Many trades owners and other small business owners set up an S corporation. If that's you, you may also work for your own company and get a W-2. That makes health insurance a little tricky.
The IRS has a special rule for owners who hold more than 2% of an S corp. This guide covers who counts, how the S corp should pay and report the premiums, and how the deduction works. If you run a sole proprietorship instead, see our guide to the self-employed health insurance deduction.
Who counts as a 2% shareholder
The IRS says a 2% shareholder is someone who owns more than 2% of the S corp's stock, or stock with more than 2% of the voting power. It counts if you own that much on any day of the tax year.
Shares can be owned directly or indirectly. Shares owned by some family members can count as yours under IRS attribution rules (section 318 of the tax code). A tax pro can tell you how this applies to your family.
For fringe benefits, the IRS treats a 2% shareholder like a partner in a partnership, not like a regular employee. That is why the usual tax-free treatment for job-based health insurance doesn't apply to you.
How the S corp pays and reports the premiums
As of October 14, 2026, under current law, the IRS says the S corp can deduct health insurance premiums it pays for a 2% shareholder. It must report them as wages on that owner's W-2, in box 1. They are subject to income tax withholding.
The premiums are not subject to FICA payroll taxes or federal unemployment (FUTA) tax if they are paid under a plan for all employees or a class of employees. In that case, the IRS says they go in box 1 of the W-2 but not in boxes 3 and 5.
The Form 1120-S instructions add two details. The S corp reports these fringe benefits for owners on line 7 or 8 of its return. It also reports the health insurance amount as an information item in box 14 of the owner's W-2.
Whose name can be on the policy
IRS Notice 2008-1 explains when a plan counts as set up by the S corp. One of two things must happen in the same tax year:
- The S corp pays the premiums for the policy that covers you (and your spouse or dependents, if covered).
- Or you pay the premiums, show the S corp proof, and the S corp pays you back.
The 2025 Form 7206 instructions say the policy can be in the S corp's name or in your own name. Either way, the premiums must end up in box 1 of your W-2.
If you buy a policy in your own name, pay for it yourself, and the S corp never pays you back or reports it, the IRS says the plan isn't set up by the S corp. You can't take this deduction for it.
How the owner's deduction works
When the steps above are done, you report the premiums as income on your return. Then you may be able to take the self-employed health insurance deduction on Schedule 1 (Form 1040), line 17. The IRS calls this an above-the-line deduction because it lowers your adjusted gross income.
You figure it with Form 7206 or the worksheet in the Form 1040 instructions. It can cover health insurance for you, your spouse, your dependents, and a child under 27 at the end of the year. Medical, dental, vision, and some long-term care insurance can count.
There are limits:
- The deduction can't be more than your wages from the S corp. Form 7206 uses the wages in box 5 of your W-2 for this.
- You can't count any month you could join a subsidized health plan through your employer or your spouse's employer, even if you didn't join.
- The same rule applies to a subsidized plan through the employer of your dependent or your child under 27.
These are general rules. Your facts matter, so talk to a tax pro before you file.
What 2% shareholders can't use
As of October 14, 2026, under current law, the IRS says a 2% shareholder can't take part in a QSEHRA. The IRS also says a 2% shareholder can't use a flexible spending arrangement (FSA) or an HRA through the S corp.
If you also have workers who aren't owners, the rules for them are different. The IRS warns that paying back their individual premiums outside an approved arrangement can lead to a tax of $100 a day per worker. Our guide on how to offer health insurance to employees covers the options for your crew.
Notice 2015-17 says S corps and their 2% shareholders may keep relying on Notice 2008-1 until the IRS says otherwise.
Marketplace plans and private plans
A 2% shareholder can buy a Marketplace plan and may also qualify for a premium tax credit. The IRS says Rev. Proc. 2014-41 explains how to figure both the deduction and the credit when you get both. The math can be complex, so ask a tax pro.
Some owners also look at a private PPO plan sold outside HealthCare.gov. It is not a Marketplace plan and can't get a tax credit. Some private plans ask health questions, and approval is not guaranteed. Some may not cover care for health problems you had before you enrolled. See our page on nationwide PPO plans for self-employed people or our nationwide private PPO health insurance page.
Daniels Health Advisors is licensed in 30+ U.S. states. We work with business owners in many fields, including the trades. See the industries we serve.