One of the main perks of being traditionally employed is receiving benefits like employer-sponsored health insurance. Leaving a 9-to-5 to strike out on your own means ditching those benefits and having to purchase your own health coverage.
However, health care plans have become much more affordable for the self-employed. Learn how you may be able to deduct your health insurance premiums and reduce your out-of-pocket health care costs—all while running your own business.
- Qualifying self-employed individuals can deduct the amount they spend on health care coverage from their net income.
- They can also deduct the health care premium costs for their spouse, dependents, and children 26 years of age or younger.
- Your self-employed health insurance premium deduction can’t exceed your business’s net income.
- Self-employed individuals may also be able to save on health care using premium tax credits and itemizing deductions for other medical expenses.
Are Self-Employed Health Insurance Premiums Deductible?
Under certain circumstances, self-employed individuals can deduct the amount they’ve spent on health insurance coverage for themselves and their families during a tax year—even though this is a personal expense, not a company cost. Eligibility requirements apply to this deduction.
Your health insurance plan may cover your children until they reach age 27, including biological children, adopted children, stepchildren, and foster children.
How the Self-Employed Health Insurance Deduction Works
The self-employment health insurance deduction enables qualifying self-employed individuals to deduct the total amount that they’ve spent on health care premiums during a tax year from their net income. However, you can only deduct up to the amount that your business earned that year.
If your health care premium expenses exceed your net income, you can include the remaining expenses with other medical expenses as itemized deductions.
Who Is Eligible?
To be eligible for a self-employed health insurance deduction, you can’t have been eligible to participate in a health plan subsidized by your employer or the employer of your spouse, child, or dependent—whether or not you actually participated in that plan. This aspect of eligibility applies monthly, so if your spouse started a new job in June and you qualified to join their employer-sponsored health plan, you could only claim the self-employed health insurance deduction for January through May.
Additionally, you must meet one of the following requirements:
- You were self-employed for the tax year and earned a net profit that you reported on Schedule F or Schedule C.
- You were a partner and reported net earnings from self-employment on Schedule K-1, box 14, code A.
- An S corporation (in which you own at least 2% of the shares) paid you wages during the tax year.
- You figured your net earnings from self-employment on Schedule SE using one of the optional methods.
Whether you are self-employed, a partner or a shareholder in an S corporation, your health insurance policy can be in your name or the name of the business. You can either pay the premiums yourself or have the company pay and report them.
If you are a partner or an S corp shareholder and pay your own premiums, the business must reimburse you and report the premium amounts as part of your gross income. If they don’t, the insurance plan won’t technically be established under your business so the premiums won’t be deductible.
What Can You Deduct?
You can deduct the total amount you spent on premiums for medical, dental, and qualified long-term care insurance for you, your spouse, and your dependents.
However, there are some exceptions. You can’t deduct:
- Amounts paid during months you were eligible to sign up for a health plan subsidized by your employer or the employer of your spouse, dependant, or child.
- Amounts paid by retired public safety officers from nontaxable retirement plan distributions.
- Amounts that were used to claim the Health Coverage Tax Credit (HCTC) or receive reimbursement of the HCTC during the year.
- Amounts paid for coverage where you received HCTC monthly advances.
The self-employed health insurance deduction only includes qualifying premium payments. You can’t deduct other medical expenses like deductibles and coinsurance.
How Much Can You Deduct?
You can deduct 100% of your qualifying health care premiums up to the amount your business has earned in net income for the year.
ACA Tax Credits Mean More Savings for the Self-Employed
How else can you lower your health insurance costs when self-employed? The Affordable Care Act introduced premium tax credits (PTCs), which are refundable credits that help qualifying Americans pay their premiums for health insurance coverage purchased through the Marketplace.
To qualify for a tax credit, you must:
- Not be eligible for affordable coverage through an employer-sponsored plan.
- Not be eligible to enroll in a government plan like Medicare, TRICARE, or Medicaid.
- Have paid your health insurance premiums by the original due date of your tax return.
- Not file your tax return with the status “married filing separately.”
- Not be a dependent.
- Have household income that’s at least 100% and no more than 400% of the federal poverty line for your household size.
To get a PTC, enroll in health insurance coverage through the Marketplace and request financial assistance. The PTC amount you qualify for will be estimated based on your family size, household income, and eligibility for non-Marketplace coverage. Your estimated credit, if you qualify for one, will be paid in advance directly to your insurance company on your behalf, lowering your out-of-pocket monthly expenses.
How To Deduct Self-Employed Health Insurance Expenses
To deduct your health care expenses as a self-employed individual, you’ll need to fill out line 17 on Schedule 1 (Form 1040). It reads, “Self-employed health insurance deduction,” and has a place to enter the amount.
What About Medical Expenses?
Medical expenses can be deducted if you itemize your deductions on Schedule A (Form 1040). You can deduct medical expenses that add up to more than 7.5% of your adjusted gross income. The expenses can include money you spent to diagnose, cure, mitigate, treat, or prevent disease, as well as payments to treat any function or structure of the body. You can also include payments made for insurance premiums that exceed the amount of net income you earned in a year.
Frequently Asked Questions (FAQs)
How do you get health insurance when you’re self-employed?
Self-employed individuals, who run businesses without employees, can buy health insurance through the individual Health Insurance Marketplace. When you fill out an application, you’ll learn if you qualify for premium tax credits and other savings.
How much does health insurance cost if you’re self-employed?
The cost of your health insurance depends on a variety of factors, including the premium tax credits you qualify for and the plan you want. Within the Marketplace, you’ll be able to browse different categories of plans with varying costs for premiums, deductibles, copays, and coinsurance. You can apply online to learn more about the potential costs for your specific situation.
Why is my self-employed health insurance deduction limited?
The self-employed health insurance deduction is limited by the amount of net profit from your business. However, you can claim leftover premium expenses if you itemize your deductions.