Self-employed health insurance deductions 101
Paying for health insurance when you’re a freelancer or 1099 can be a real, well, drag. We have good news. Eligible self-employed individuals can take advantage of the self-employed health insurance deduction, which allows you to deduct up to 100% of health, dental, and long-term care insurance premiums for yourself, your spouse, and your dependent or non-dependent children who are younger than 27.
Before we dive deeper on this topic, we do want to say that we are not legal experts and this is not legal advice. Always consult your own legal counsel on the tax impact of your health insurance.
Ok, now that all the caveats are out of the way, let’s dive in!
When your health insurance premiums may be deductible
For freelancers, 1099s, and other self employed people who pay for their own health insurance from their pocket, premiums may be tax deductible. If you work for yourself and aren’t eligible for employer-sponsored health plans through your spouse, you are likely eligible for this deduction. If you qualify, you can deduct 100% of your health insurance premiums paid for yourself, your spouse, and any dependents under 27. If you qualify, this deduction also reduces your adjusted gross income (AGI), which lowers your overall taxable income.
Here’s how you qualify:
- You don’t have other health insurance coverage: You can’t take advantage of the self-employed health insurance deduction if you are eligible for an employer-sponsored health insurance plan from your employer or your spouse’s.
- You report business income: If you report business income from your self-employed venture, you should be able to claim this deduction. You cannot deduct more than you earn from your business. In other words, if your business is not generating income or incurs a loss, you cannot claim the deduction. This rule applies to each business you own. So, if you run more than one business, you cannot combine the incomes from multiple businesses in order to bolster the income limit of the deduction.
If you qualify, you are entitled to a special personal deduction for the self-employed (rather than a business deduction). This deduction applies to federal, state, and local income taxes, but does not impact self-employment taxes.
When you purchase health insurance directly through the exchange, through Decent, or through another insurance company, the money you pay towards monthly premiums can be written off as a tax deduction. For self-employed people, this is reflected as an adjustment to your self-employment income.
There are a few other situations in which you may be able to take advantage of the self-employed health insurance deduction:
- If you are a partner in a business and have self-employment net earnings
- If you were paid wages from an S corporation where you own more than 2% of the outstanding stock
- If you used an optional method to calculate your self-employment earned income.
When your health insurance is probably not tax deductible
There are several circumstances under which you are not eligible to use the self-employed health insurance deduction, including the following:
- If you didn’t pay for your health insurance
- If your employer pays for your health insurance premiums
- If you received a subsidy to purchase health insurance on the exchange through the Affordable Care Act, the subsidy that lowered the cost of your premium cannot be deducted.
- If you paid for health insurance with pre-tax money
- If you don’t itemize your tax deductions
- If you are on COBRA insurance after leaving a job (this is continued coverage under your previous employer’s group plan)
Let’s look at an example. Let’s say you are working as a real estate agent full-time in January and purchase your own health insurance. Then, in June, you take on a full-time role in sales for another company and continue to do real estate on the side. You become eligible for an employer-sponsored health insurance plan at your new job, but do not enroll because you want to remain covered under your own insurance. You would only be able to take a deduction for premiums paid in January through May. Even though you chose not to enroll in your company’s health insurance plan in June, you became eligible. Once the new plan becomes an option, you can no longer deduct your premiums.
How tax reporting works for the health insurance deduction
The self-employed health insurance deduction is taken directly on the Form 1040 as a personal deduction. This deduction should not be reported on the Schedule C if you are a sole proprietor. In the case that you do not claim 100% of your self-employed health insurance costs (if, for example, your premiums exceed your business income), you may include the percentages that you are deducting with medical expenses on Schedule A, which is subject to the 7.5% of Adjusted Gross Income (AGI) limit (for 2017 through 2019 under the Tax Cuts and Jobs Act). This AGI limit will increase to 10% in 2020.