The S-Corp Health Insurance Deduction in Colorado

Short answer: if you own more than 2% of an S corporation in Colorado, 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. Colorado starts from federal taxable income, which already has the deduction taken out, so it lowers your Colorado tax too, at the flat 4.4% rate. (Reviewed November 2026 by Daniel Griffin, licensed independent advisor, NPN #22052447. Not tax advice; confirm with your tax preparer.)

• $6,408a year of Anthem’s lowest-cost 2027 Silver plan for a 40-year-old in Denver
• $980of Social Security and Medicare tax a Colorado 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
• 4.4%Colorado’s flat rate; the deduction comes off it too

How the Money Moves in Colorado

1. Buy the planA Connect for Health Colorado plan or a private plan, in your name or the company’s.
2. The S corp pays$534 a month for a 40-year-old’s cheapest 2027 Silver plan in Denver metro, paid or reimbursed by the company.
3. Payroll adds it$6,408 a year goes into W-2 Box 1 wages, not Boxes 3 and 5.
4. Form 7206The deduction is worked out there, capped at your Medicare wages.
5. Schedule 1Line 17: the $6,408 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).

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 Denver metro plan above, a salary of $6,408 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; a Colorado family of four’s typical lowest-cost Silver plan is $1,707 a month, $20,488 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 Colorado for 2027

Colorado income tax starts from federal taxable income and is a flat 4.4%, the Department of Revenue’s rate for 2025 (a TABOR surplus can lower it temporarily under C.R.S. 39-22-627), so a deduction taken on the federal return lowers your Colorado tax too. Colorado runs its own marketplace, Connect for Health Colorado, so the federal plan file behind the other states’ numbers on this site does not cover it. The prices here are Anthem Blue Cross and Blue Shield’s 2027 rates by rating area, one of several insurers on Connect for Health Colorado. 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 Colorado

Colorado: Flat 4.4% on Federal Taxable Income

Colorado is one of the states that begins with federal taxable income rather than adjusted gross income. The self-employed health insurance deduction is taken before either, on Schedule 1, so it is already out of the number Colorado starts from. At the flat 4.4% rate, every dollar of premiums the company runs through payroll saves 4.4 cents of Colorado tax on top of the federal saving.

Sole proprietor, partner or C corporation owner instead? The rules differ: see the self-employed health insurance deduction in Colorado and how each kind of business handles owner health insurance. With staff in Colorado, see S corp owners in Colorado and ICHRA for small businesses.

Before the year closes: the year-end checklist, every date in order. Tax professionals with Colorado clients: a printable one-page Colorado handout.

Common Questions

Can an S corp owner deduct health insurance in Colorado?

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. Colorado starts from federal taxable income, which already has the deduction taken out, so it lowers your Colorado tax too, at the flat 4.4% rate.

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 Denver metro that is $6,408 a year on the cheapest Silver plan for a 40-year-old.

Does the S corp health insurance deduction lower Colorado tax?

Yes. Colorado income tax is based on federal taxable income, which the deduction has already reduced, at a flat 4.4%.

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)
• Colorado Department of Revenue, Individual Income Tax Guide (rate; federal taxable income)
• CMS, Plan Year 2027 Qualified Health Plan Landscape file
• HHS, 2026 poverty guidelines (2027 coverage)
• Social Security Administration, 2027 fact sheet (wage base)
• Anthem Blue Cross and Blue Shield, 2027 individual rates by rating area (quoted October 2026)