Health Insurance for Your Business: A Simple Error May Deny Your Deduction

As a business owner, you most likely provide health benefits for you and your employees. Even if you do not have employees, having a health insurance policy in your business may save you money.

As a self-employed taxpayer, you are allowed to deduct from your adjusted gross income, 100% of the cost of the health insurance policy. While this may not save in self-employment tax, the deduction will reduce your overall tax liability. You can title the policy in your name or in the name of your business.

If your business is a C corporation, the policy must be established by the business and in the business name. C corporations are allowed to deduct the cost of health insurance provided to the shareholders while remaining tax-free to the shareholder.

If your business is an S corporation, the policy must be established by the business, but not necessarily in the business name. A plan providing medical care coverage for the 2% shareholder in an S corporation is established by the S corporation if: (1) the S corporation makes the premium payments for the policy covering the shareholder (including a spouse or dependents, if applicable); or (2) the 2% shareholder makes the pre­mium payments and furnishes proof of payment to the S corporation, and then the S corporation reimburses the shareholder for the premium payments in the current taxable year. If the insurance premiums are not paid or reimbursed by the S corporation and included in the shareholder’s income, a plan providing medical care coverage for the shareholder is not established by the S corporation and the shareholder is not allowed the deduction. Provided these two conditions are met, and the payment for the premiums is included as wages to the shareholder, the shareholder is allowed a deduction on Form 1040, line 29, against income.