Learn About Health Insurance Deductions for Self-Employed Workers

Posted: April 24, 2024

Understanding Health Insurance Deductions for Self-Employed Workers

Generally, health insurance for self-employed individuals is tax deductible. The deduction applies to self-employed workers, their spouses, dependents and non-dependents under the age of 27. However, the type of health insurance coverage also determines whether the tax deduction is allowed.

In this guide, you’ll learn about the various types of health insurance policies available to self-employed workers and how to know which one is tax deductible. You’ll also learn about the eligibility requirements and what disqualifies a person. Finally, we’ll cover how you file health insurance deductions and answer some common questions.

Types of Health Insurance for Self-Employed Workers

There are different types of health insurance for self-employed individuals, depending on the nature of the business. Are you working a temporary side gig or transitioning between jobs? Do you freelance or own a business? These factors can influence the type of coverage you should get, but here are some general examples:

• Short-term insurance: This is ideal for those who need health insurance coverage for a short duration. For example, you can get short-term insurance if you’re working freelance while applying for full-time employment. Premiums are usually low, although out-of-pocket costs may be high.
• COBRA: The Consolidated Omnibus Reconciliation Act (COBRA) is a temporary health insurance program that allows workers who lose their health benefits to remain on the employer-based plan for a limited duration. It covers many situations, such as voluntary or involuntary job loss, reduction in working hours, divorce and death.
• Private health insurance: Some insurance providers offer long-term health coverage to self-employed individuals. There are diverse coverages depending on the insurer and the specific coverage you purchase. Researching and speaking to a professional before buying the coverage is essential.
• Health insurance marketplace: The health insurance marketplace can help you determine if you qualify for a lower health insurance premium, Medicaid or tax credit. For example, low-income earners may qualify for Medicaid, which is government-sponsored.

Remember, the Internal Revenue Service (IRS) determines the type of policy premiums you can claim as a self-employed health insurance tax deduction. They allow deductions for policies that fall within one of the following categories:

1. Medical insurance
2. Dental insurance
3. Long-term care insurance

For long-term care policies, the IRS requires specific coverage before you can file for deductions. The amount varies according to the covered person’s age and tax year.

Is Health Insurance Tax Deductible?

If you are an eligible self-employed individual with qualifying insurance, you can deduct health insurance premiums when filing your income taxes. Qualifying insurance includes all Medicare premiums, medical insurance and certain long-term care coverage. The deduction applies to self-employed individuals, their spouses and dependents. It reduces taxable income, increasing savings while ensuring medical protection.

The deductions cannot exceed the earned income collected from the business. Partners and members of a limited liability company (LLC) treated as partners for tax purposes are considered self-employed.

What Qualifies for a Self-Employed Health Insurance Deduction?

The criteria for self-employed health insurance deductions include the following:

• You must be self-employed: A self-employed individual is a person who carries on business or trade as an independent contractor or sole proprietor. You may also be eligible if you are a limited partner who receives guaranteed payments, a general partner or a shareholder with more than 2% of the outstanding stock in an S corporation with wages reported on Form W-2.
• You must have no employee: Your business cannot have an employee apart from your spouse or family member.
• You must show a net profit for the tax year: You must report a net profit on Form 1040. When the health insurance deduction exceeds the net income, you may add the premium costs to your itemized medical expenses.
• You must be ineligible for an employer-sponsored health insurance plan: You cannot qualify for an employer-sponsored plan for the filing period. You may not claim a deduction if you refuse to join the employer’s insurance program.

Who Is Not Eligible for a Self-Employed Insurance Deduction?

People who do not meet the eligibility requirements are automatically disqualified. This includes individuals who participate in employer-sponsored subsidized health plans. If your spouse participates in such a program, you cannot deduct their premiums when filing your returns. If you had access to an employer plan for part of the year, you cannot claim deductions for that period. The deduction is applied per month. Businesses with employees other than their spouses or family members are also ineligible.

How Do You File Health Insurance Deductions?

The most direct way to claim health insurance premiums costs is by applying them as a deduction to your total gross income. After taking these deductions, the results are called the adjusted gross income (AGI). In other words, your AGI is the gross income, such as sales, minus allowable adjustments like health savings accounts (HSA) and student loan interest contributions.

There are two benefits to applying insurance premiums as an income adjustment:

1. You can claim 100% of your eligible health insurance premiums as an income deduction.
2. Your total tax liability is determined by your AGI. As the AGI reduces, the tax debt also reduces.

You may add the outstanding expenses with the other itemized medical costs if you do not submit all your paid premiums as an income deduction.

Frequently Asked Questions (FAQs)

Here are answers to some common questions:

What Percentage of Health Insurance Is Tax Deductible for Self-Employed?

Qualified self-employed individuals can deduct 100% of their health insurance premiums for themselves, their spouses, dependants and non-dependents below the age of 27 at the end of the year. The premium includes dental, medical and qualified long-term care coverage.

How Much of the Health Insurance Premiums Can W-2 Employees Deduct?

If you take the itemized deduction on your tax return, you can only deduct the out-of-pocket portion of the employer-sponsored health insurance premiums. You can deduct the premiums and other medical expenses to the extent that they exceed 7.5% of your AGI.

What Is the Self-Employed Health Insurance Deduction Tax Form?

You can claim the self-employed health insurance deduction by reporting on Schedule 1 of Form 1040 in the adjustment to income section.

Contact Health for California for Your Health Insurance Solutions

Health for California helps self-employed individuals get health insurance that meets their needs. Our online application process is accurate and fast, providing convenient solutions to business owners. You can also consult with our top professionals to choose the best coverage for your situation and answer any questions. We are always ready to assist. Plus, our services are free. Contact us to learn more!