Partner Health Insurance Premiums Are Guaranteed Payments

When a partnership pays health insurance premiums for a partner, those premiums are treated as guaranteed payments under Internal Revenue Code Section 707(c). The partnership deducts the payment as a business expense on Form 1065, the partner picks up the same amount as income through Schedule K-1, and the partner then claims a matching self-employed health insurance deduction on Schedule 1 of their personal return. The result, when done correctly, is that the premium ends up deductible against the partner’s income tax without ever touching the itemized medical expense floor.

Why Partner Premiums Are Guaranteed Payments

Partners are not employees, and they don’t get the tax-free fringe benefits employees get. When a partnership pays an employee’s health insurance, the business deducts it and the employee excludes the benefit from income. That exclusion is not available to partners.

Revenue Ruling 91-26 filled the gap. It held that health insurance premiums a partnership pays on behalf of a partner qualify as guaranteed payments under Section 707(c), as long as the premiums are paid for the partner’s services and are set without regard to partnership income. Section 707(c) treats guaranteed payments as if made to a non-partner for purposes of gross income under Section 61 and business expense deductions under Section 162.¹

So the partnership deducts the premium, the partner reports it as income, and that income inclusion is what makes the partner eligible for the self-employed health insurance deduction on the personal return. The two moves offset each other on the income tax side, but only if every step is done properly.

The Plan Must Be Established Under the Partnership

For the deduction to work, the health insurance plan has to be considered established under the partnership. The IRS accepts two ways of getting there.²

The first is direct payment. The partnership obtains the policy, in its name or the partner’s, pays the premiums, and reports the amount on the K-1 as a guaranteed payment.

The second is reimbursement. The partner buys a policy in their own name, pays the premiums, and the partnership reimburses the partner and reports the reimbursement on the K-1 as a guaranteed payment. If the partnership doesn’t reimburse, the plan is not considered established under the business, and the above-the-line deduction is off the table.

This second scenario is where partners lose money without realizing it. A partner who quietly pays their own premiums outside the partnership books cannot claim the self-employed health insurance deduction. Those premiums can still go on Schedule A as itemized medical expenses, but only the portion exceeding 7.5% of AGI helps, which for most partners means little or no actual benefit.

How to Report the Payment on the K-1

The partnership reports the premium in two places on Schedule K-1 (Form 1065). It’s included in total guaranteed payments in Box 4, which flows into the partner’s gross income. Separately, the specific medical insurance amount goes in Box 13 with Code M.³ The Code M figure is what the partner carries to the personal return to calculate the deduction.

Box 13, Code M can include premiums for the partner, the partner’s spouse, dependents, and any child of the partner under age 27 at the end of the tax year, even if the child isn’t a dependent.² Keep records of payment dates, the carrier, and who the policy covers. Those records support both the partnership’s expense deduction and the partner’s personal deduction if either is questioned.

Claiming the Deduction on the Personal Return

The partner claims the self-employed health insurance deduction on Schedule 1 (Form 1040), Line 17. It’s above the line, so it reduces adjusted gross income whether the partner itemizes or not, and that lower AGI can improve eligibility for other income-based tax benefits. The deduction sits under Section 162(l), and three limits govern it.⁴

Earned Income Cap

The deduction can’t exceed the partner’s earned income from the partnership that established the plan. Earned income for this purpose is the partner’s distributive share of ordinary business income plus guaranteed payments. If premiums for the year run $18,000 but earned income from the partnership is $14,000, the deduction stops at $14,000. The excess can’t be carried forward, though it may be usable as an itemized medical expense on Schedule A.

No Subsidized Employer Plan Available

You can’t claim the deduction for any month in which you were eligible for a subsidized health plan maintained by any employer, including your spouse’s employer or the employer of a dependent or a child under 27 covered by the policy.² Eligibility is the trigger, not enrollment. Being able to join disqualifies you whether you actually enroll or not. The test is applied month by month, so a mid-year change in a spouse’s employment can shift eligibility partway through the year.

Form 7206 or the Worksheet

Most partners can use the worksheet in the Form 1040 instructions to compute the deduction. Form 7206 is required if you had more than one source of income subject to self-employment tax, you’re deducting long-term care premiums, or you file Form 2555 for foreign earned income.² Partners with more than one active business will almost always land on Form 7206.

The deduction isn’t limited to standard medical insurance. Qualified long-term care premiums count, subject to age-based dollar caps, and Medicare premiums for Parts A, B, C, and D also qualify. The earned income cap and the employer-plan rule apply to those amounts too.

Self-Employment Tax Is Not Reduced

This is the single point that catches the most partners off guard. The self-employed health insurance deduction reduces income tax. It does not reduce self-employment tax. The K-1 instructions for Box 14, Code A are direct: “Don’t reduce net earnings from self-employment by any separately stated deduction for health insurance expenses.”³ The Form 7206 instructions say the same thing: “You can’t subtract the self-employed health insurance deduction when figuring net earnings for your self-employment tax.”²

Congress allowed a one-year exception for 2010 under the Small Business Jobs Act, but it was never extended. The full 15.3% SE tax rate (12.4% Social Security plus 2.9% Medicare) applies to health insurance guaranteed payments even though the same dollars are deductible against income tax.⁵ A partner with $15,000 in premiums still owes roughly $2,295 in SE tax on that amount. Estimated tax payments should reflect that.

What Happens to Premiums That Don’t Qualify Above the Line

Premiums that exceed earned income, or that fall in months when you were eligible for an employer plan, aren’t automatically lost. They can be included with other medical expenses on Schedule A (Form 1040) if you itemize.² Only the portion exceeding 7.5% of AGI is deductible there, so the practical benefit is often modest.

The K-1 instructions confirm the mechanic: any Box 13 Code M amount not deducted on Schedule 1, Line 17 can go on Schedule A, Line 1.³ The same dollar can’t appear in both places.

Common Mistakes That Cost Partners the Deduction

The most expensive mistake is also the most common: a partner pays premiums out of pocket and never runs the money through the partnership. No reimbursement means no guaranteed payment, no K-1 reporting, and no above-the-line deduction. The partner ends up itemizing on Schedule A with the 7.5% floor swallowing most of the benefit.

The next mistake is bookkeeping. Partnerships that lump health insurance in with other guaranteed payments, without separately identifying the insurance component, invite trouble. The partnership agreement or a written addendum should call out the health insurance piece, and the K-1 should report it specifically in Box 13, Code M.

The third is misreading the employer-plan rule. Partners with access to a spouse’s plan sometimes assume that skipping enrollment preserves the deduction. It doesn’t. Eligibility alone disqualifies the deduction for those months, whether you enroll or not. Check spouse and dependent employment coverage month by month before claiming a full year.

1
Office of the Law Revision Counsel. 26 USC 707 – Transactions Between Partner and Partnership
2
Internal Revenue Service. Instructions for Form 7206 (2025)
3
Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) (2025)
4
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
5
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)