There are two important issues related to health insurance deductions for S corporations.
First, if you own more than 2 percent of an S corporation, there are three steps you need to follow to claim a deduction for health insurance:
Step 1. The cost of the insurance must be on the S corporation’s books.
Step 2. The corporation must include the cost of the health insurance premiums on your W-2 form as taxable income (but not subject to payroll taxes).
Step 3. If eligible, you must claim the health insurance deduction as an above-the-line deduction on Schedule 1 of Form 1040.
Second, this three-step procedure applies to your spouse, children, grandchildren, great grandchildren, parents, grandparents, and great-grandparents if they work for your S corporation and the corporation covers them with health insurance.
The three rules apply to the relatives listed above who work in the S corporation, even if they don’t own any stock directly. For health insurance purposes, the tax code attributes your stock
ownership to them and deems that they own what you own.
It’s crucial to get this right, as failing to do so could result in a lost health insurance deduction for your family members and zero deductions for the S corporation.
If you or your S corporation did not handle this correctly in the past, you need to amend the returns to ensure that you create and protect the proper tax deductions.