Self-Employed Health Insurance Deduction

If you’re self-employed, the cost of your health insurance is an above-the-line deduction. This levels the playing field with employees who don’t need to include health insurance premiums paid by their employers in their gross incomes. Here’s how the self-employed health insurance deduction works.

Self-Employed Health Insurance Deduction Requirements

The deduction is available if you…

  • Had a net profit on Schedule C (sole proprietor), Schedule C-EZ, or Schedule F (farming).
  • Were a partner with net earnings from self-employment.
  • Had a loss but used an alternate method of calculating your income to get credit for Social Security.
  • Were a 2%+ shareholder in an S-corporation and met certain technical requirements.

In addition, if you were were eligible to participate in a subsidized health insurance plan maintained by your, your spouse’s, your dependent’s, or your child under age 27’s employer, you may not claim this deduction even if you opt to not participate in that plan.

Self-Employed Health Insurance Deduction Amount

The deduction is generally the amount you paid in health insurance premiums. If you were only eligible for the deduction in certain months, you may only claim the premiums you paid for those months.

How does the self-employed health insurance deductions work for S-Corporations?

S-corporations make things a little more complicated but end up in the same place.

  1. Buy health insurance through the business. You can’t buy coverage individually.
  2. The business can deduct that expense as compensation.
  3. Greater than 2% owners must include the value of their insurance plan in their taxable wages. This differs from regular employees who can exclude the health insurance premiums.
  4. Greater than 2% owners can deduct the cost of their health insurance policy as self-employed health insurance on Form 1040.

What if you receive the premium tax credit?

You may still be able to take the self-employed health insurance deduction if you receive the premium tax credit. The deduction is the amount of the premium you’re responsible for as calculated on your tax return for that year. It is calculated by subtracting your final subsidy amount from your total plan cost. It is not simply your monthly payment.

Example: Subsidy Higher than Expected

  • You have a $100 per month policy with an $80 subsidy. You pay $20 per month.
  • At the end of the year when you get your  Form1095-A and complete your tax return, you find out you were eligible for a $90 per month subsidy.
  • Your total health insurance cost for the year was $1,200. You received a $1,080 credit ($90 x 12). Your self-employed health insurance deduction is $120 ($1,200 – $1,080). It is not $240 ($20 monthly payment x 12).
  • The extra $10 per month in subsidies ($90 – $80) that you didn’t receive during the year will be a separate $120 credit on your tax return. If you don’t owe tax when you file, you’ll receive a refund.

Example: Subsidy Lower than Expected

  • You have a $100 per month policy with an $80 subsidy. You pay $20 per month.
  • At the end of the year when you get your  Form1095-A and complete your tax return, you find out you were eligible for a $70 per month subsidy.
  • Your total health insurance cost for the year was $1,200. You received an $840 credit ($70 x 12). Your self-employed health insurance deduction is $360 ($1,200 – $840). It is not $240 ($20 monthly payment x 12).
  • Since you received $10 per month more in subsidies than you were eligible for, you will need to repay $120 (12 x $20) as part of your Advanced Premium Tax Credit reconciliation when you file your tax return.

Self-Employed Health Insurance Obamacare Circular Calculation

One thing that you may notice is that if Obamacare subsidies are based on your AGI and your share of your premiums decreases your AGI, it results in a circular calculation. Every time you figure your deduction, it lowers your AGI, increases your subsidy, and in turn reduces your deduction.

The simplest way around this is to let your tax preparer or software do the calculation for you. If you do your taxes by hand, the IRS says to keep redoing the calculation until the change in your AGI is less than $1 different from your last calculation.

Conclusion

If you’re self-employed and don’t have access to insurance through an employer, you can generally deduct your health insurance premiums. If you have any additional questions, ask a tax expert.