Self-Employment Health Insurance Deduction: A Guide

If you own a small business or you’re otherwise self-employed, you have to take responsibility for yourself in many different ways. No one else is going to withhold taxes from your salary, so you have to make estimated tax payments for yourself. No company is going to put you on their group health insurance plan, so you have to set it up for yourself.  While it can be a lot of work to have to keep everything in order, there are perks to being self-employed as well. Not only do you get the freedom of being your own boss and making these decisions for yourself, but there are all kinds of incentives and tax deductions you can take advantage of to lower your costs.  One of these perks is the self-employment health insurance tax deduction. This is a deduction that encourages you to get effective health care by giving you a chance to decrease your tax liability. Find out all about it and make sure you know what you’re doing when it’s time to file your taxes.   

1. It Reduces Your Taxable Income

This health insurance deduction is one of many tax deductions for small business owners that should be common knowledge. If you are self-employed, it allows you to deduct your health insurance premiums from your adjusted gross income, which means you have less taxable income. Any kind of self-employment health insurance, dental insurance, or qualified long-term care insurance should qualify. This benefit is an above-the-line deduction, which means that the money you use to pay those premiums is essentially tax-free. With a lower AGI, you may be more likely to qualify for other helpful tax credits and benefits. You might even drop to a lower tax bracket if you were on the fence between the two. 

2. You Must be Self-Employed Without Another Option

The primary requirement for eligibility for this benefit is to be self-employed. You can be the sole proprietor or a partner in a small business, an independent contractor, or even a wage-earning partial owner of an S-corporation.  This benefit is meant to support health insurance when you’re self-employed, for those that don’t have access to employer-sponsored health insurance plans. Therefore, if either you or your spouse are able to participate in an employer-based plan, then you shouldn’t be able to get this benefit.  If you can get health insurance through an employer, they will take the premiums out of your pay. This deduction essentially allows you to do the same thing as your own employer. You are taking the premiums out of your pre-tax pay. 

3. The Deduction Can’t be Greater Than Your Income

One small loophole is that you can’t deduct your healthcare premiums from your income if you have premium expenses exceeding the income you earned through self-employment.  Your health care premiums are supposed to be taken out of your self-employment income, so if your business reports a loss or you don’t have enough income to pay your premiums, then it doesn’t make sense for you to be able to claim the deduction on your self-employment tax return. Your income from self-employment must be equal to or greater than your health insurance deduction. 

4. Medical Expenses May be Deductible

While your health insurance premiums are deducted from your income pre-tax, qualifying medical expenses can also be deducted from your final tax bill. You will have to file for these costs as itemized deductions.  Medical bills deductible from your tax liability have to add up to more than 10% of your adjusted gross income. (Before 2019 the requirement was only 7.5% of AGI.) You can receive medical and dental expense deductions for many different services and treatments received and paid for within the last tax year. Here are just a few of the medical expenses you can count: 

• Diagnosis, cure, treatment, and prevention of disease 
• Fees paid to medical professionals, including psychiatrists, chiropractors, and nontraditional medical practitioners
• Prescription medications and Insulin
• Inpatient or residential care
• Cost of transportation to medical care, such as ambulance services or travel to receive medical care
• Dental care treatments
• Vision care expenses including glasses or contacts
• Medicare premiums reported with Social Security benefits

Partner With A Tax Professional Who Specializes in Self-Employed Taxes

The self-employment health insurance deduction encourages more individuals to sign up for health insurance for those without employer-sponsored plans. Having insurance is crucial, as the costs of going without can be much higher if something unfortunate were to happen. Once insured, it's important to claim your premium deductions and itemize medical expenses if you will benefit. Working with 1-800Accountants, experts who specialize in self-employed taxes can help you navigate the process with ease. They'll assist you in ensuring you claim all your potential tax benefits and deductions, even if you don't qualify for self-employment deductions or itemization. This includes exploring options like flexible spending or health savings accounts. Don't delay securing your health insurance and taking full advantage of available tax savings for those who are self-employed. Learn more about the top reasons you need an accountant if you're self-employed.