The IRS allows S-corporations to pay for (and deduct) the medical expenses of their shareholders, but only under certain stipulations. First, the employee or owner must be a more-than-two-percent shareholder of the corporation.
Second, the insurance premiums paid on behalf of (or reimbursed to) a shareholder-employee must be reported by the S- Corporation as wages on the shareholder-employee’s Form W-2. These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. The additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but is not included in Boxes 3 and 5 of Form W-2.
On the personal tax side, a two-percent shareholder-employee can deduct medical care premiums from his or her Adjusted Gross Income (an above-the-line deduction) if the medical care coverage was paid for or reimbursed by the S corporation and reported on the shareholder’s W-2, and the shareholder meets all other self-employed medical insurance deduction requirements. However, if the shareholder or the shareholder’s spouse is eligible to participate in any subsidized health care plan, the shareholder is not entitled to an above-the-line deduction.