How Group Health Insurance Is Taxed for Partners and LLC Members
A partner is not an employee of the partnership, so the partnership reports the premiums as guaranteed payments and the partner takes the self-employed health insurance deduction on the personal return. An LLC follows whichever set of rules matches the way it is taxed.
Three Steps for Partners
The Partnership Pays or Reimburses
The policy can be in the partnership’s name or the partner’s. If it is in the partner’s name and the partner pays, the partnership must reimburse the partner and report the amounts as guaranteed payments. Otherwise the plan is not considered established under the business.
The Premium Is a Guaranteed Payment
The partnership reports the premium to the partner as a guaranteed payment and generally deducts it as a business expense. See how employers deduct group health premiums.
The Partner Deducts It Personally
The partner takes the self-employed health insurance deduction on the personal return, using Form 7206. It can cover the partner, spouse, dependents and a child who is under age 27 at the end of the year.
Conditions for the Deduction
These come from the IRS instructions for Form 7206.
Net Earnings From the Partnership
The partner must have net earnings from self-employment from the partnership, shown on Schedule K-1, and the deduction cannot exceed them.
No Other Subsidized Plan
The deduction is lost for any month the partner or the partner’s spouse was eligible for an employer-subsidized plan, even without enrolling.
No Section 125 for Partners
Pre-tax payroll deduction through a cafeteria plan is for employees. A partner is not one, so the partner’s own premiums come through the personal deduction instead.
Put the Arrangement in Writing
Recording how the partnership pays or reimburses premiums, in the partnership agreement or in written minutes, makes the treatment easy to support.
The Rules Follow the Tax Classification
An LLC is a state-law entity, not a tax category. The federal treatment depends on how the LLC is taxed.
Single-Member LLC
Taxed as a sole proprietorship by default. See the sole proprietor guide.
Multi-Member LLC
Taxed as a partnership by default, so the rules on this page apply to its members.
LLC Taxed as an S Corporation
An LLC can elect S corporation treatment. See the S corporation owner guide.
LLC Taxed as a C Corporation
An LLC can elect to be taxed as a corporation. See the C corporation owner guide.
Common Problems for Partners
Paying Personally With No Reimbursement
A partner who pays a personal policy without partnership reimbursement and guaranteed payment reporting generally cannot claim the deduction.
Treating a Partner as an Employee
A partner generally cannot be a W-2 employee of their own partnership, so running a partner’s premium through payroll is a mislabel.
Expecting Self-Employment Tax Savings
The deduction reduces income tax. The guaranteed payment generally remains part of the partner’s self-employment earnings.
Partner and LLC Member Questions
Is a partner treated as an employee?
No. That is why the premium is reported as a guaranteed payment instead of through payroll. See how the exclusion works for employees.
Can the partnership buy a group plan?
Yes when it has covered employees who are not partners, and carrier rules apply. Partners generally take part as partners, not as employees.
What if I have a multi-member LLC?
By default it is taxed as a partnership, so this page applies to you unless the LLC elected corporate treatment.
Does it matter whose name is on the policy?
The policy can be in either name. If it is in yours and you pay, the partnership must reimburse you and report guaranteed payments.
Can I use a cafeteria plan?
Generally not as a partner. The partnership’s employees can, and your premiums come through the personal deduction.
Who should confirm my situation?
Your CPA. We can set up the plan and record the arrangement, and your CPA can confirm the K-1 and the return.
CFH are licensed insurance brokers, not tax advisors, and this page is general information rather than tax advice. Ownership, family relationships and how the business is taxed all change the result, so confirm your own treatment with your CPA. Our clients also have access to CPAs and attorneys through the firm.
Where These Rules Come From
IRS: Instructions for Form 7206, Self-Employed Health Insurance Deduction · S Corporation Compensation and Medical Insurance Issues · Notice 2008-1 · Publication 15-B, Employer’s Tax Guide to Fringe Benefits
Related Guides
Related reading: Tax Benefits of Group Health Insurance for Owners · C Corporation Owners · S Corporation Owners With More Than 2 Percent · Sole Proprietors · Small Business Health Care Tax Credit · Section 125 Tax Savings Calculator
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