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Self-Employed Health Insurance Deduction

Business Owners Tax Planning Independent Contractor

It’s no secret that the cost of healthcare, including health insurance premiums, is quite high.  Many employed individuals are fortunate to benefit from coverage through their employer or spouse’s employer, but many self-employed persons find themselves having to pay out-of-pocket for the coverage.  The good news is, for many who are self-employed or independent contractors, the cost related to the premiums for health and dental insurance is deductible.  

To qualify for the deduction, the taxpayer must not be eligible for other insurance coverage.  This includes coverage through his/her own job or a spouse’s.  Secondly, there must be business income.  The amount of the insurance premiums that are considered deductible are limited to the amount of income claimed by the business.  This means that if you have an LLC, for example, that made $0 in 2021, you cannot deduct any out-of-pocket insurance premiums paid.  If you paid $5,000 in premiums but only recognized $3,000 in business income, you can only deduct $3,000 of the premiums.  

The plan may be purchased as the business or you may purchase it individually.  If your business purchases the plan, that business is considered the plan sponsor (meaning that business’s income will be the basis for the amount of insurance premiums one can deduct).  The IRS also allows self-employed individuals to purchase the plan under their own name.  This option is advantageous for taxpayers with more than one business because it allows them to choose the business they believe will make the most money to be the sponsor.  Additionally, if you own more than one business, each business can purchase a different portion of the insurance coverage, thereby increasing deductibility.  In other words, one of your businesses can purchase or sponsor the health insurance plan while another business purchases or sponsors the dental coverage.  

The health insurance deduction for self-employed individuals is a personal deduction, not a business deduction, and is reported accordingly on the tax return.  The expense is reported directly on Schedule Form 1040,  not schedule C (if you’re a sole proprietor).  If you itemize your deductions and do not claim 100% of the insurance premiums on your 1040, the unclaimed amount can be added to your other medical expenses on Schedule A (subject to AGI limitations).  If your business claims no income, 100% of the premiums paid can be added to medical expenses on Schedule A.    

Interested in this or other planning strategies that can benefit your business?  Get in touch with Levesque & Associates!