Health insurance is no fun topic. There’s lots of debate around the necessity of paying high premiums. However, if you’re self-employed (i.e. you work as a contractor or freelancer), then pay attention. It’s important to know how to take health insurance as a tax deduction.
If you’re self-employed, work as a contractor or freelancer, then this deduction is for you!
What is the deduction?
In a nutshell, the self-employed health insurance deduction allows eligible self-employed taxpayers to deduct up to 100% of health, dental, and long-term care insurance premiums for themselves and their families (spouses, dependents, and children under 27)
This is taken on Form 1040 Schedule 1 Line 16 as part of your personal tax return. It is available to anyone who is self-employed (sole proprietor, a partner in a partnership or a greater than 2% S corp owner) as long as your business income is greater than the premiums paid. We’ll touch on this a little later with an example.
Before we continue there are a couple of requirements you need to understand to take health insurance as a tax deduction.
Qualifying for the self-employed health insurance deduction
Generally, there are two requirements you must satisfy to qualify for the self-employed health insurance deduction.
Requirement 1: No other health insurance was available to you throughout the year.
You can only take this deduction if you MUST buy your own health insurance.
This means you are not offered any group health insurance plans through an employer.
If you were able to buy into a subsidized employer plan at any time during the year, then you can’t take this deduction! This applies even if you don’t actually enroll in the plan. It also means that you can’t take this credit if you are eligible for health insurance through a spouse or dependent’s employer.
This limitation is applied on a month-by-month basis, so if you were only eligible for an employer plan for part of the year, you may qualify to take the self-employed health insurance deduction for the part of the year when you had no access to an employer’s coverage.
Let’s say you have a small business selling graphic design services. In May, you take a full-time job as a camp host for the next 5 months. On June 1st you become eligible for the health insurance plan through the campground. However, you choose not to enroll in it.
In this example, you can only take the deduction for your health insurance premiums from January through May. The deduction got taken away the minute you became eligible to join your employer’s plan in June.
Once the job ends in October, you would be able to take your personal payments for health insurance again. Why? Because at that time you are no longer eligible for an employer plan.
One important side note. If you maintain COBRA insurance from a previous employer, you won’t qualify for this deduction. I realize you’ll be paying for the premiums yourself. However, the IRS considers this part of your previous employer’s group plan and doesn’t allow it as part of the self-employed health insurance deduction.
Requirement 2: You must have a net profit from self-employment.
To take the self-employed health insurance deduction, you must also make a net profit from your self-employment.
What is the net profit from self-employment?
This is your revenue minus any business expenses. For example, you take in $40,000 in revenue and have $25,000 in expenses. Your net profit would be $15,000.
If you pay $10,000 for health insurance, then you qualify for the full self-employed health insurance deduction.
However, if you have a net profit of $3,000 and your health insurance premiums were $10,000, you are only able to deduct up to $3,000 in health insurance premiums.
The deductible health insurance premium amount depends on how much of a net profit you make.
|If your net profit is…
|Then you may be able to deduct…
|More than the amount paid for health insurance premiums
|Up to 100% of health, dental, and long-term care insurance premiums
|Less than the amount paid in insurance premiums
|Your premiums up to the amount of net profit
What if I own an S corp?
The self-employed health insurance deduction is available to you. However, it gets handled a little differently.
By now, I hope you know that an S corp owner involved in the business must take a reasonable compensation (aka a W-2 salary). In this case, your health insurance premiums are considered part of your W-2 salary for income.
Take a look at this sample W-2:
You can see that the S corp health insurance is reported in Box 14 and also included in wages in Box 1. However, the health insurance premium is NOT included in Box 2 or 3 for Social Security and Medicare wages.
If you own an S corp, this is exactly how you need to handle health insurance premiums in order to be eligible to take health insurance as a tax deduction.
The $5,000 health insurance premiums are eligible for the tax deduction on your personal Form 1040. It shows up the same as a sole proprietor on Schedule 1 of Form 1040. If you’re using tax software, I encourage you to double-check for this.
To qualify, the plan must be paid for by the business. The plan can either be in your name or the name of the S corp. However, if you pay the premiums personally, the S corp must reimburse you.
What if I’m a partner in a partnership?
Don’t fret. You are still eligible for the self-employed health insurance deduction. However, it gets handled a little differently.
As a partner in a partnership with income subject to self-employment tax, you do qualify to take the deduction. Self-employment earnings are reported on your Schedule K-1 from the partnership. Just like the example above the amount of the health insurance tax deduction cannot exceed the partnership earnings.
To qualify, the plan must be paid for by the business. For partnerships, the plan can either be in your name or the name of the partnership. If you pay the premiums, the partnership must reimburse you. The health insurance premium amounts will also be included as guaranteed payments as part of your Schedule K-1.
If any of this confuses you, I highly encourage you to reach out to a tax professional for help.