Big businesses and corporations get all kinds of tax breaks for health insurance. But what about self-employed people? What health insurance tax breaks do they get?
Self-employed people get to keep all of their income for themselves and their business, but they also have to cover all of their own expenses. Of those, health insurance is one of the biggest. To help offset this big expense, the government allows self-employed people to take a tax deduction for the cost of their health insurance. But what is this tax deduction and how does it work? In this article, we’ll tackle both of those questions and more, so keep reading to find out!
The self-employed health insurance deduction is a way for self-employed people that qualify to deduct the health insurance costs for themselves, their spouses, and their dependents from their taxes. This tax deduction is limited to those that are not eligible for employer-subsidized insurance and whose businesses turn a net profit.
Being self-employed can be one of the most freeing experiences of your life. But having to cover all of your own expenses can be stressful. Trust me, I’ve been there myself. During my early years as a self-employed worker, I spent hours upon hours researching ways to save money or get a tax break. That’s when I stumbled upon the self-employed health insurance deduction. Everything you read here comes from my own experience as well as guidelines from the IRS.
What is the Self Employed Health Insurance Deduction?
The self-employed health insurance deduction, as the name implies, is a way for self-employed people to deduct their health insurance from their taxable income. In layman’s terms, it’s a way for self-employed people to get a tax break at the end of the year. Just like big businesses and companies are able to get a tax break based on what they pay for their employees’ health insurance, self-employed people can get a break from the IRS too. But there’s much more to it than that.
Let’s start by taking a look at what all can be included and then we’ll get into who qualifies and also the delineation between a tax deduction and a business expense. One of the great things about the self-employed tax deduction (besides the tax savings!) is that it’s able to be applied to a wide range of health care expenses.
Just because it’s a self-employed benefit, it isn’t limited just to you as the self-employed worker and your own health insurance. This health insurance deduction can be applied to 100% of the amount that you pay for health, dental, and even long-term care insurance for yourself, your spouse, and any dependents that are 26 years old or younger.
But there are of course some requirements that must be met to qualify for this tax deduction, so let’s dive in.
Who Can Use the Self Employed Health Insurance Deduction?
It’s important to keep in mind that the self-employed health insurance deduction is only offered to people who are, you guessed it, self-employed. But the IRS doesn’t define “self-employed” as just one type of employment. So even if you aren’t self-employed in the practical sense of the word, you might still apply for the deduction. Here are the people who can potentially qualify:
- Self-Employed — The traditional sense of being self-employed, this includes both sole proprietors and single-member LLC owners. Sole proprietors and single-member LLC owners are eligible to use the deduction if they qualify. The tax deduction is applied to a self-employed worker’s personal income and goes on Form 1040 during tax time.
- Partnerships — Partners that are members of a legal business partnership, as well as LLC members that are treated as partners for tax purposes, can also qualify for this deduction. For partnerships, the deduction is also taken against the partners’ individual income. So it gets reported on Schedule K-1 of Form 1065.
- S Corporations and Small Business Owners — While it’s even a bit more into the grey area of confusion when it comes to tax deductions, S Corporation owners and other small business owners can also qualify for the tax deduction. With these corporations, the premiums can be paid by either the owner or the corporation itself, but it’s still taken as a personal tax deduction and reported on the W-2 statement.
Requirements and Limitations of the Deduction
Now that you have an idea of who can qualify for the self-employed health insurance deduction and a brief idea of how it’s reported differently, it’s time to dive in a little deeper. As you read the above section, you may have noticed the caveat about “if they qualify” or “potentially qualify” while describing who can use the deduction.
So let’s take a look at what enables anyone that’s self-employed, as defined by the above categories, to qualify for the tax deduction. At the same time, you’ll learn about the things that can prohibit someone from qualifying as well.
Ineligible for Employer-Subsidized Health Insurance Plan
The first of the two main qualifiers for deduction eligibility is that anyone looking to use the tax deduction can only do so if they did not have access to any other health plan. If you’re trying to decide if that includes you, keep in mind that this rule includes both your own as well as your spouse’s employer-subsidized plan.
So if you have a full-time job but you have a separate self-employed gig on the side, you are ineligible for this tax deduction if your full-time job offers health insurance. They just have to offer it, you don’t even have to accept it. Same for your spouse’s employer. If health insurance is an option besides buying it yourself, then you can’t choose to buy it yourself and take the tax deduction.
You Must Have Turned a Net Profit
The second of the two major qualifiers for this tax deduction is that you must report and show a net profit for the year for your business when it comes to tax time. If after all of your income and expenses you end up reporting a net loss for the year, you will not be able to qualify for the tax deduction to cover your health insurance expenses.
This is because if your net income for the year is negative (i.e. you show a net loss), then there is nothing to apply the tax deduction against. Since it’s taken as a deduction on your personal income, there has to actually be some net income for the deduction to be used.
Deduction Cannot Exceed Earned Income
This one ties into the above, but there is also a hard limit on the maximum amount of health insurance coverage that you can deduct even if you do qualify. And that hard cap is the earned income that you report on your taxes. For reasons similar to the above qualifier, the amount that you are trying to deduct cannot be higher than your earned income. Let’s take a look at a quick example.
You are self-employed and you don’t have access to an employer-subsidized health care plan from another job or through your spouse, so you can check that qualifier off. And through the year, you got your business going and earned a net income of $10,000 so you could check that one off as well. So per the two qualifiers, you’re good to go.
But say your insurance premiums are $1,000 per month and you paid $12,000 for them throughout the year. The most you could deduct in health insurance is the $10,000 that you had in earned income. The other $2,000 would not qualify for a tax deduction.
So in the end, you’d end up deducting all of your taxable income and you’d qualify to get a refund for the full amount of your taxes. But you’d still have to pay the full $2,000 to cover health care with no other tax breaks earned on it!
Month-by-Month Eligibility
The last limitation to keep in mind is that eligibility is actually determined monthly by the IRS. This means that you are only able to deduct the premiums that you paid for the months where you qualified — the months where you didn’t have access to an employer-subsidized health care plan yourself or through your spouse.
This final caveat was implemented for two reasons. First, to prevent people from taking advantage of the system and trying to claim the deduction even if they were granted access to an employer’s health insurance soon after. But it also helps people that leave their current position to work for themselves and suddenly find themselves paying for their own health insurance.
For example, let’s say you separated from your old job for the last four months of the year (and you’re not married) to start your own self-employed gig. If during those four months, you had to pay for your own health insurance, you could write off the insurance premiums that you paid during those four months.
