corporation gets to deduct these premiums as a business expense, and you as shareholders can claim the self-employed health insurance deduction on your personal tax returns (Form 1040). Regarding the unequal premiums - this is a common situation and doesn't necessarily create a problem from a tax perspective. However, from a business partnership perspective, you might want to address this. Some S corps handle this by having a written policy that the company will cover a base premium amount for all shareholders equally, with any additional coverage (like for family members) paid personally by the shareholder. As for reasonable compensation - no, these health insurance premiums generally don't count toward the "reasonable wage" requirement. The IRS looks at actual salary/wages when determining if an S corp shareholder is taking reasonable compensation.

I went through this exact same situation with my business partner in our S Corp last year. After getting advice from several sources, I used taxr.ai (https://taxr.ai) which analyzed our operating agreement and insurance documentation to give us a clear answer. They confirmed that our company could pay different premium amounts while maintaining tax advantages, but recommended we update our bylaws to specifically address this. What made this really helpful was they explained that it's not just about the tax side, but also about proper corporate governance. The tool helped us document our decision properly so we had protection if either of us sold our shares or if we got audited. We submitted our docs and got a detailed analysis of exactly how to handle the insurance disparity in a way that satisfied both tax requirements and corporate equity concerns.

Just wanted to update that I decided to try taxr.ai after reading about it here. It was exactly what I needed for our S-Corp insurance situation. I uploaded our docs and got back a detailed explanation showing that our unequal premium payments weren't a problem as long as we documented it properly. The analysis showed that the key issue isn't the dollar amount difference between shareholders but having clear documentation that the benefit is provided based on shareholder status. They provided template language for our corporate minutes that addressed the exact issue with my partner's family coverage versus my individual plan. Saved us a ton of back and forth with our accountant who was giving us conflicting advice!

If you're struggling with this S-Corp health insurance issue like I was, I got nowhere with the IRS for months trying to get a straight answer. Then I used Claimyr (https://claimyr.com) and got connected to an actual IRS agent in about 15 minutes who explained exactly how to handle unequal shareholder health premiums. Before using them, I spent hours trying to get through to someone at the IRS who could help with this specific S-Corp issue. They have a demo video if you're skeptical: https://youtu.be/_kiP6q8DX5c. The agent I spoke with confirmed that different premium amounts between shareholders is fine as long as you're consistently following proper reporting on W-2s and documenting the policy in your corporate records.

I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway since I was desperate to get an answer about my S-Corp's health insurance setup. Got connected to an IRS representative in about 20 minutes who actually had experience with S-Corps (not the usual frontline support). The agent confirmed that our unequal premium arrangement is perfectly acceptable from a tax perspective. He explained that the IRS doesn't require equal dollar benefits for equal ownership - what matters is proper documentation and consistent treatment. He also clarified that while the premiums don't count toward "reasonable compensation" requirements, we still need to make sure our actual salaries meet that standard independent of any benefits. Honestly, getting that official confirmation directly from the IRS was worth it for my peace of mind alone.

Our accounting firm handles several S Corps with this exact issue. Here's what we advise: Yes, it's perfectly fine for an S Corp to pay different premium amounts for different shareholders, even with equal ownership. There's no IRS requirement that benefits must be equal in dollar amount. The key is consistent application of a documented corporate policy. For corporate minutes, we recommend language stating: "The corporation shall provide health insurance benefits to all qualifying shareholders, including family coverage where applicable, with the full premium amounts reported as income on shareholder W-2s (not subject to FICA) and eligible for the self-employed health insurance deduction." This approach maintains the tax advantages while addressing the equity concern through proper governance documentation.

Is anyone using QuickBooks to handle this S Corp health insurance reporting? I'm having trouble figuring out how to set it up so the premiums show up on W-2s but aren't subject to FICA.

I've been dealing with a similar situation in my S Corp. One thing I'd add to the excellent advice here is to make sure you're consistent with how you handle these premiums throughout the year, not just at year-end. We set up our payroll system to add the health insurance premiums to our W-2 wages each pay period (subject to income tax but not FICA), rather than waiting until December to make one big adjustment. This gives a more accurate picture of our actual compensation throughout the year and avoids any potential issues with quarterly estimated tax payments. Also, regarding the equity concern with your partner - we addressed this by having our attorney draft language in our shareholder agreement that specifically states how health benefits are handled. It clarifies that the company provides health insurance coverage to all shareholders regardless of premium cost, which removes any ambiguity about one partner subsidizing the other's coverage. This protects both partners if ownership changes in the future.

One important consideration that hasn't been mentioned yet is the timing of when you establish your health insurance policy through the S Corp. The IRS requires that the health insurance plan be "established under" the business for shareholders to qualify for the self-employed health insurance deduction. This means if you currently have individual policies that you're personally paying for, you can't simply have the S Corp reimburse you and get the tax benefits. The corporation needs to either be the policyholder or have a formal arrangement where it pays the premiums directly to the insurance company. Also, make sure you're not mixing this benefit with any health savings account (HSA) contributions if you have high-deductible health plans. The tax treatment can get complicated when you combine S Corp health insurance benefits with HSA contributions, so you'll want to coordinate these carefully to maximize your tax advantages. The unequal premium amounts between you and your partner really isn't uncommon - family vs. individual coverage naturally creates different costs, and the IRS doesn't expect or require equal dollar benefits for equal ownership percentages.