Any entrepreneur knows how difficult it can be to navigate the tax code and comply with the required filings. But for those that qualify as “self-employed”, here’s some good news: Your health insurance premiums are most likely a tax-deductible business expense.
What Is the Self-Employed Health Insurance Deduction?
In general, health insurance premiums are completely deductible if you’re self-employed and self-insured. They are entered on page one of IRS Form 1040, meaning that you can take the deduction even if you don’t itemize. Health insurance premiums are deducted directly from your Adjusted Gross Income (AGI).
This self-employed health insurance deduction is one of the most beneficial for the self-employed. Stephen Fishman, a small business law expert and author of Deduct It! Lower Your Small Business Taxes says:
“Be absolutely sure you take it because it can be one of the largest deductions you have.”
How Can You Qualify?
While nearly any healthcare premium qualifies for this deduction, there are limits. Some essential qualifications for the self-employed health insurance deduction include:
- Neither you nor your spouse can be eligible for a separate employer-sponsored plan for any month’s worth of premium you are claiming.
- If you are operating as an S-corp, which is sponsoring your healthcare, the deduction cannot exceed your company’s total profit in that calendar year.
- Entrepreneurs running multiple companies need to be sure that the sponsoring company has more income than their total health insurance premiums.
- You have to qualify as self-employed, which requires that you have no employees for whom you are filing a W-2. (Expenses filed on a 1099 form to independent contractors do not count against this qualification).
Specific Rules Surrounding the Deduction
As self-employed, you qualify for all Affordable Care Act (Obamacare) health insurance premium deductions. You can take advantage of healthcare exchanges, and note that any government subsidy received for an individual policy is not taxable. You can participate in the health exchanges without any penalties.
However, the deduction does not extend to contributions to health savings accounts (HSAs), which many self-employed people use because the contribution to the account reduces their taxable income. The premiums you actually pay for the HSA’s high-deductible insurance remains fully deductible, like any other health insurance premium.
Additional healthcare expenses of any kind, such as prescription drugs, glasses, and copays are not directly deductible. These are filed in Schedule A, and the deduction is 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 and comes with higher deductible premiums.
Selecting the Right Health Insurance Plan
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 your best option. That’s because the higher premium is completely deductible.
Self-employed people need to estimate their out of pocket expenses with each plan they consider to find the best one for their situation. Generally, they will want minimum out of pocket costs since deductions for them are limited.
If you are self-employed, you need to evaluate how you can optimize the maximum tax advantages for your healthcare costs. You should compare an HSA with a high-deductible policy against a traditional comprehensive plan that covers sizable medical expenses. Both have their own advantages. A health insurance professional can help steer you through the options and find the coverage that works best for you and your family.
Despite these complications, the self-employed health insurance deduction is one of the most straightforward given to solo entrepreneurs. All of the various options have good tax benefits; the trick is finding the one that provides you the best advantages based on your healthcare needs.