S Corporation Owner Medical Expenses - Tax Treatment and W-2 Reporting?

The handling of medical expenses for S Corp owners has some specific rules. As a 100% owner, here's what you need to know: Health insurance premiums paid by your S Corp for you (the more-than-2% shareholder) must be reported as wages on your W-2, but they're not subject to FICA or FUTA taxes. So they'll show up in Box 1 of your W-2, but not in Boxes 3 and 5. The good news is you can then take a self-employed health insurance deduction on your personal tax return (Form 1040, Schedule 1), which essentially makes those premiums tax-deductible as long as the S Corp established the plan and either paid the premiums directly or reimbursed you. For other medical expenses (like your procedure costs), those aren't business expenses of the S Corp. You'd need to handle those through either a qualified Health Reimbursement Arrangement (HRA) or include them as taxable compensation. With an HRA, the corporation can reimburse you tax-free up to certain limits. Make sure everything is properly documented with a written plan to withstand potential scrutiny from the IRS.

I went through this exact headache last year with my S Corp! After trying to figure it out on my own and getting completely lost, I found this AI tool called taxr.ai (https://taxr.ai) that analyzes tax situations for S corps and small businesses. I uploaded my health insurance statements and some details about my S Corp structure, and it walked me through exactly how to handle the health insurance premiums properly. It confirmed what the previous commenter said - that the premiums need to be included on the W-2 but you can deduct them on your personal return. The tool also flagged that I needed to have the health insurance policy established under the corporation's name rather than my personal name to maximize the tax benefits. Honestly saved me from making a costly mistake.

I was skeptical about taxr.ai but decided to try it for my S-Corp medical expense situation. I'm actually impressed with the results. The system analyzed my specific scenario (3 shareholders with different ownership percentages) and gave me a detailed breakdown of how to handle each person's health benefits correctly. The tool caught that we had been incorrectly treating all medical reimbursements the same way regardless of ownership percentage. For our 15% shareholder, we had been unnecessarily including their health insurance on their W-2 when we didn't need to (since they're below the 2% ownership threshold). It also helped me set up proper documentation for our health reimbursement arrangement. I expected some generic advice but it actually provided customizable templates specific to our business structure. Saved me a ton of research time!

I was skeptical about taxr.ai but decided to try it

If you're dealing with S Corp health insurance issues or really any complex IRS questions, don't waste days trying to get through to the IRS phone lines like I did. I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes when I had been trying for weeks. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c My specific issue was that the IRS had questioned how we reported health insurance on our shareholder-employees' W-2s, and I needed clarification directly from them. After Claimyr got me through, the agent walked me through the correct coding for Box 14 on the W-2 and confirmed our approach to health premium reporting. Figured I'd share since S Corp health insurance reporting is such a headache and sometimes you just need to speak directly with the IRS.

I want to apologize for being so skeptical about Claimyr. After posting my dubious comment, I decided to try it myself since I'd been struggling with an S Corp health benefit reporting issue that I couldn't resolve through the IRS website. Well, I'm genuinely shocked - it actually worked exactly as described. I got a call back in about 20 minutes, and then was connected to an IRS representative who specialized in business tax issues. I explained my situation with how we'd been reporting our shareholder's health insurance (we'd been deducting it as a business expense without adding it to their W-2), and the agent clearly explained why this was incorrect and how to fix it. For anyone dealing with S Corp medical expense questions like the original poster, sometimes getting direct IRS confirmation is the only way to be 100% confident. This saved me from continuing an incorrect reporting method that could have triggered an audit.

One thing nobody's mentioned yet is that if you have an S Corp, you should really consider setting up a QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) to handle health expenses in a tax-efficient way. I've had one for my single-owner S Corp for 2 years. The main benefits: 1) The S Corp can reimburse both insurance premiums AND out-of-pocket medical costs tax-free up to the annual limits ($5,850 for individual coverage in 2023), 2) You avoid payroll taxes on these amounts, and 3) It's all properly documented for the IRS. The health insurance still needs to show up on your W-2, but a properly structured QSEHRA simplifies everything else about medical expense handling.

Has anyone here actually gotten audited specifically about S Corp health insurance treatment? I'm curious what the real-world risk is. I've been just paying health insurance personally and taking the self-employed health insurance deduction without running it through my S Corp payroll at all... which I'm now realizing might be incorrect after reading this thread.

Thanks for sharing your audit experience - that's exactly the kind of real-world insight that's helpful! It sounds like the IRS is definitely paying attention to this area. For anyone in a similar situation to @Sasha Ivanov, you'll want to correct this for future years. The proper flow should be: S Corp pays or reimburses health insurance premiums → those amounts get added to your W-2 as wages (but not subject to FICA/FUTA) → you then take the self-employed health insurance deduction on your personal return. Just paying personally and taking the deduction skips the crucial W-2 reporting step that the IRS expects to see. It's one of those things that might fly under the radar for a while, but if you do get audited, it's an easy thing for them to catch since the deduction on your personal return won't match up with any corresponding W-2 wages. The good news is this is usually fixable by amending prior year returns if needed, though you'll want to consult with a tax professional about the best approach for your specific situation.