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Small Business Solutions

By: Tax Hotline
Summer 2026 (Vol. 44, No. 2)

Q: My wife and I own a small corporation and get paid as W-2 employees but due to our small size we struggle getting employer health insurance and we are over the income limit for Healthcare.gov. Would switching to an S-Corp allow the company to pay more of our expenses and lower our reported income?

A: With just you and your wife as employees, traditional group health plans may be costly or limited, but alternatives exist. Here are some key strategies to consider:

1. Accountable Plan for Reimbursements.

Set up a formal written accountable plan. The business can reimburse you tax-free (not added to W-2) for substantiated business expenses. This is deductible by the S-Corp and avoids payroll taxes on the reimbursed amounts. Examples include: home office, cell phone/internet, mileage or vehicle costs, supplies, travel and equipment. This saves 5.3% FICA compared to salary or non-accountable reimbursements.

2. Consider QSEHRA or ICHRA.

With QSEHRA, your small business reimburses employees (you and your wife) for health insurance premiums and medical bills, up to IRS limits. Tax-free to you, deductible for the company. ICHRA is similar, but more flexible. The business sets the reimbursement amount for individual health plans & expenses and there is no strict IRS dollar cap. Both avoid expensive group insurance and can help with Healthcare.gov subsidies if structured right.

3. Contributing Assets to the Business Name.
  • Contribute personal assets (e.g., vehicle, computer equipment, furniture, office items) as a capital contribution.
  • Benefits: Increases your stock basis; business can depreciate the assets or deduct related expenses (maintenance, etc.) if used for business. Provides some liability protection and can combine with accountable plan reimbursements for operating costs.
  • Be sure to document fair market value and business use.
4. Additional Tax-Efficient Moves
  • Retirement plans (Solo 401(k) or SEP IRA): Business contributions reduce pass-through income (based on W-2 salary).
  • HSA (if HDHP): Tax-deductible contributions plus tax-free medical use.
  • Home office/vehicle: Use accountable plan or proper allocation if contributed.

Be sure to keep salary 'reasonable' for your role, hours, industry, and company size (use salary surveys as support). Too low risks IRS reclassifying distributions as wages. Many owners aim for a defensible minimum while maximizing deductible business expenses and distributions. We recommend you contact a CPA or Tax Pro to run scenarios for salary level. deductions and subsidies. Also, contact an Insurance Broker and get quotes for QSEHRA/ ICHRA, small group, or marketplace options in your state. Confirm your state's small group health rules, any additional taxes, or insurance mandates.

This combination (low-but-reasonable salary with accountable plan, proper health setup and strategic asset contributions) is a standard approach for small S-Corp owners that can meaningfully reduce personal out-of-pocket costs while supporting subsidy eligibility.

Q: Do we have to switch to an S-Corp to take these benefits?

A: No, it depends on your specific goals, numbers, and overall tax picture. A regular C-Corp has some advantages and disadvantages compared to an S-Corp in your situation (low salary for ACA subsidies plus business covering expenses). Here's a clear breakdown to help you evaluate:

C-Corp Advantages
  • Fringe benefits. For owner-employees, the corporation can often pay health insurance premiums (and certain other benefits) as a deductible business expense, and they can be tax-free to you (not added to W-2 as income).
  • No reasonable compensation scrutiny in the same way as S-Corps though reasonable salary is still best practice to avoid dividend recharacterization issues.
  • Easier to contribute personal assets as capital; business can depreciate and deduct related expenses similarly.
  • Accountable plans are still fully available for tax-free reimbursements of business expenses.
C-Corp Disadvantages
  • Double taxation. Corporate income is taxed at the entity level (21% federal), then again when distributed as dividends (qualified dividends taxed at 0%/15%/20%). This can make keeping profits in the business or taking distributions less efficient than an S-Corp's pass-through taxation.
  • Your W-2 salary still affects your household MAGI but health benefits paid by the C-Corp are generally not added to your W-2 income (better than S-Corp), which may help subsidy eligibility.
  • There are more formalities and potential state taxes on C-Corps in some places.
S-Corp Potential Benefits
  • Pass-through taxation avoids double tax and losses can flow to your personal return.
  • Distributions (after reasonable salary) avoid payroll taxes.
  • Often preferred for small owner-operated businesses wanting to minimize self-employment taxes.

Switching from C-Corp to S-Corp requires filing Form 2553 with the IRS (and possibly state forms). There are eligibility rules, timing restrictions and potential built-in gains tax on appreciated assets if you switch. It's reversible but not always straightforward. Many small businesses start as C and elect S later.

To help you decide, model both structures for your projected income, salary, expenses, subsidies, and distributions. Factor in your wife's involvement, total household income, and long-term plans (e.g., selling the business, retirement). Keep in mind you can implement most of what we discussed previously without switching.