When your S corporation pays for or reimburses your health insurance costs as an employee who owns more than 2% of the company, the payments are put in box 1 of your W-2 and not in boxes 3 or 5.

When figuring out how much you can deduct from your taxes for self-employed health insurance on Form 1040, you must use your Medicare wages (shown in box 5 of Form W-2) as your “earned income,” not the amount shown in box 1.

Here are two examples of how this rule affects S corp owner health insurance deduction things:

• Ted’s S corporation doesn’t pay him a salary in cash, but it pays back $18,000 for his health insurance. His W-2 shows that he made $18,000 in box 1, but nothing in boxes 3 and 5. Ted has $18,000 in taxable wage income because the company pays for his health insurance. However, he has no Medicare wages, so his Form 1040 self-employed health insurance deduction is $0.
• Janet’s company pays her a cash salary of $107,000 and pays back $22,000 for her health insurance. Janet’s W-2 from her S corporation shows that she earned $129,000 in box 1, $107,000 in box 3, and $107,000 in box 5. The IRS lets her deduct $22,000 from her self-employed health insurance on Form 1040 because her Medicare wages are more than the cost of the insurance.

To avoid bad tax results, make sure that the Medicare wages your S corporation reports (in box 5) are equal to or more than the health insurance costs you paid for or were reimbursed for.

We know that S corp taxation can be hard. Schedule your free tax consultation and find out more about how the ideas in the article can apply to your specific tax situation.