Short answer: if you own more than 2% of an S corporation in Alabama, the company pays or reimburses your health insurance premiums and puts them in Box 1 of your W-2 as wages, but not in the Social Security and Medicare boxes. You then take them back off your income as the self-employed health insurance deduction, on Form 7206 and Schedule 1, line 17. Alabama allows the same deduction on Form 40 (line 7), so it lowers your Alabama tax too, at 5% on most of it. (Reviewed November 2026 by Daniel Griffin, licensed independent advisor, NPN #22052447. Not tax advice; confirm with your tax preparer.)
- $8,070a year of the lowest-cost Silver plan for a 40-year-old in the typical Alabama county, 2027
- $1,235of Social Security and Medicare tax an Alabama owner skips on it, against the same amount paid as salary under $192,300
- Box 1where those premiums land on your W-2; Boxes 3 and 5 stay clear of them
- 5%Alabama’s top rate, which applies above $3,000 of taxable income for a single filer
How the Money Moves in Alabama
- Buy the planAny of the 4 insurers on the Alabama marketplace, or a private plan, in your name or the company’s.
- The S corp pays$722 a month for a 40-year-old’s cheapest 2027 Silver plan in Birmingham, paid or reimbursed by the company.
- Payroll adds it$8,662 a year goes into W-2 Box 1 wages, not Boxes 3 and 5.
- Form 7206The deduction is worked out there, capped at your Medicare wages.
- Schedule 1Line 17: the $8,662 comes back off your income.
A more-than-2% shareholder is treated like a partner for fringe benefits, so the premiums cannot be a tax-free benefit the way they are for staff. IRS Notice 2008-1 is the route around that: wages for income tax, left out of Social Security and Medicare wages, then deducted under section 162(l).
Paying the premiums from your personal account and never running them through the company. The IRS’s own example in Notice 2008-1 is a shareholder who pays for a policy in their own name with no reimbursement: no plan established by the S corporation, no deduction.
In Birmingham that mistake costs the whole $8,662 and roughly $2,079 of federal income tax at 24%. The fix has a deadline: the company pays or reimburses the premiums by December 31 and adds them to your W-2. The year-end checklist has every date in order.
Work out your deduction
Form 7206-style worksheet. An estimate, not a tax return.Presets: the typical lowest-cost Alabama Silver plan for 2027. Line 10: Social Security tax to the $192,300 wage base, Medicare 2.9%, plus 0.9% over $200,000. Nothing you type leaves this page until you send it.
The Cap Most Owners Miss
The deduction cannot be more than your earned income from the S corporation, which for a more-than-2% shareholder means wages as defined for Social Security and Medicare tax (section 162(l)(5)), Box 5 of the W-2. The premiums are in Box 1 but not Box 5, so they never raise the cap, and an owner who takes no salary gets no deduction at all. For the Birmingham plan above, a salary of $8,662 or more keeps every dollar deductible.
Three More Rules
- The spouse ruleNo deduction for any month you could join a subsidized employer plan, yours or your spouse’s, even if you did not enroll.
- Family countsYour spouse, dependents and any child under 27 at year end are covered; an Alabama family of four’s typical lowest-cost Silver plan is $2,013 a month, $24,159 a year to deduct. A spouse, child, grandchild or parent of the owner counts as a 2% shareholder too.
- Marketplace creditOnly the premium you pay after any premium tax credit is deductible. Above $63,840 of income for one person there is no 2027 credit, so the full premium counts.
What It Is Worth in Alabama for 2027
| Household | Per month | Deductible per year | Federal tax saved at 22% | At 24% | Plus Alabama tax at 5% |
|---|---|---|---|---|---|
| One adult, 40 | $672 | $8,070 | $1,775 | $1,937 | $404 |
| Two adults, 40, and two children | $2,013 | $24,159 | $5,315 | $5,798 | $1,208 |
Alabama taxes income at 2%, 4% and 5% (5% above $3,000 of taxable income for a single filer, $6,000 married filing jointly), and its Form 40 allows the self-employed health insurance deduction to the same extent as the federal one (line 7). The marketplace in Alabama has 4 insurers for 2027, a median of 49 plan options per county, and a PPO in every one of its 67 counties. Above $63,840 of household income for one person ($132,000 for a family of four) there is no premium tax credit, so the deduction carries the full saving.
What It Saves Across Alabama
| Where | Lowest Silver, per month | Deductible per year | Federal tax saved at 24% | Payroll tax not charged | Alabama tax saved at 5% |
|---|---|---|---|---|---|
| Birmingham (Jefferson County) | $722 | $8,662 | $2,079 | $1,325 | $433 |
| Mobile (Mobile County) | $656 | $7,872 | $1,889 | $1,204 | $394 |
| Huntsville (Madison County) | $735 | $8,821 | $2,117 | $1,350 | $441 |
| Montgomery (Montgomery County) | $662 | $7,944 | $1,907 | $1,215 | $397 |
| Tuscaloosa (Tuscaloosa County) | $693 | $8,319 | $1,996 | $1,273 | $416 |
Want a PPO? In Birmingham the cheapest Silver PPO for a 40-year-old is $789 a month, against $722 for the cheapest Silver plan of any kind. The extra $811 a year is deductible too, which at 24% trims it to about $616.
Alabama’s Federal-Tax Twist
Alabama lets you deduct the federal income tax you pay (Form 40, line 12). Lower federal tax from the health insurance deduction therefore means a slightly smaller Alabama deduction for federal tax, so the net Alabama saving runs a little under 5%: about 3.8% at a 24% federal bracket. On a year of the typical lowest-cost Silver plan, $8,070, the 5% figure is $404 before that offset.
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Sole proprietor, partner or C corporation owner instead? The rules differ: see the self-employed health insurance deduction in Alabama and how each kind of business handles owner health insurance. With staff in Alabama, see S corp owners in Alabama and ICHRA for small businesses.
Before the year closes: the year-end checklist, every date in order. Tax professionals with Alabama clients: a printable one-page Alabama handout.
Common Questions
Can an S corp owner deduct health insurance in Alabama?
Yes, if you own more than 2% and the S corporation pays or reimburses the premiums and reports them in Box 1 of your W-2. You deduct them on Form 7206 and Schedule 1, line 17. Alabama allows the same deduction on Form 40 (line 7), so it lowers your Alabama tax too, at 5% on most of it.
What if I paid the premiums from my personal account?
Have the S corporation reimburse you and add the amount to your W-2 before it is issued. A policy you pay yourself with no payment or reimbursement by the company gets no deduction; in Birmingham that is $8,662 a year on the cheapest Silver plan for a 40-year-old.
Can I deduct S corp health insurance on my Alabama return?
Yes. Alabama Form 40, line 7, allows self-employed health insurance premiums to the same extent as the federal deduction, and Alabama taxes income at up to 5%.
Sources
- IRS, Instructions for Form 7206 (2025)
- IRS, Notice 2008-1 (2-percent S corporation shareholders)
- 26 U.S. Code section 162(l)
- IRS, Publication 974 (premium tax credit)
- Alabama Department of Revenue, What is Alabama's individual income tax rate?
- CMS, Plan Year 2027 Qualified Health Plan Landscape file
- HHS, 2026 poverty guidelines (2027 coverage)
- Social Security Administration, 2027 fact sheet (wage base)
- Alabama Department of Revenue, Form 40 instructions (2024)