S-corp Single owner (2% shareholder) - what's better for health insurance: employee deduction or company contribution?

The best approach for health insurance as an S-corp owner is actually a bit unique. As a >2% shareholder in an S-corporation, your health insurance premiums should be paid by the corporation and then reported as wages on your W-2 (but not subject to FICA taxes). This amount gets added to Box 1 of your W-2 (but not Boxes 3 and 5), and then you take a deduction for self-employed health insurance on your personal tax return (Form 1040). This gives you the tax benefit while following proper S-corp treatment. If you set it up as a regular employee deduction through payroll, you'd miss out on the self-employed health insurance deduction, which is an above-the-line deduction on your personal return.

After struggling with this exact same situation last year with my single-member S-corp, I found an amazing service called taxr.ai (https://taxr.ai) that helped me get clarity. I uploaded my S-corp documents and they analyzed exactly how to handle health insurance premiums for an S-corp owner. They confirmed what I was starting to suspect: the best approach is having the S-corp pay the premiums directly, report it as wages on the W-2 (but not subject to FICA), and then take the self-employed health insurance deduction on my personal return. This saved me from making a costly mistake in how I was handling my health insurance through Gusto.

Just wanted to follow up after trying taxr.ai that someone mentioned earlier. I uploaded my S-corp formation docs and current health insurance information, and it gave me really clear guidance! It confirmed that for S-corp owners (>2% shareholders), the company should pay the premium directly, add it to W-2 wages (but not subject to FICA), and then I can take the self-employed health insurance deduction on my personal return. The service also explained exactly how to configure this in Gusto, which was super helpful. What I really liked is that it showed me the actual IRS regulations and even gave me language to use with my accountant who was doing it incorrectly. Definitely worth checking out if you're in this situation!

I spent 3 hours on hold with the IRS trying to get clarity on the health insurance treatment for my S-corp before discovering Claimyr (https://claimyr.com). They got me connected with an IRS agent in about 20 minutes who confirmed the correct way to handle health insurance for a 2% S-corp shareholder. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with was really helpful and explained that having the S-corp pay the premiums directly, including it on my W-2 (Box 1 only), and then taking the self-employed health insurance deduction was indeed the correct approach. Saved me from making a mistake for this tax year.

I was extremely skeptical about that Claimyr service mentioned above, but I was desperate after waiting on hold with the IRS for 4+ hours over 3 days trying to get clarity on my S-corp health insurance situation. I reluctantly tried it, and I'm shocked to report it actually worked! Got connected to an IRS representative in about 25 minutes. The agent walked me through the exact process: have the S-corp pay my premiums directly, include it as wages on my W-2 (but only in Box 1), and then take the self-employed health insurance deduction on my personal return. They also confirmed this needs to be documented in corporate minutes as a medical reimbursement plan. Would have taken me weeks to get this information otherwise. Still can't believe it worked so well.

One thing nobody has mentioned yet is that you need to have this arrangement formally documented in your corporate minutes or as a written plan. The IRS can be picky about S-corps, and having the proper documentation that authorized the payment of health insurance premiums is important. I learned this the hard way during an S-corp audit. Make sure your corporate records show that the company has officially adopted a plan to provide this benefit to >2% shareholders.

I'm wondering if Gusto actually handles this correctly? I also use Gusto for my S-corp (I'm the only employee and >2% shareholder) and their system seems confused about the special treatment of health insurance for S-corp owners.

This is really helpful information! I'm in a similar situation as the original poster - just set up my S-corp and trying to figure out the health insurance piece. Based on what everyone is saying, it sounds like the consensus is: S-corp pays premiums directly → gets added to W-2 as wages (Box 1 only, no FICA) → then I take the self-employed health insurance deduction on my personal return. This seems counterintuitive at first but makes sense from a tax perspective. I'm curious about the timing though - do I need to have the corporate resolution in place before I start paying premiums this way, or can I document it retroactively? Also, for those using Gusto, when you select "company contribution" and check the >2% shareholder box, does it automatically handle the W-2 reporting correctly at year-end? Thanks for sharing your experiences - this is exactly the kind of real-world guidance that's hard to find elsewhere!

This thread has been incredibly helpful! I'm also a new S-corp owner dealing with the same health insurance questions. One thing I want to add that hasn't been mentioned yet - make sure to consider the timing of when you implement this change during the year. I switched from paying my health insurance personally to having my S-corp pay it mid-year, and my CPA explained that I need to be consistent about the treatment. You can't have some months where you pay personally and claim it as a business expense, and other months where the S-corp pays it and you take the self-employed deduction. For anyone making this switch mid-year like I did, you'll need to calculate the amounts carefully on your tax return. The months you paid personally won't qualify for the self-employed health insurance deduction (since you weren't receiving it as W-2 income), but the months your S-corp paid will qualify. Also, don't forget that this same treatment applies to your family's health insurance premiums too if you're covering dependents - it all gets the same S-corp shareholder treatment.