If you own more than 2 percent of an S corporation, the good news is that the rules for deducting your health insurance remain unchanged for 2026. By following a few important steps, you can continue to deduct the cost of coverage for yourself, your spouse, your dependents, and your children under age 27.
To qualify, your S corporation must either pay your health insurance premiums directly or reimburse you for them. The corporation must then include the premium amount as taxable wages in box 1 of your Form W-2, but not in boxes 3 or 5. You can then claim the self-employed health insurance deduction on your individual tax return if you meet the eligibility requirements.
One of the most common mistakes involves compensation. Your deduction cannot exceed your box 5 Medicare wages. If you take little or no salary, you may lose part or all of the deduction, even though the premiums appear on your W-2.
You cannot take the deduction if you or your spouse is eligible for employer-subsidized health insurance. If your spouse can get family coverage as a tax-advantaged fringe benefit at their job, you lose the deduction – even if your spouse never actually enrolls in coverage.
Another trap affects family members who work in the business. Under the tax law’s family attribution rules, certain relatives may be treated as shareholders even if they own no stock directly. This can change how their health insurance must be reported and deducted.
Finally, be careful if you reimburse non-owner employees for individually purchased health insurance. Doing so outside an approved arrangement can trigger IRS penalties.