Business

Feb 23, 2026

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Health Insurance for Business Owners: What’s Deductible, What’s Not, and How to Avoid Expensive Reporting Mistakes

Health insurance for business owners touches three systems at once: payroll, bookkeeping, and taxes. When those systems are not aligned, you can pay the premium and still lose the deduction. This guide covers the four most common coverage setups, what is and is not deductible in each, and where things break down when coordination fails.

Written by: Spencer Carroll, CPA

Overview

Business owners often pay health insurance premiums the wrong way and lose the deduction entirely without realizing it.

S corp owners face a specific W-2 reporting requirement that controls whether the deduction is allowed at all.

Out-of-pocket medical costs are generally not deductible for high earners due to the 7.5% AGI threshold.

HSAs, HRAs, and marketplace subsidy reconciliation each carry planning opportunities that most business owners overlook.

Table of Contents

Every year during open enrollment, we get the same questions from founders and high earners.

“What should I pick?”
“Can my business pay for it?”
“Is this deductible?”
“My payroll provider says one thing, my bookkeeper says another, and my CPA says it depends.”

They are not wrong. Health insurance touches three systems at once: payroll, bookkeeping, and taxes. If those systems do not talk to each other, you can pay the premium and still lose the deduction.

Here is how to think about it.

Start with the four scenarios

Most business owners land in one of these setups:

Individual plan through the marketplace (state or federal exchange)
Individual plan outside the marketplace (private insurer)
Covered under a spouse’s employer plan
- the spouse’s employer covers all costs
- or you pay part of the cost
Business-sponsored coverage
- group plan for employees
- or a reimbursement arrangement depending on entity type

Once you know which bucket you are in, the tax treatment becomes much easier.

What is “deductible” depends on what you are paying

Let’s get precise, because this is where people talk past each other.

Health insurance premiums are what you pay just to be insured.

Premiums are not:

deductibles
co-pays
coinsurance
prescriptions
out-of-pocket maximum amounts

Most of the time, when business owners say “my health insurance costs are deductible,” they mean premiums.

That is generally true.

Out-of-pocket medical spending is a different conversation.

Marketplace plans: subsidies get reconciled later

If you buy coverage through the marketplace, you may receive a subsidy based on expected income.

When you file your return, that subsidy gets reconciled based on actual income:

if you earned more than expected, you may owe some subsidy back
if you earned less, you may qualify for additional credit

This is why variable-income founders should treat marketplace planning as part of tax forecasting, not just a benefits decision.

S corps: the deduction lives or dies on W-2 reporting

If you are a pass-through business owner, your entity type determines how the premiums must be paid and reported.

Single-member LLC taxed as disregarded (Schedule C)

This is the simplest setup.

Whether you pay personally or from the business account, the premiums flow to your personal return and you can generally take the deduction if you qualify.

There is no W-2 reporting requirement.

S corporation (2%+ shareholder)

This is where people mess it up.

If you are a more-than-2% shareholder in an S corp, premiums need to be handled in a specific way for you to get the deduction:

the business pays the premiums directly, or reimburses you
premiums must be reported on your W-2 in the correct boxes
payroll and bookkeeping need to code it correctly

This is the trap.

We see founders pay the premiums personally and never get reimbursed or recorded properly. On an S corp, that can mean you lose the deduction.

And no, “we’ll fix it at tax time” is not always a real fix if payroll and reporting were not set up correctly.

A common fear: “if it’s on my W-2, am I getting taxed on it?”

Here is the nuance.

For S corp owners, premiums typically get included in Box 1 wages (income tax wages), but not in Social Security or Medicare wage boxes. Then your return takes a matching adjustment so your taxable income does not increase if it is prepared correctly.

Your W-2 can look higher. Your actual tax can stay the same. The purpose is to meet the reporting requirement so the deduction is allowed.

This is why having professional tax prep matters. Small technicalities create real dollars.

Who is responsible for what (and why this breaks)

This is the “hot potato” problem we see every year.

Health insurance touches three roles:

You pick the plan and decide how it will be paid.
Payroll admin/provider configures reimbursement and W-2 treatment if required.
Bookkeeper records payroll entries correctly in the books.
Tax team claims the deduction correctly on the return.

If any one of those is missing, you can end up with:

premiums paid but not deducted
W-2 reported incorrectly
books that do not match payroll
tax returns that miss adjustments

Most problems are coordination problems, not tax law problems.

What is deductible beyond premiums

This is where people get disappointed.

For most business owners operating as pass-through entities:

premiums are generally deductible (with correct structure)
out-of-pocket medical expenses (co-pays, dental, prescriptions, travel for medical care, etc.) generally fall into itemized deductions and are limited

Medical itemized deductions are typically only deductible to the extent they exceed 7.5% of adjusted gross income.

For high earners, that threshold can wipe out most of the benefit.

This is why founders sometimes feel like they are “stuck” paying large medical costs with after-tax dollars.

Sometimes they are.

When a C corporation and HRA can make sense

There is an advanced solution for a narrow profile:

A properly structured health reimbursement arrangement (HRA) inside a C corporation can allow certain medical reimbursements to be tax-free to the owner as an employee, while remaining deductible to the corporation.

But this is not a casual move.

Key constraints to understand:

HRAs often need to apply broadly to eligible employees, not just the owner
C corporations introduce other tax tradeoffs, including double taxation
this strategy works best for owners with consistently high medical costs year over year

This is not “you had one expensive year, let’s flip to a C corp.”

This is “you have a recurring pattern and the numbers justify the complexity.”

For the right client, it can save a lot. For most, it is the wrong tool.

Talk to an expert now.

Learn more

HSA strategy: the closest thing to a “perfect” tax account

If you choose an HSA-eligible high deductible plan, an HSA can be one of the most powerful long-term tax tools available.

HSAs have a triple advantage:

contributions reduce taxable income
growth is tax-free
withdrawals for qualified medical expenses are tax-free

The part most people miss: you can reimburse yourself later.

If you pay medical expenses out of pocket and keep clean receipts, you can withdraw that amount from the HSA years later, tax-free, while the money stays invested in the meantime.

For disciplined founders, that is why some people treat the HSA like a stealth retirement account.

The strategy only works if you keep documentation.