Health Insurance Deduction for Self-Employed

Health Insurance is not required anymore, but if you still pay for your health insurance premiums and you are self-employed, you can benefit from claiming the health insurance deduction on your federal tax return. Let’s review the rules.

Who can deduct? Self-employed: sole-proprietors, more-than-2% S-corporation shareholders and partnerships owners/partners.

What can be deducted? Premiums paid for medical and dental insurance, qualified-long-term care insurance for a business owner, his/her spouse, and dependents

What are the requirements?

- You must have a net profit on your Schedule C/F or

- You must have earnings from self-employment reported on Schedule K1 from your partnership or

- You must be a more-than-2% shareholder in a S-corporation, and your health insurance premiums should be added to your wages and reported on your form W2 (subject to federal tax only, though)

How to claim the deduction? The health insurance deduction is claimed on Schedule 1 as an adjustment to income (not as a business expense!). It decreases your taxable income – income that is subject to income federal tax.

Important! You cannot claim this deduction if you and/or your spouse were eligible for the employer subsidized plan, even if you didn’t actually apply for it.

From businesses’ point of view:

- C Corporations deduct their employees’ health insurance premiums in full, even if they have loss that year

- S Corporations deduct their more-than-2% shareholders’ health insurance premiums in full, running the payments through their payroll

- Partnerships generally deduct their partners’ health insurance premiums as guaranteed payments to them

- Sole-proprietorships: owners deduct the full cost of health insurance premiums they paid as an adjustment to income on Schedule 1