Any entrepreneur knows how difficult it can be to navigate the tax code and comply with the required filings. Health insurance premiums, however, are remarkably simple and almost always deductible in the most advantageous way possible for the self-employed.
The only changes under the Affordable Care Act (ACA) that the self-employed need to be aware of are an increase in options and flexibility to meet their family’s needs.
In general, health insurance premiums are completely deductible. They are entered on page one of IRS Form 1040, meaning that you can take them even if you don’t itemize deductions. Health insurance premiums come directly off your Adjusted Gross Income (AGI).
This deduction for health insurance premiums is one of the most important ones for the self-employed. “Be absolutely sure you take it because it can be one of the largest deductions you have,” says Stephen Fishman, small business law expert and author of Deduct It! Lower Your Small Business Taxes.
While nearly any healthcare premium qualifies for this deduction, there are limits. Neither you nor your spouse can be eligible for an employer-sponsored plan for any month’s worth of premium you are claiming. And if you are operating as an S-corp, which is sponsoring your healthcare, the deduction cannot exceed the total profit by that company in that calendar year. Entrepreneurs running multiple companies need to be sure that the sponsoring company has more income than their total health insurance premium.
You also have to qualify as self-employed, which is to say that you have no employees for whom you are filing a W-2. Expenses filed on a form 1099 to independent contractors do not count against this qualification.
All health insurance premium deductions for the self-employed remained in place with the passage of the ACA. As an individual you can take advantage of health care exchanges like anyone else, and any government subsidy received for an individual policy is not taxable. You can participate in the health exchanges like any other person without any penalties.
The deduction does not extend to health savings accounts (HSA), which many self-employed people find to be a flexible and convenient alternative. These contributions come directly off your income. The cost of a corresponding high deductible insurance premium remains fully deductible, like any other health insurance premium.
Additional health care expenses of any kind, such as prescription drugs, glasses, and co-pays are not deductible directly. These are filed in Schedule A, and limited to outlays over 10% of your AGI. For this reason, any entrepreneur with high healthcare costs may find it advantageous to have a comprehensive policy, which covers all of these expenses but requires a higher premium.
This creates a dilemma for many self-employed people. In general, if your income is high and someone in your family has a chronic condition that requires expensive prescription drugs or many doctor’s visits, a comprehensive whole-health policy is going to be the most advantageous for you because the premium is completely deductible. But this limits flexibility and the ability to manage your own health care expenses.
Every self employed person needs to estimate their out of pocket expenses with any proposed health insurance plan before they can find the tax advantages for any plan based on their own situation. Generally, these need to be minimized because of their limited deductibility.
In general, managing every self-employed person’s healthcare costs for the maximum tax advantage comes down to a choice between an HSA with a high deductible policy or a traditional comprehensive policy necessary to manage high ongoing medical expenses. Both have their own advantages based on the nature of the expenses anticipated for the entire family being covered. A health insurance professional can help steer you through the options and find the coverage that works best for your family.
Despite these complications, health insurance is one of the straightforward and deductible of all the expenses faced by a self-employed entrepreneur. All of the various options have good tax advantages, with the only trick being maximizing your own advantages based on your family’s situation.