Understand the Health Insurance Tax Deduction for Self-Employed
As a self-employed individual, you are entitled to a that other people generally can't claim on their taxes. This is a benefit well earned by business owners, and deductions help offset the amount of taxes you are required to pay. One tax break for the self-employed involves a tax deduction for health insurance premiums, including medical, dental, long-term care insurance for you, your spouse and/or your dependents.
If you, your spouse or your dependents were eligible for group health insurance through an employer, you may not take the health insurance deduction provided for self-employed people during the months you were eligible for group health insurance.
Limitations and Calculation of Insurance Deduction
The maximum amount of health insurance premiums allowed as a tax deduction is limited to 50% of self employment tax deduction and by contributions made to a SIMPLE IRA, SEP-IRA or Keogh plan. You can calculate the maximum amount of your deduction as follows:
Health insurance tax deduction limit = Income from self employment – 50% of your deduction for – contributions made to qualified retirement plan.
Eligibility for Insurance Deduction
You must meet the requirements as stated by the IRS to claim the health insurance tax deduction. To take the deduction, your business must show a profit. If your business shows a loss you are not allowed to deduct health insurance costs under the self employed tax deduction, but you can still claim health insurance expenses if you itemize and report the medical deduction on Schedule A.
Eligible individuals meet at least one of the following criteria:
- File one of the following IRS forms and show a net profit: Schedule C on Form 1040; Schedule C-EZ on Form 1040; or Schedule F on Form 1040.
- Receive a Schedule K-1 Form 1065 showing net earnings in a .
- Receive a Form W-2 from an S corporation in which you are a shareholder with more than 2% outstanding stock.
Who Pays For Health Insurance Premiums for Eligible Tax Deductions?
Regardless of the type of business you own, you can pay for health insurance premiums yourself or through the business, and the policy may be in your own name or in the name of the business. There are a few requirements for ensuring the insurance has been established under the business, however.
For individuals filing a Schedule C, F or C-EZ, it doesn't matter whether you pay the insurance premiums directly or if the business pays – and it doesn't matter which name the policy is under.
For individuals receiving a Schedule K-1, the policy may be in your name or in the name of the partnership. If the partner is paying for his or her own insurance premiums, they must be reimbursed by the partnership with “guaranteed payments”. The amount should be shown on the Schedule K-1 and included in your gross income to ensure the health insurance is established under the business.
For shareholders owning more than 2% of stock, the insurance policy may be in the S corporation's name or your name individually. Either the business or the individual can pay for the premiums, but if you pay for them individually the S corporation must reimburse you the amount and report the amount paid on Form W-2 as wages included in your gross income.
