Medical expenses are usually not a Schedule C deduction. You may have other options, though.
Can a sole proprietor deduct health insurance premiums?
As an independent contractor or small business owner, there’s a good chance that you qualify for the self-employed health insurance deduction. The two main rules for this deduction are:
- You need to have business income
- You can’t be eligible for a health insurance plan through your employer or your spouse’s employer
If you meet those requirements, you can usually deduct your health insurance premiums.
The self-employed health insurance deduction is a separate above-the-line deduction. It goes on Schedule 1 of your Form 1040 rather than Schedule C.
Just to be clear, you can’t enter your health insurance costs as a business expense on Schedule C.
Can a sole proprietor deduct out-of-pocket medical expenses?
If you have unreimbursed medical expenses not covered by insurance, you usually can’t claim them as a business expense on your Schedule C.
Personal Medical Expenses
You may qualify for the medical expense deduction. The medical expense deduction is a personal itemized deduction that kicks in when your medical expenses exceeded a certain amount of your adjusted gross income (AGI).
Currently, you can deduct medical and dental expenses that exceed 7.5% of your adjusted gross income. If your deductible medical expenses are less than your standard deduction and you don’t have other itemized deductions to make your itemized deductions more than the standard deduction, you’ll probably want to take the standard deduction so you get the bigger deduction.
You may also have the option to select a health insurance plan that lets you use a health savings account. If you use an HSA, you can deduct the money you put in and then take it out tax-free to cover qualified medical expenses. That’s an indirect way of deducting your medical expenses.
Note: You can’t include expenses you paid from your HSA in your itemized deductions since you already got the HSA deduction.
Business Medical Expenses
There are some jobs that require you to incur specific medical expenses as a requirement to work. One example is the medical exams the DOT mandates for truck drivers.
The difference with these types of expenses is that they aren’t personal in nature. They’re necessary for your work. That makes them deductible expenses on your Schedule C.
You may want to talk to a tax professional if you’re thinking about deducting medical expenses as a business expense. The Internal Revenue Service doesn’t like creative accounting on this issue, so if it’s not a common deduction for people in your field, make sure you’re following the rules.
Also, you generally can’t take double medical expense deductions. If you claim an expense as a business expense, you can’t include it in your personal itemized deductions. You can only take a personal deduction for medical bills you didn’t claim as a business expense.
What if you’re paying for an employee’s medical expenses?
Generally, if you have employees, you can deduct money you pay them. If you’re a sole proprietor, that’s a business expense that can go on your Schedule C.
Newfront Insurance has a good blog on why you shouldn’t pay employee medical expenses. Basically, there are strict rules about health insurance and similar issues. If you pay for medical expenses, that could be considered an employer health plan and trigger a whole bunch of government regulations you don’t want to be involved in.
If you want to help an employee who has been having a tough time, you may want to give the employee a cash bonus without conditions like showing proof of medical care costs.
If an employee got hurt at work, you should usually go through workers’ compensation or other insurance first. If you want to do more, talk to your accountant or lawyer about the right way to do it to protect yourself from both an accounting and legal standpoint.