Self-employed health insurance deduction can help reduce taxes

Self-employed individuals take on a lot on their own – healthcare costs are no exception. Thankfully the self-employed health insurance deduction helps alleviate some of those costs. However, there are several details to understand about who is eligible and who isn’t.

Learn what you need to know about this deduction in this post.

Can self-employed deduct health insurance?

Yes, qualifying taxpayers can deduct health care premiums you paid for yourself, your spouse, and even dependents if you meet the criteria, which we’ll outline below.

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Self-employed health insurance deduction: Who can claim it? Who can’t?

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Some taxpayers are eligible to take the self-employed health insurance tax deduction, while others can’t.

To qualify for this deduction, you must be one of the following:

  • Self-employed with a net profit for the year,
  • A partner with net earnings from self-employment reported with Code A in Box 14, Schedule K-1 (IRS Form 1065)
  • An employee of an S corporation in which the taxpayer is a more than 2% shareholder, or
  • An individual with a net loss who used one of the optional methods for computing self-employment income.

If you don’t owe self-employment tax on Schedule C income, you can still qualify for the self-employed health insurance deduction.

  • As a self-employed person, your healthcare insurance premiums are tax deductible if your business has reported a profit within the tax year on Schedule C or Schedule F.
  • You’re also eligible to claim it if you’re a general or limited partner receiving guaranteed payments or have net earnings from self-employment reported with Code A in Box 14 of Schedule K-1 (Form 1065).
  • In addition, if you’re an S corporation shareholder who owns more than 2% of the business’ stock and reports wages on Form W-2, you can also claim the self-employed health insurance tax deduction.
  • Statutory employees (excluding full-time life insurance salespersons) who receive Form W-2 but who use Schedule C to report income and expenses may qualify for the deduction.

Who isn’t able to claim the deduction?

You’re not able to deduct health insurance premiums if you’re self-employed and have access to employer-sponsored subsidized healthcare plans (where an employer pays a portion of the premium) through an employer or your spouse’s employer. This is an IRS rule to prevent someone who is an employee and a self-employed person from claiming the deduction.

We should also note that the deduction applies on a month-to-month basis. What does that mean? You can be disqualified from claiming the health insurance deduction if you were covered by an employer plan for any month of the year.

Are there income limitations to the self-employed health insurance tax deduction?

Yes, there are earned income limitations set in place for the self-employed health insurance deduction. The rule is that your deduction can’t exceed your business’ earned income minus the deductions for one-half of self-employment tax and qualified retirement plan contributions.

Here’s an example: you’re self-employed as a sole proprietorship that incurred a loss for the year (as opposed to making profit). In that case, you don’t have earned income for the year and the deduction is limited to $0.

How to deduct health insurance premiums for the self-employed

You should take the self-employed health insurance deduction as an adjustment to your gross income on Schedule 1 of Form 1040. And, it doesn’t matter if you claim the standard deduction or itemize your deductions – either way you can take it.

You can use the Self-Employed Health Insurance Deduction Worksheet in the Form 1040 Instructions to calculate your deductible amount. Additionally, Worksheet 6-A in Pub. 535, Business Expenses, is helpful to calculate the deduction if:

  • You had more than one source of income subject to self-employment tax,
  • You file Form 2555 for the foreign earned income exclusion, or
  • Amounts you paid for qualified long-term care insurance are used to figure the deduction.

If you itemize your deductions and don’t claim 100% of the self-employed health insurance on Schedule 1, include any remaining expenses as “medical expenses” on Schedule A. This amount is subject to the adjusted gross income threshold for medical expenses.

Where do I put health insurance on Schedule C?

We’ll sometimes get the question, “where do I put health insurance on Schedule C?” While many other self-employed tax deductions are reported on the Schedule C, this one will be reported on Schedule 1 (Form 1040).

Self-employed health insurance tax deduction help

Small business taxes are an overwhelming topic without the right resources. If you’re not confident you have the time or expertise to tackle taxes on your own, our Block Advisors small business certified tax pros are here to help with your tax and bookkeeping needs.

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