Health Insurance Deduction Options for Small Business Owners

Health insurance deduction by entity type:

Sole proprietor / single-member LLC (Schedule C):

• The self-employed health insurance deduction (IRC 162(l)) allows the owner to deduct premiums for themselves, their spouse, and dependents as an above-the-line deduction on Form 1040 (Schedule 1, Line 17).
• This deduction reduces adjusted gross income (AGI), which affects the QBI deduction, student loan interest deduction, and ACA premium tax credit.
• Limitation: the deduction cannot exceed the net profit from the business.
• The deduction does NOT reduce self-employment tax (it reduces income tax only).

S-Corp (>2% shareholder):

• The S-Corp pays or reimburses the shareholder’s health insurance premiums.
• The premiums are included on the shareholder’s W-2 (Box 1, but NOT in Box 3 or 5, meaning they are subject to income tax but NOT subject to FICA).
• The shareholder then claims the self-employed health insurance deduction on Schedule 1, offsetting the W-2 inclusion.
• Net effect: the premiums are deductible for income tax purposes, not subject to FICA, and the S-Corp gets a deduction for the W-2 wages (including the health insurance premium).
• Critical compliance: the premiums MUST be included on the W-2. If the S-Corp pays for health insurance but does not include it on the W-2, the deduction is disallowed.

C-Corp:

• The C-Corp provides health insurance as a tax-free fringe benefit (IRC 106).
• Premiums paid by the C-Corp are deductible by the corporation as a business expense.
• Premiums are NOT included in the shareholder-employee’s income.
• No self-employed health insurance deduction needed (the benefit is already tax-free).
• This is one of the few genuine tax advantages of a C-Corp for small businesses: the health insurance is completely excluded from income and payroll taxes.

Partnership / multi-member LLC:

• Same treatment as sole proprietor: the partner takes the self-employed health insurance deduction on Schedule 1.
• The partnership must report the premiums as a guaranteed payment (or reduce the partner’s distributive share by the premium amount and report it separately).

QSEHRA (Qualified Small Employer Health Reimbursement Arrangement):

• For businesses with fewer than 50 employees that do NOT offer a group health plan.
• The employer reimburses employees (including the owner in a C-Corp, but NOT in an S-Corp for >2% shareholders) for individual health insurance premiums and medical expenses.
• Reimbursements are tax-free to the employee and deductible by the employer.
• 2025 maximum: $6,350 for self-only, $12,800 for family.

ICHRA (Individual Coverage HRA):

• For businesses of any size.
• The employer sets a monthly allowance for health insurance premiums.
• Employees purchase their own insurance on the individual market.
• Reimbursements are tax-free and deductible.
• No maximum limit.