Have you taken advantage of the self-employed business owner health insurance deduction?
Self-employed business owners may deduct health insurance premiums from gross income for a reduction in taxable income. The deduction is for medical and dental insurance and qualified long-term care insurance for yourself as the business owner and also for your family.
How the Self-Employed Health Care Deduction Works
As a self-employed business owner, you may deduct the cost of health insurance you buy for yourself and your spouse, dependents, and children under 27 years old as of the end of the tax year. Under specific circumstances, you may also be able to deduct Medicare premiums and premiums for long-term care insurance.
This insurance plan must be established under your business, and your personal services must have been a major income-producing factor in the business—but the insurance policy can be in either your name or the name of the business. You can pay the premiums personally or through your business.
How Do I Qualify for this Deduction?
You can qualify depending on your status as a business owner and your profits in one of these business types:
- If your business reported a net profit for the year on Schedule C. This would be the case if you are a sole proprietor or single-member LLC owner
- If you are a partner with net earnings for the year, as reported on your Schedule K-1 (the form that shows your annual earnings from the partnership)
- If you used an optional method to figure your net earnings from self-employment on Schedule SE (self-employment tax calculation)
- If you were paid as an employee from an S corporation where you are a more-than-2% shareholder. The wages you are paid are the ones on your W-2 annual report form
Shareholders in corporations aren't eligible for this deduction because they are not self-employed.
How to Calculate the Health Care Deduction
The IRS has several versions of a worksheet you can use to calculate the amount of the deduction.
You can use this simplified worksheet on page 86 of the Instructions for Form 1040.
You must use the worksheet on page 22 of IRS Publication 535 if:
- You had more than one source of self-employment income,
- You file Form 2555 for foreign earned income, or
- You are using amounts paid for qualified long-term care insurance to calculate the deduction.
You must use the worksheet on Publication 974 (premium tax credit) if you bought your insurance through the HealthCare Marketplace and you are claiming the premium tax credit.
How to Get This Tax Deduction
The premiums for your self-employed health insurance are deducted from your gross income on your personal tax return before your Adjusted Gross Income is calculated, reducing your personal income.
First, you will need to determine the amount of health insurance premiums for the year, for yourself and eligible dependents.
You will need to know (this is a simplified example):
A. The amount paid in the year for insurance coverage established under your business (or the S corporation in which you were a more-than-2% shareholder) for you, your spouse, and your dependents.
B. For a qualified long-term care plan, you will need to enter the amount you paid, subject to a maximum payment amount, depending on the age of the beneficiary. Here's the schedule:
- $420 — if that person is age 40 or younger
- $790— if age 41 to 50
- $1,580— if age 51 to 60
- $4,220— if age 61 to 70
- $5,270— if age 71 or older
C. Then you will need to enter the net profit from the business under which the insurance plan is established.
To get the amount of the benefit, you add up A. and B. and compare this amount to your net profit. The amount of the deduction is the smaller amount. The amount of this health care deduction is limited based on your business profit. No profit, no deduction.
Here's an example: Your business had $12,000 in profits for the year. The total of the costs of your health care insurance premiums is $8,000. You can take the full amount of the deduction. But if your profit is $7,000, you can only take a deduction of $7,000.
The amount of the deduction is included on your Form 1040 or 1040-SR on Schedule 1, Line 16 as an adjustment to income, reducing your adjusted gross income.
Deducting Long-term Care Insurance Premiums
Premiums you pay for a long-term care insurance policy may also be deductible under this self-employed health care deduction. The deductions are limited to the lower of the amount you actually pay or a premium dollar limit based on the age of the beneficiary (see above).
To qualify for this deduction, you must be paying premiums for a qualified long-term care insurance contract that meets specific requirements, including:
- It must be guaranteed renewable,
- It must provide that refunds and dividends may be used only to reduce future premiums or increase future benefits,
- It must not have a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, and
- It must not pay or reimburse any expenses that would be reimbursed under Medicare.
The policy must provide specific long-term care services.
Restrictions and Limits on the Deduction
The health care premium deduction is only available against a profit; if your business had a loss, you cannot claim this deduction. Premiums for your family may also be deducted, based on the same restrictions as above.
It is only available to self-employed individuals, not corporate owners (who are not self-employed).
The deduction is also not available if you were eligible for health insurance for another employer (including your spouse's employer), even if you didn't participate in this insurance coverage.
Because the information about this deduction is complicated, and there are many limitations and restrictions, please check with your tax professional before claiming this deduction, and get help with the worksheet.