Can My S Corp Pay My Health Insurance? And 5 Other Rules Owners Skip
Yes, your S corp can pay your health insurance. The catch: if you own more than 2% of the company, the S corp has to pay or reimburse the premiums and put them on your W-2. If it doesn't, you lose the deduction. Here's the problem I keep seeing:
"S corp owners have to pay their health care premiums through their S corp, and they just... for some reason, they can never do it."
Health insurance is the one people ask about. But it's one of a handful of S corp rules that owners find annoying and skip. Below is each one: the annoying part, why it matters, and what doing it right looks like.
Can my S corp pay my health insurance?
Yes. For these rules, you're a "2% shareholder" if you own more than 2% of the company's stock on any day of the year. If you own your S corp outright, or split it with a partner, that's you.
The annoying part
The premiums have to go through the company and onto your W-2. Paying them from your personal account feels simpler, especially when the policy is in your own name.
Why it matters
The IRS is direct about this in Notice 2008-1. If the S corp doesn't pay or reimburse the premiums and include them in your wages, there is no plan "established by the S corporation," and you can't take the health insurance deduction under Section 162(l).
The IRS's own example: an owner buys a policy in their name, pays the premiums personally, and the company pays nothing back. No deduction.
What doing it right looks like
- The S corp pays the premiums. Or you pay them, give the company proof, and it reimburses you in the same tax year. The policy can be in your name or the company's.
- The premiums go on your W-2 as wages in Box 1. They're subject to income tax withholding. They're left out of Boxes 3 and 5, so there's no Social Security or Medicare tax on that amount.
- The amount also shows in Box 14 as an information item.
- You deduct the premiums on your personal return, on Schedule 1 (Form 1040), using Form 7206 to figure the amount (2025 forms).
- It goes on the W-2, not the K-1. The IRS says Schedule K-1 and Form 1099 "should not be used as an alternative to the Form W-2" for this.
One limit: you can't take the deduction if you or your spouse was eligible to participate in any subsidized health care plan.
A note on HSAs. The same 2% rule changes how health savings accounts work for you. As a 2% shareholder, you can't make pre-tax (salary-reduction) HSA contributions through the company. Company contributions to your HSA are treated as distributions or guaranteed payments, depending on the facts (IRS Publication 15-B, 2026).
If last year's premiums never made it onto your W-2, don't try to patch it on your own. Talk to us first.
The other S corp rules owners skip
Here's how I see the rest of them:
"Some of the annoying compliance things of S corps are these. But if you do them, then your audit risk is down. And, oh, by the way, I've been through audits. They're not fun."
1. Pay yourself a reasonable salary, through real payroll
The annoying part: Payroll means withholding, tax deposits, a Form 941 every quarter, and a W-2 by January 31. Taking everything as distributions is easier.
Why it matters: The IRS says S corps "must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made." It has the authority to reclassify distributions as wages subject to employment taxes, and courts have upheld that. The IRS also warns owners not to take their pay as "cash distributions, payments of personal expenses, and/or loans rather than as wages."
What doing it right looks like: There's no formula. In the IRS's words, "There are no specific guidelines for reasonable compensation in the Code or the Regulations." Instead, the IRS lists factors, including:
- your training and experience
- your duties and responsibilities
- the time and effort you devote to the business
- what comparable businesses pay for similar services
- what you pay employees who aren't owners
We look at your role and your numbers to set a salary that fits those factors, then run it through payroll every pay period. If you're still deciding whether an S corp makes sense at all, start with our post on S corp tax savings in New Jersey.
2. Take distributions in proportion to ownership
The annoying part: With two or more owners, someone always needs cash first.
Why it matters: An S corp can have only one class of stock. That means every share has to carry identical rights to distributions and liquidation proceeds, as set by your governing documents: articles, bylaws, state law and binding agreements. Distributions that differ in timing or amount don't automatically break that rule. But the regulations say they "are to be given appropriate tax effect" based on the facts. And the income on each owner's K-1 is split by percentage of stock, figured day by day, not by who took the cash.
What doing it right looks like: When you take a distribution, pay every owner in proportion to their shares, at the same time. If one owner needs money and the others don't, talk to us before anyone writes the check.
3. Reimburse yourself through an accountable plan
The annoying part: Turning in receipts and expense reports to your own company.
Why it matters: If you're an officer who works in your S corp, you're its employee. Paying personal bills out of the business account blurs the line between wages, distributions and business expenses. That's the "payments of personal expenses" the IRS warns about above. And skipping the reimbursement doesn't get you a personal deduction instead. Unreimbursed employee expenses are a miscellaneous itemized deduction that's no longer allowed. And if you could have been reimbursed but didn't claim it, you can't deduct the expense.
What doing it right looks like: An accountable plan has three conditions:
- The expenses are business expenses you paid while working for the company.
- You back them up with receipts or records within a reasonable time.
- You return anything you were paid beyond your documented expenses within a reasonable time.
Paid that way, reimbursements aren't wages and aren't subject to income, Social Security, Medicare or FUTA tax. Paid without those conditions (a "nonaccountable plan"), they're wages, with payroll taxes on top (IRS Publication 15, 2026).
4. File on time
The annoying part: For a calendar-year S corp, the return is due in March, and it needs clean books behind it.
Why it matters: Form 1120-S is generally due by the 15th day of the third month after your tax year ends. For calendar-year 2025 returns, that was March 16, 2026. Shareholders' K-1s are due the same day. If you need more time, you request an extension on Form 7004.
File late and the penalty is charged per shareholder, per month:
- $255 per shareholder for each month or part of a month late, up to 12 months, for returns required to be filed in 2026.
- $260 per shareholder per month for returns required to be filed in 2027 (your 2026 return).
- Separately, $340 for each K-1 not given to a shareholder on time or missing required information (2025 Form 1120-S instructions).
Here's what the late-filing penalty looks like at the 2027 rate (illustrative, no tax due):
| Shareholders | Months late | Penalty |
|---|---|---|
| 1 | 2 | $520 |
| 2 | 6 | $3,120 |
| 2 | 12 | $6,240 |
"If you don't do it correctly, there is no, oh, I'm sorry, I'll do it better next time. They send you a bill for $3,000 or 5 or whatever it is. So do it correctly."
New Jersey too. The NJ return (CBT-100S) is due the 15th day of the month after the federal return was originally due. Since privilege periods beginning on or after December 22, 2022, a federal S corp no longer needs a separate New Jersey S election; it files a Shareholder Jurisdictional Consent with its return instead. The NJ minimum tax still applies: $375 to $1,500, based on NJ gross receipts (2025 CBT-100S instructions).
5. Track your basis with Form 7203
The annoying part: Another form, with numbers that carry forward year to year.
Why it matters: You must file Form 7203 in any year you:
- claim a deduction for your share of an S corp loss,
- receive a non-dividend distribution,
- sell or otherwise dispose of S corp stock, or
- receive a loan repayment from the S corp.
What doing it right looks like: Keep it up every year. The IRS itself suggests completing Form 7203 even in years it isn't required, "as this will ensure their bases are consistently maintained year after year."
Getting it right
None of these rules is complicated once it's set up. The work is doing them every year, the same way. If you're not sure your S corp is doing all of this, we can look at how it's set up and tell you what to fix.
This is general information, not advice for your specific situation. Tax rules change; this post reflects the rules as of November 2026.