How to Report Partner Health Insurance on Form 1065

To report partner health insurance on Form 1065, treat the premiums as guaranteed payments under IRC Section 707(c): include them on Line 10 of the 1065, then pass each partner’s share through on Schedule K-1 in Box 4 (as part of guaranteed payments) and again in Box 13 with Code W. The Line 10 entry gives the partnership its deduction. The K-1 entries put the amount in the partner’s gross income and flag it as eligible for the self-employed health insurance deduction on the partner’s personal return.¹

Why Premiums Have to Be Guaranteed Payments

Partners are owners, not employees, so the partnership cannot deduct their health insurance the way a corporation deducts premiums for a W-2 worker. The IRS route is to classify the premiums as guaranteed payments under Section 707(c), which are payments to a partner determined without regard to partnership income. The same rule applies to members of a multi-member LLC filing as a partnership.²

That classification does two things. The partnership deducts the premiums as a business expense, reducing ordinary business income. The premium amount also lands in the partner’s gross income, which is what sets up the self-employed health insurance deduction on the partner’s Form 1040. Skip the guaranteed payment treatment and the math falls apart on both sides.

The alternative some partnerships try, reducing the partner’s distributions or capital account by the insurance cost instead of running it through Line 10, is the single most damaging mistake in this area. The partnership loses the deduction entirely, and the partner has no basis for the personal deduction either.²

The Plan Has to Be Established by the Partnership

Before any reporting step matters, the arrangement must qualify as a plan established under the partnership’s business. Three setups meet that test:³

The partnership pays the insurer directly, whether the policy is in the partnership’s name or the partner’s.
The partner pays the premiums out of pocket and the partnership reimburses those amounts, then reports the reimbursement as a guaranteed payment on the K-1.
The policy is in the partnership’s name and the partnership pays. This is the cleanest setup.

What does not work: the partner pays personally and the partnership never reimburses. Even a verbal understanding that “the partnership covers insurance” is not enough. The reimbursement has to actually happen and has to show up on the K-1.³

Line 10 of Form 1065

On the return itself, total health insurance premiums for all partners go on Line 10, the line for guaranteed payments to partners. The 1065 instructions specifically direct preparers to include on Line 10 any amounts paid during the year for medical care insurance covering a partner, a partner’s spouse, dependents, and children under age 27.⁴ Premiums are combined on that line with any other guaranteed payments the partnership makes for services or use of capital.

Line 10 is a deduction on page 1, so it reduces the partnership’s ordinary business income before that income flows through to partners. The same total appears on Schedule K, Line 4, which aggregates guaranteed payments across the partnership. The two figures should reconcile.

Even though Line 10 is a single aggregate, the partnership needs to track each partner’s premium amount separately behind the scenes. That partner-by-partner breakdown drives everything on the K-1s.

Schedule K-1: Box 4 and Box 13, Code W

Each partner’s K-1 needs the premium reported in two places. Miss either one and the reporting breaks.

Box 4: The Income Inclusion

The premium goes into Box 4 as a guaranteed payment. Current K-1s split this into Box 4a (guaranteed payments for services), Box 4b (guaranteed payments for use of capital), and Box 4c (total).⁵ Health insurance premiums belong in Box 4a because the IRS treats them as payments for services rendered as a partner. Box 4c will show the combined total of the insurance premiums and any other guaranteed payments the partner received.

This is what puts the premium amount into the partner’s gross income. The step can feel backward, since the goal is a deduction, but the self-employed health insurance deduction requires earned income to deduct against. No income inclusion, no deduction.

Box 13, Code W: The Deduction Flag

Separately, report the exact same premium amount in Box 13 using Code W, the code that identifies payments for a partner’s health insurance.⁵ Box 13 is other deductions, and Code W is the specific flag that tells the partner and the IRS that the amount qualifies for the self-employed health insurance deduction.

The Box 13, Code W figure is not a deduction the partner takes from K-1 income directly. It is a signal the partner carries to their Form 1040, where the actual deduction is calculated. The amount reported here should match the health insurance portion included in Box 4a. Do not bury the amount under any other Box 13 code.

What the Partner Does With the K-1

The partner claims the self-employed health insurance deduction as an above-the-line adjustment on Schedule 1 (Form 1040), Line 17.⁶ The deduction reduces adjusted gross income directly, so the partner does not need to itemize.

The deduction is capped at the partner’s earned income from the partnership under which the plan is established.⁷ Any premium above that cap does not disappear; the partner can pick it up as a medical expense on Schedule A if they itemize, subject to the 7.5% of AGI floor.⁸

One boundary worth flagging on the K-1 cover letter to partners: for any month the partner (or the partner’s spouse) was eligible to participate in a subsidized health plan maintained by any employer, the deduction is not available. Eligibility alone disqualifies the month, whether or not the partner actually enrolled. The test runs month by month.⁷

The Self-Employment Tax Point

The guaranteed payment for health insurance is included in the partner’s net earnings from self-employment, so the partner owes SE tax on it. The self-employed health insurance deduction reduces income tax only. It does not reduce SE tax.⁹ Partners are often surprised by this, and it is worth surfacing when you deliver the K-1.

HSA Contributions Through the Partnership

Partnership contributions to a partner’s Health Savings Account follow a similar reporting path. They are treated as guaranteed payments under Section 707(c), deductible by the partnership, includible in the partner’s gross income, and reported as guaranteed payments on the K-1.¹⁰

Unlike an employer’s contribution to an employee HSA, a partnership’s contribution to a partner’s HSA is not excludable from gross income under Section 106(d). The partner instead claims the HSA deduction as an adjustment to income on their personal return. And unlike health insurance premiums, HSA contributions run through as guaranteed payments are included in net earnings from self-employment for SE tax purposes.¹⁰

Common Reporting Mistakes

Recording premiums as a distribution. When the partnership reduces the partner’s capital account for insurance rather than running the cost through Line 10, nobody gets a deduction. The partnership records a draw, the partner sees a smaller distribution, and the pathway to the self-employed health insurance deduction is gone.²

Including the amount in Box 4 but omitting Box 13, Code W. The partner has the income inclusion but no notification of the deduction amount. The deduction is still technically available, but the missing code creates confusion at return time and can trigger IRS matching issues.

Failing to actually reimburse when the partner paid personally. If the policy is in the partner’s name and the partner pays out of pocket, the partnership must reimburse in fact, not in principle. Without a real reimbursement flowing through the books and onto the K-1, the plan is not considered established under the partnership.³

Mismatched figures between Box 4a and Box 13, Code W. The health insurance portion inside Box 4a and the Box 13, Code W amount should be the same number. When they differ, either the income side or the deduction side is off.

Ignoring the spouse’s employer plan. Preparers pass through the full-year premium on the K-1 without warning the partner about the month-by-month eligibility test. Partners whose spouses have access to an employer-subsidized plan may need to prorate the deduction on Form 1040, and they will need the underlying detail from the partnership to do it.⁷

1
Office of the Law Revision Counsel. 26 U.S. Code 707 – Transactions Between Partner and Partnership
2
Internal Revenue Service. Publication 541 – Partnerships
3
Internal Revenue Service. Instructions for Form 7206
4
Internal Revenue Service. 2025 Instructions for Form 1065
5
Internal Revenue Service. Instructions for Form 1065
6
Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income
7
Internal Revenue Service. Instructions for Form 7206
8
Internal Revenue Service. Topic No. 502 – Medical and Dental Expenses
9
Internal Revenue Service. Instructions for Form 7206 – Section: Effect on Self-Employment Tax
10
Internal Revenue Service. Notice 2005-8 – Health Savings Accounts