Can My LLC Pay for My Health Insurance?

A Limited Liability Company (LLC) can pay for an owner’s health insurance premiums, but the methods for payment and the available tax deductions depend on how the LLC is treated for federal tax purposes. An LLC is a legal structure created by state law, but the Internal Revenue Service (IRS) taxes it based on a classification the owners either choose or accept by default. The rules for a single-owner LLC taxed as a sole proprietorship are different from a multi-owner LLC taxed as a partnership, and different still from an LLC that elects to be taxed as a corporation.

The Impact of LLC Tax Classification

A Limited Liability Company is a business structure formed under state law, but for federal tax purposes, it is not a distinct classification. The IRS defaults to treating an LLC as either a “disregarded entity” or a partnership, or the LLC can elect a specific tax status like a corporation. This choice directly controls how the business and its owners are taxed, including the rules for health insurance premiums.

A single-member LLC is, by default, a “disregarded entity,” meaning the IRS taxes it as a sole proprietorship. The business’s income and expenses are reported on the owner’s personal tax return, typically using Schedule C of Form 1040. For tax purposes, the LLC and the owner are one and the same.

A multi-member LLC is automatically classified as a partnership for tax purposes. The LLC files an informational tax return on Form 1065, and each member receives a Schedule K-1 detailing their share of the income and deductions. Members then report this information on their personal tax returns, as profits “pass-through” to them.

An LLC can also file Form 2553 to elect to be taxed as an S corporation or Form 8832 to be taxed as a C corporation. As an S corporation, the LLC retains its pass-through nature, but owners who work in the business are treated as employees and must be paid a reasonable salary. If taxed as a C corporation, the LLC is treated as a separate taxable entity from its owners, filing its own corporate tax return on Form 1120 and paying corporate income tax.

Payment Options for Disregarded Entities and Partnerships

For owners of LLCs taxed as disregarded entities (sole proprietorships) or partnerships, health insurance premiums are not a standard business expense deduction on the company’s books. Instead, the deduction is claimed on the owner’s personal tax return. The LLC can pay the premium directly to the insurance provider, which is then treated as a draw for a single member or as a guaranteed payment for a partner.

This process allows the owner to take the Self-Employed Health Insurance Deduction on Schedule 1 of Form 1040. This is an “above-the-line” deduction, meaning it reduces the owner’s adjusted gross income (AGI), which can be more beneficial than an itemized deduction. The deduction allows self-employed individuals to subtract the cost of health, dental, and qualifying long-term care insurance for themselves, their spouse, and their dependents.

To qualify, the plan must be established by the business. This requirement is met whether the policy is in the name of the business or the individual owner, as long as the business pays the premiums directly or reimburses the owner. For multi-member LLCs, the premium amount paid by the LLC is treated as a guaranteed payment to the partner, reported on Form 1065 and flowing to the partner’s Schedule K-1. A primary limitation is that the deduction cannot exceed the net earnings from the business.

Specific Rules for an LLC Taxed as an S Corporation

When an LLC elects to be taxed as an S corporation, the rules for handling owner health insurance are specific, particularly for any owner who holds more than 2% of the company’s stock. These individuals are considered shareholder-employees, and a procedure must be followed for the health insurance premiums to be deductible.

The process begins with the S corporation paying the health insurance premium on behalf of the shareholder-employee. The company can pay the insurer directly or reimburse the shareholder for premiums they paid. The total amount of these premiums must be included in the shareholder-employee’s taxable wages, which is reported in Box 1 of their annual Form W-2.

A detail in this reporting is that while the premium amount increases the figure in Box 1, it is not subject to Social Security or Medicare (FICA) taxes. Therefore, this amount should not be included in the totals for Box 3 (Social Security wages) or Box 5 (Medicare wages and tips) of the Form W-2.

After the S corporation correctly reports the premium payment on the W-2, the shareholder-employee can then claim the Self-Employed Health Insurance Deduction on Schedule 1 of their personal Form 1040. This mechanism allows the S corporation to deduct the cost as a wage expense, while the shareholder-employee subtracts it from their income. If the S corporation fails to include the premiums in the shareholder’s W-2, the shareholder cannot take the deduction.

Deductions for an LLC Taxed as a C Corporation

An LLC that elects to be taxed as a C corporation is a distinct legal and tax entity separate from its owners. The company can purchase a health insurance policy and pay the premiums for its employees, including those who are also owners. The C corporation deducts the full cost of these premiums as an ordinary business expense on its corporate income tax return, Form 1120.

The process is similar to how a C corporation would deduct any other employee benefit cost, such as salaries or retirement plan contributions. For the owner-employee, the value of the health insurance premiums paid by the corporation is treated as a tax-free fringe benefit. Unlike the rules for S corporations or partnerships, the amount is not added to the owner-employee’s taxable wages on their Form W-2. This means the benefit is received free of personal income, Social Security, and Medicare taxes.

Providing Health Insurance for Non-Owner Employees

Regardless of how an LLC is taxed, the rules for providing health insurance to non-owner employees are consistent. The cost of health insurance premiums paid by the LLC for its non-owner employees is a deductible business expense. This deduction reduces the company’s taxable income, whether that income is reported on a Schedule C, Form 1065, Form 1120-S, or Form 1120.

An LLC can establish a traditional group health plan for its employees. The premiums the business pays for this coverage are deductible, and the benefits received by the employees are generally excluded from their taxable income. This is a common method for businesses to attract and retain talent.

Alternatively, a small business may use a Health Reimbursement Arrangement (HRA), such as the Qualified Small Employer HRA (QSEHRA). Under a QSEHRA, the LLC provides a fixed allowance for employees to use for their own health insurance premiums or other qualified medical expenses. The reimbursements are deductible for the business and are tax-free to the employee, provided the employee has qualifying health coverage.