Can an S Corp Shareholder Deduct Medicare Premiums?

An S corporation shareholder who owns more than 2% of the company can deduct Medicare premiums, but the S corp shareholder Medicare premium deduction only works when the corporation pays or reimburses the premiums and reports that amount as wages on the shareholder’s W-2. Done right, the shareholder claims an above-the-line deduction on Schedule 1 that lowers adjusted gross income without any need to itemize. Done wrong, the deduction shrinks to a Schedule A medical expense or disappears entirely.

Who Counts as a More-Than-2% Shareholder

The deduction turns on owning more than 2% of the S corporation’s outstanding stock, or more than 2% of its total voting power, on any day during the tax year. Under Internal Revenue Code Section 1372, a shareholder above that line is treated like a partner in a partnership for fringe benefit purposes.¹ That partnership treatment is what unlocks the self-employed health insurance deduction for someone who is technically a W-2 employee.

Family attribution counts. Under IRC Section 318, you are treated as owning stock held by your spouse, children, grandchildren, and parents.² If your spouse owns 3% and you own nothing directly, the IRS still treats you as a 2% shareholder. Legally separated spouses under a divorce or separate maintenance decree are excluded from the attribution.

Which Medicare Premiums Qualify

The deduction covers premiums for Medicare Part B, Part D prescription drug coverage, Medicare Advantage plans, and Medigap supplemental policies. Part A premiums qualify too if you have to pay them, though most people receive Part A premium-free.³ It also extends to premiums you pay for your spouse, your dependents, and your children under age 27, whether or not the children are your tax dependents.

The standard 2026 Medicare Part B premium is $202.90 per month, or roughly $2,435 per year. Shareholders subject to income-related monthly adjustment amounts pay more, reaching $689.90 per month at the top bracket.⁴ Stack Part B, Part D, and a Medigap policy for a couple and the annual total can run well into five figures, which is why the above-the-line treatment is worth protecting.

What the S Corporation Has to Do

Two steps make or break the deduction: the corporation has to pay or reimburse the premiums, and it has to report them correctly on the W-2. Miss either one and the shareholder loses the above-the-line deduction.⁵

Paying or Reimbursing the Premiums

The corporation can pay Medicare directly, or it can reimburse the shareholder for premiums the shareholder paid personally. Both work. The policy can be in the shareholder’s own name, as long as the corporation ultimately bears the cost and includes the amount in the shareholder’s wages.⁶

Timing matters. The payment or reimbursement has to happen during the same tax year the premiums apply to, and the amount has to appear on the W-2 for that year. Some corporations add the premiums to each paycheck; others make one adjustment on the final paycheck of the year. Either approach is fine, provided the W-2 issued by January 31 includes the premiums.

Getting the W-2 Right

The premium amount goes into Box 1, Wages, Tips, Other Compensation. It does not go into Box 3 (Social Security wages) or Box 5 (Medicare wages), because these payments are exempt from FICA and FUTA when made under a plan covering all employees or a class of employees.⁶ Sliding the premiums into Boxes 3 and 5 by mistake causes the shareholder to overpay Social Security and Medicare tax on that amount.

The premium should also appear in Box 14, labeled something like “SEHI” or “S-Corp Health Insurance.” Box 14 does not affect the tax calculation, but it gives the shareholder the documentation needed to claim the deduction on the personal return.

Claiming the Deduction on Your 1040

Once the W-2 is correct, the shareholder reports the deduction on Schedule 1 (Form 1040), line 17, “Self-employed health insurance deduction.”⁷ This is above the line, so it reduces AGI whether you itemize or not.

The math nets out. The W-2 inclusion adds the premium amount to wages, and the Schedule 1 deduction removes the same amount from AGI. You land in roughly the same place you would have if the premiums had never touched your income, plus a lower AGI that can help you qualify for other credits and can push you under Medicare IRMAA thresholds.

The Earned Income Cap

The deduction cannot exceed your W-2 wages from the S corporation for the year.³ If your W-2 wages are $5,000 and premiums are $7,000, the Schedule 1 deduction stops at $5,000. Schedule K-1 distributions do not count as earned income for this purpose.

Excess premiums above the cap are not lost. You can move the remainder to Schedule A as a medical expense, subject to the 7.5% AGI floor, as long as you reduce the Schedule A amount by whatever you already claimed on Schedule 1 so you are not double-counting.⁸

The Other-Employer-Plan Boundary

You cannot claim the deduction for any month in which you were eligible to participate in a subsidized health plan through another employer, and eligibility alone disqualifies the month even if you did not enroll. The rule also covers a plan offered through your spouse’s employer.⁶ If your spouse had employer coverage available from January through June, you can only claim the deduction for July through December.

If the S Corporation Did Not Follow the Rules

When the corporation fails to pay or reimburse the premiums and report them on the W-2, the shareholder cannot claim the above-the-line deduction. The fallback is Schedule A, where Medicare premiums become a personal medical expense.⁸ That route is worse on two fronts. Only the portion of total medical expenses above 7.5% of AGI counts, and itemizing only helps if your total itemized deductions beat the standard deduction, which many shareholders’ totals do not.⁹

Fixing a Botched W-2

If the corporation issued a W-2 without the health insurance premiums included, it can file a corrected Form W-2c to add them, and the shareholder can file Form 1040-X to claim the deduction for that year. The correction works, but it is slow, and it invites more scrutiny than a clean return. Building the premium reporting into payroll from the start is the better play.

The IRMAA Side Effect

Medicare Part B and Part D premiums are set from your modified AGI two years earlier. Cross certain thresholds and IRMAA surcharges kick in that can more than triple the base premium. For 2026, single filers above $109,000 in modified AGI and joint filers above $218,000 begin paying Part B surcharges.⁴

Because the self-employed health insurance deduction lowers AGI, it can push a shareholder below an IRMAA threshold and cut future Medicare premiums. A couple just above the $218,000 joint threshold who deducts $10,000 in combined Medicare premiums could sidestep $81.20 per month in Part B surcharges, which is close to $975 for the year on top of the income tax benefit. Run both spouses’ premiums through the S corporation’s payroll and the effect compounds.

1
Office of the Law Revision Counsel. 26 USC 1372 – Partnership Rules to Apply for Fringe Benefit Purposes
2
Office of the Law Revision Counsel. 26 U.S. Code 318 – Constructive Ownership of Stock
3
Internal Revenue Service. Instructions for Form 7206 (2025)
4
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
5
Internal Revenue Service. IRS Notice 2008-1
6
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
7
Internal Revenue Service. 2025 Schedule 1 (Form 1040)
8
Internal Revenue Service. 2025 Instructions for Schedule A (Form 1040)
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill