Can an S Corp Shareholder Deduct Medicare Premiums?

A shareholder who owns more than 2% of an S corporation can deduct Medicare premiums as a self-employed health insurance deduction, but only when the corporation pays or reimburses the premiums and includes that amount in the shareholder’s W-2 wages. Done right, the S corp shareholder Medicare premium deduction comes off the top of income on Schedule 1, with no itemizing required and no 7.5% floor to clear. Done wrong, the deduction either shrinks to a Schedule A medical expense or disappears.

Who Counts as a More-Than-2% Shareholder

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

Family attribution counts. Under IRC Section 318, you’re treated as owning stock held by your spouse, children, grandchildren, and parents.² If your spouse owns 3% and you own nothing, you’re still a 2% shareholder in the IRS’s eyes. The same goes for a parent whose adult child holds the shares. Spouses legally separated under a divorce or separate maintenance decree are excluded from this attribution.

Which Medicare Premiums Qualify

The deduction covers Medicare Part B, Part D prescription drug coverage, Medicare Advantage plans, and Medigap supplemental policies. If you have to pay for Medicare Part A (most people get it premium-free), those premiums qualify too.³ It also extends to premiums you pay for your spouse, dependents, and children under age 27, even when those children aren’t your tax dependents.

The standard 2026 Medicare Part B premium is $202.90 per month, roughly $2,435 for the year.⁴ Shareholders hit by income-related monthly adjustment amounts (IRMAA) pay much more, with Part B reaching $689.90 per month at the top bracket. Stack Part B, Part D, and Medigap for a couple and the annual total runs well into five figures. That’s why the above-the-line treatment is worth protecting.

What the S Corporation Has to Do

Two things have to happen inside the corporation. It has to pay or reimburse the premiums, and it has to report that amount as wages on the shareholder’s W-2. Miss either step and the shareholder loses the above-the-line deduction.⁵

Pay or Reimburse

The corporation can pay the insurer directly or reimburse the shareholder for premiums already paid out of pocket. Both routes produce the same result. The policy itself can be in the shareholder’s name rather than the corporation’s, provided the corporation ultimately bears the cost and runs it through wages.⁶ Timing matters: the payment or reimbursement has to fall in the same tax year as the premiums, and the amount has to land on that year’s W-2.

Report It on the W-2 the Right Way

The premium amount goes in Box 1 (Wages, Tips, Other Compensation). It is not included in 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 Putting the premiums in Boxes 3 and 5 by mistake costs the shareholder Social Security and Medicare tax they shouldn’t have paid.

The corporation should also enter the amount in Box 14 with a label like “SEHI” or “S-Corp Health Insurance.” Box 14 doesn’t change the tax calculation, but it’s the documentation the shareholder uses to support the deduction on the personal return.

Claiming It on Your 1040

Once the W-2 is right, the deduction goes on Schedule 1 (Form 1040), line 17, labeled “Self-employed health insurance deduction.”⁷ It reduces adjusted gross income whether or not you itemize. The W-2 inclusion raises your wages by the premium amount; the Schedule 1 deduction cuts your AGI by the same amount. You come out close to where you’d be if the premiums had never been income, with the added benefit that your AGI is lower, which can help with other credits and with Medicare IRMAA.

The Earned Income Cap

The deduction can’t exceed your W-2 wages from the S corporation for the year.³ Receive $5,000 in W-2 wages and pay $7,000 in Medicare premiums, and the above-the-line deduction tops out at $5,000. S corporation distributions reported on Schedule K-1 don’t count as earned income for this test. Premiums above the cap can still be added to your other medical expenses on Schedule A, subject to the 7.5% AGI floor, as long as you don’t double-count what you already claimed on Schedule 1.⁸

If You Had Access to Other Subsidized Coverage

You can’t take the deduction for any month you were eligible to participate in a subsidized health plan from another employer, including your spouse’s employer, even if you didn’t actually enroll.⁶ If your spouse had employer coverage available January through June and nothing after that, the deduction is available only for July through December.

If the S Corporation Didn’t Handle It Right

Without the pay-or-reimburse and W-2 inclusion, the above-the-line deduction is gone. The only fallback is Schedule A, treating Medicare premiums as a personal medical expense.⁸ That’s a much weaker outcome. Only medical expenses above 7.5% of AGI count, and itemizing only beats taking the standard deduction, which for 2026 is $16,100 for single filers and $32,200 for joint filers.⁹ Many shareholders don’t clear either hurdle even with the premiums included.

If a prior-year W-2 left the premiums out, the corporation can issue a Form W-2c to add them, and the shareholder can file Form 1040-X to claim the deduction. The fix works but takes time. Building the premium reporting into regular payroll from the start is simpler and avoids amending returns.

The IRMAA Side Benefit

Medicare Part B and Part D premiums look back to your modified AGI from two years earlier. Cross certain income thresholds and IRMAA surcharges can more than triple the base premium. For 2026, single filers with modified AGI above $109,000 and joint filers above $218,000 start paying Part B surcharges, which climb to $689.90 per month at the top bracket.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 joint filer sitting just above $218,000 who deducts $10,000 or more in combined Medicare premiums could avoid $81.20 a month in Part B surcharges alone, close to $975 over a full year on top of the income tax savings. The effect doubles when both spouses have Medicare premiums running through the corporation’s payroll.

Records to Keep

Hold on to the W-2 showing premiums in Box 1 and Box 14, plus proof of each premium payment: bank statements, Medicare billing notices, or insurance invoices. If the corporation reimbursed you rather than paying the insurer, keep the reimbursement records too. The IRS can ask for substantiation for up to three years after filing, so plan to store the paperwork at least that long.

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