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Health Insurance Deduction for Self-Employed Individuals

Health Insurance Deduction for Self-Employed Individuals
Ines Zemelman, EA
21 September 2022

Compared to workers who are considered employees, being self-employed has several tax implications. The deductions available are one significant difference. For example, the self-employed health insurance deduction allows independent contractors and other self-employed persons to deduct their health insurance premiums.

This is one tax deduction you don't want to overlook. If you are self-employed, you can deduct up to 100% of your health insurance premiums paid for the year. To qualify for the deduction, you must fulfill specific requirements.

In this article, we’ll go over those rules and explain how self-employed people can write off health insurance.

Is Health Insurance Tax Deductible for Self-Employed?

Yes, if you have qualifying insurance and are a self-employed individual, they are deductible. Medical insurance, qualifying long-term care coverage, and all Medicare premiums are all examples of qualifying health insurance (Parts A, B, C, and D).

Note for prior tax years: If you did not include Medicare premiums (or other insurance premiums) on a prior year's return, you can file an amended return to claim or raise your deduction for self-employed health insurance for that year.

What Kinds of Health Insurance Are Tax Deductible for Self-Employed Individuals?

A tax deduction is one that reduces a person's (organization's) obligation by decreasing taxable income. To determine the tax payable, expenses such as health insurance premiums can be deducted from the taxpayer's gross income.

Self-employed individuals can deduct 100% of their health insurance premiums for themselves, their spouse, dependents, or any non-dependent children aged 26 or under at the end of the year. The deduction applies solely to federal, state, or municipal income taxes, not self-employment taxes.

The Internal Revenue Service (IRS) specifies the sort of policy premium that self-employed individuals can claim. According to the IRS, self-employed individuals should fall into the following categories.

  • Dental Insurance
  • Medical Insurance
  • Long Term Care (LTC) Insurance

To be eligible for the deduction, you must fulfill the two conditions listed below.

  • You have no additional health coverage.
  • You have a business income.

Who Can Claim a Self-Employed Health Insurance Deduction?

Before you begin filling out tax forms, make sure you and your company qualify for the self-employed health insurance deduction. To be eligible for the deduction, you and your company must meet the following requirements:

  • Carry out a trade or business as a sole proprietor or independent contractor.
  • A partner in a company or trade.
  • Otherwise, you're in business for yourself (including a part-time business).

Show your net profit for the tax year.

You must demonstrate a net profit and can deduct just the amount earned from the business for which the insurance was set up. (If your health insurance deduction exceeds your net income, you can deduct the premiums as part of your other itemized medical expenditures.)

Not eligible for an employer-sponsored medical or long-term care plan.

Even if you do not join, you are not able to claim self-employed health premiums for any months in which you were eligible for an employment plan.

Each month, eligibility is determined.

You can only claim the health insurance premium write-off for months when neither you nor your spouse was eligible for an employer-sponsored health plan.

For example, if you were single and ineligible for any employer-provided health plan for the last six months of the year because you quit your job and launched your own business, you can deduct the premiums you paid for coverage during that time.

How to Write off Health Insurance if Self-Employed?

This health insurance write-off is reported on Part II of Schedule 1 as an adjustment to income and moved to page 1 of Form 1040, so you benefit whether or not you itemize your deductions.

Unlike an itemized deduction, this deduction approach is advantageous since it reduces your adjusted gross income (AGI).

Lowering your AGI lowers your chances of being affected by unfavorable phase-out rules, which can diminish or eliminate certain tax incentives.

How Do I Claim Health Insurance Benefits for Myself and My Family?

Once you've determined your eligibility, you'll need to know where to deduct health insurance premiums for self-employment tax reasons.

The straightforward method to claim your health insurance premiums is to subtract them from your total gross income. The outcome of these deductions is your adjusted gross income or AGI. Essentially, your AGI is your gross income (the entire amount you make from employment or other sources) less any proper adjustments, like student loan interest or health savings account (HSA) payments.

AGI = Gross Income - Adjustments

Using your premiums as an income adjustment has two advantages:

  • Your overall tax burden is determined by your AGI. If you utilize your insurance premiums to reduce your AGI, you will have a lower tax liability.
  • You can deduct 100% of your qualified health insurance premiums from your income.

If you do not claim all of your paid premiums as an income deduction, you can add the leftover amounts with your other itemized medical expenditures. This would be necessary, for example, if your health insurance premiums surpassed your business income. Remember that beginning with the 2021 tax year, you can only utilize 10% of your total qualified health-related expenses, including premiums, if you combine them with your other itemized medical bills.

Remember that this advice only relates to insurance expenses for yourself and your family. Whether you itemize or claim the cost as an income adjustment, this deduction is treated as a personal tax write-off rather than a business expenditure.

Can I Receive Both the Premium Deduction and the Premium Tax Credit Provided by the Affordable Care Act (ACA)?

The self-employed health insurance deduction and the premium tax credit can both be used in conjunction. If you qualify for both, keep this guideline in mind: Your total eligible insurance premiums cannot exceed the sum of your combined insurance premium deductions and premium credits.

Calculating these deductions can be a difficult task. To assist you to manage the various alternatives and requirements, the IRS provides spreadsheets and instructions for two calculating methods: simplified (also known as an alternative) and iterative. The worksheets are optional but may give important information.

How Do I Report Health Insurance Premiums Paid for My Employees?

If you are self-employed and have a workforce, you can deduct dental and medical insurance premiums paid on behalf of your employees, including eligible LTC insurance and HSA payments.

You would list these fees as business expenses and provide the necessary forms with your tax return. The tax schedule you utilize is determined by your self-employment status. A sole proprietor, for example, can submit a Schedule C"Profit or Loss From Business" form.

Use the IRS self-employed health insurance deduction worksheet to calculate deductible health insurance company expenses. If you have more than one health plan, use a separate form for each trade or business.

For example, suppose you own two small businesses: a roofing firm (company A) and a printing company (business B).

  • Complete one worksheet only for business A if it has a health insurance plan ABC
  • Complete a second worksheet for business B if it had a health insurance plan XYZ.

Bottom Line

If you qualify, the health insurance is tax deductible for self-employed and provides great tax relief. With the escalating cost of health insurance, a tax deduction might help you cover at least a portion of the price which will aid you to stay healthy and happy.

Ines Zemelman, EA
Founder of TFX