Health insurance costs are crushing Denver small business owners. If you're paying $1,500 per month for family coverage, that's $18,000 per year out of pocket. The good news: S-Corp owners can deduct these premiums and reduce their tax bill. The bad news: most Denver accountants get the process wrong.
Here's the truth: S-Corp health insurance deductions follow specific IRS rules that differ from standard business deductions. Mess this up and you lose the deduction entirely. Get it right and you can save thousands in taxes annually.
S-Corp owners (those owning more than 2% of the company) can't deduct health insurance premiums as a regular business expense. The IRS treats health insurance for more-than-2% shareholders as a fringe benefit that must be included in W-2 wages.
Here's the process: your S-Corp pays the health insurance premiums (or reimburses you for premiums you paid). The S-Corp includes these premium amounts in Box 1 of your W-2 as wages (but not in Boxes 3 and 5 for Social Security and Medicare). You then deduct the premiums on your personal tax return as a self-employed health insurance deduction.
This creates a net zero effect on your actual tax bill, but it requires proper handling to work correctly. Our Denver business CPA services set this up correctly for S-Corp clients to ensure they get the full deduction.
This is where most Denver S-Corp owners make mistakes: the health insurance premiums must be included in your W-2 wages. Many business owners pay their premiums personally and never tell their accountant. Or their payroll company doesn't know to include the premiums in W-2 wages.
If the premiums aren't in your W-2, you can't deduct them as self-employed health insurance. You're stuck taking them as an itemized deduction on Schedule A, which requires you to exceed the 7.5% of AGI threshold. Most people don't clear that hurdle, so they get no deduction at all.
The correct approach: have your S-Corp pay the insurance premiums directly to the insurance company, or have the S-Corp reimburse you for premiums you paid, and make sure your payroll service includes these amounts in Box 1 of your W-2.
The IRS requires your health insurance to be an "established plan" of the S-Corp. This doesn't mean you need formal plan documents, but the S-Corp should document its decision to provide health insurance coverage to shareholder-employees.
Most Denver S-Corps handle this with a simple corporate resolution stating the S-Corp will pay or reimburse health insurance premiums for shareholders. Keep this resolution in your corporate records. If the IRS ever questions the deduction, you have documentation showing it was an official company benefit.
The self-employed health insurance deduction covers medical insurance, dental insurance, and qualified long-term care insurance. It does not cover life insurance or disability insurance. These must be handled separately.
If you're paying for health insurance for your spouse and children, those premiums qualify too. The deduction extends to coverage for your dependents, not just yourself.
Here's a limitation that catches some Denver S-Corp owners: you can only deduct health insurance premiums up to your earned income from the S-Corp. If your S-Corp paid you $65,000 in wages and you paid $18,000 in health insurance premiums, you can deduct the full $18,000.
But if your S-Corp paid you $8,000 in wages and you paid $18,000 in health insurance premiums, you can only deduct $8,000. The excess $10,000 doesn't carry forward. You lose it.
This is why proper tax reduction planning includes ensuring your S-Corp salary is high enough to cover your health insurance premiums. Don't set your salary so low that you can't deduct your insurance.
The self-employed health insurance deduction reduces your adjusted gross income, but it doesn't reduce your qualified business income for purposes of the QBI deduction. This is good news for S-Corp owners.
Your QBI is based on your S-Corp profit (minus your W-2 wages). The health insurance deduction comes later in the tax calculation. So you get both the health insurance deduction and the full QBI deduction. No tradeoff required.
Colorado follows federal rules for self-employed health insurance deductions. If you deduct the premiums on your federal return, you also get the deduction on your Colorado return. This saves you an additional 4.40% on top of your federal tax savings.
For a Denver S-Corp owner paying $18,000 per year in health insurance premiums, the deduction saves about $4,320 in federal taxes (assuming a 24% tax bracket) plus $792 in Colorado state taxes. That's $5,112 per year in total tax savings just from properly deducting health insurance.
If you have a high-deductible health plan, you can contribute to a Health Savings Account (HSA). For 2025, the contribution limits are $4,300 for self-only coverage or $8,550 for family coverage, plus an additional $1,000 if you're 55 or older (according to IRS Publication 969).
HSA contributions are different from health insurance premiums. You can make HSA contributions personally and deduct them on your tax return as an "above the line" deduction. You don't need to run them through your S-Corp.
HSA contributions reduce your taxable income and grow tax-free. When you withdraw funds for qualified medical expenses, the withdrawals are tax-free too. It's one of the best tax-advantaged accounts available.
If your spouse has access to health insurance through their employer, you might be tempted to go on their plan and avoid the S-Corp health insurance complications. That works, but you lose the tax deduction.
Health insurance premiums paid through a spouse's employer are typically paid with after-tax dollars deducted from their paycheck. You don't get a separate deduction on your tax return. Compare the administrative simplicity of using your spouse's insurance against the tax savings of properly deducting S-Corp health insurance to see which option is better for your Denver family.
If you changed insurance plans during the year, started new coverage mid-year, or ended coverage before year-end, you can still deduct the premiums you paid during the time you had coverage. Just make sure all premiums are properly included in your W-2 wages.
Our Denver bookkeeping services track health insurance premium payments throughout the year and ensure they're correctly reported on year-end W-2s.
Paying premiums personally without having the S-Corp reimburse you is the most common mistake. The S-Corp must be involved in the payment for you to claim the self-employed health insurance deduction. Failing to include premiums in W-2 Box 1 wages is another mistake. Without this step, the IRS won't allow the deduction. Deducting premiums that exceed your S-Corp wages is also wrong. You can't deduct more than your earned income from the S-Corp.
If you pay health insurance premiums personally, set up a formal reimbursement arrangement with your S-Corp. Submit documentation of premiums paid (insurance bills or cancelled checks). Have the S-Corp reimburse you. Include reimbursements in your W-2 wages. Deduct the total premiums on your personal return.
Document this arrangement in a corporate resolution. State that the S-Corp will reimburse shareholder-employees for health insurance premiums paid personally, and that reimbursements will be included in W-2 wages.
Your payroll service needs to know about the health insurance arrangement. If you're running payroll through a provider, tell them you're a more-than-2% S-Corp shareholder and you need health insurance premiums included in W-2 Box 1 (but not Boxes 3 and 5).
Some payroll providers have specific codes for this. Others require manual adjustments at year-end. Make sure your payroll company understands the requirement, or you'll end up with an incorrect W-2 and a lost deduction.
If you're 65 or older and paying Medicare premiums (Parts B, C, or D), these qualify for the self-employed health insurance deduction too. Run them through your S-Corp the same way as regular health insurance.
Medicare premiums can be substantial, especially for higher-income individuals subject to IRMAA (Income-Related Monthly Adjustment Amount) surcharges. Getting the deduction for these premiums provides significant tax savings.
Qualified long-term care insurance premiums are deductible, but there are age-based limits. For 2025, the limits range from $470 for people age 40 or younger to $5,880 for people older than 70 (according to IRS Publication 502).
Include qualified long-term care premiums in your W-2 wages along with regular health insurance. Just be aware of the deduction limits based on your age.
Setting up S-Corp health insurance deductions correctly from day one saves headaches later. When you first elect S-Corp status or start paying health insurance premiums, establish the formal arrangement with a corporate resolution, set up reimbursement procedures with your bookkeeper, notify your payroll provider of the W-2 reporting requirement, and track premiums throughout the year.
At Succentrix, we help Denver S-Corp owners implement proper health insurance arrangements as part of our tax strategy services. We document the arrangement, coordinate with payroll providers, and ensure premiums are correctly reported on W-2s. Most clients save $3,000 to $6,000 annually in taxes just by properly deducting health insurance premiums they were paying anyway.
If you're a Denver S-Corp owner and you're not sure if your health insurance deductions are set up correctly, reach out to our team. We'll review your current setup, identify any mistakes that could cost you the deduction, implement the proper procedures going forward, and ensure you're getting maximum tax savings on your insurance premiums. Don't leave thousands of dollars in tax savings on the table because of improper health insurance handling.
