If you are self-employed, there are several tax incentives and deductions that can significantly reduce your tax liability; the deduction for self-employed health insurance being one of them. Unlike individuals who pay for premiums through an employer sponsored plan, self-employed individuals may be eligible to deduct the total amount of premiums paid to qualifying plans. This helpful tax guide will discuss the eligibility requirements for the self-employed health insurance deduction.
Self-Employed Health Insurance Deduction
The self-employed health insurance deduction allows self-employed individuals to deduct amounts paid for medical, dental and qualified long-term care insurance for yourself, your spouse, and your dependents. One of the following must apply to be eligible for this deduction:
- You are self-employed and report net profit on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040).
- You are a partner with net earnings from self-employment income reported on Schedule K-1 (Form 1065), box 14, code A.
- You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
- You receive wages from an S-corporation in which you were a more-than-2% shareholder. However, health insurance premiums must be paid or reimbursed by the S-corporation and reported as wages on Form W-2.
Establishing a Qualified Plan
For the health insurance premiums to be tax deductible they must also be established according to IRS guidelines. The insurance plan must be established in the following way:
- For self-employed individuals who report income and expenses on Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.
- For partners, a policy can be either in the name of the partnership or in the name of the individual partner. The partnership may pay for the premiums on behalf of the partner but the premiums paid must be reported on Schedule K-1 (Form 1065) as guaranteed payments. However, if the partner pays for the premiums the partnership must reimburse the partner and report guaranteed payments on Schedule K-1 (Form 1065). Otherwise, the insurance plan won’t be considered to be established under your business and may not be tax deductible.
- For more-than-2% shareholders, a policy can be either in the name of the S-corporation or in the name of the shareholder. If premiums are paid by the S-Corporation then the amount paid will be included on Form W-2 as gross wages. Like partnerships, if a shareholder pays for premiums out of pocket then the S-corporation must reimburse the shareholder and report taxable wages in box one on Form W-2.
You may not deduct premiums paid on the following insurance plans:
- Self-insurance reserve funds.
- Insurance plans that pay loss of earnings from sickness or disability.
- Certain life insurance or annuities.
- Life insurance used to secure a business loan.
With the rising cost of health insurance for self-employed taxpayers, the deduction for self-employed health insurance may alleviate some of the high cost of medical premiums. It is important to distinguish between qualified and non-qualified plans in order to take advantage of this tax deduction. If you are unsure if you qualify for the health insurance deduction or if you need help establishing a qualified plan, contact your CPA.