How to deduct health insurance costs if self-employed

Take a deep breath

This article was originally published on March 9, 2016, and was updated on Feb. 22, 2019. 

Health insurance continues to be in the news, and shows no signs of going away. Everyone needs it — even if you are self-employed. So you end up paying for health insurance, just like you did when you were working for someone else. However, there is a tax benefit to doling out some additional cash for the cost of health insurance. You can deduct health insurance costs on your federal tax return. 

Related: Calculating self-employment taxes 

How to deduct health insurance costs if you’re self-employed

This year is a little different. For tax year 2018, the self-employed health insurance deduction amount is not included on the face of the 1040.

IRS Form 1040 2018 Redesigned
Form 1040 for tax year 2018 has been redesigned. You will no longer enter the self-employed health insurance deduction on this form.

Instead, it is included on the new Schedule 1, which details the adjustments to income to determine your adjusted gross income.

Deduct Health Insurance Costs Schedule 1 2018
For tax year 2018, enter the self-employed health insurance deduction amount on line 29 of Schedule 1.

If you have paid premiums for health insurance, there are few things you need to keep in mind.

What can you deduct?

If you are self-employed, you might be able to deduct the premiums you paid for medical, dental and qualifying long-term care insurance coverage for you and your family. Unlike the healthcare costs that are included on Schedule A of the Form 1040, you enter the amount you paid on Schedule 1 of Form 1040 on line 29 — so you get the tax benefit regardless of whether or not you itemize your deductions.

The benefit to this is you will end up lowering your adjusted gross income (AGI).

 

This helps because it reduces the chance that you may be affected by the phase-out rules that can reduce or eliminate certain tax breaks. However, a drawback is that you can’t deduct the premiums when you determine your self-employment taxes.

When can you deduct health insurance costs?

So now that you know what costs you can deduct, it is just a matter of putting the total paid into the Schedule 1 for Form 1040, right? Well, not really.

According to the rules, you can only claim the costs for any months when neither you nor your spouse were eligible to participate in an employer-subsidized health plan.

Say you were single, and for the first six months you worked at XYZ Corporation, where you had a deduction on your paycheck for healthcare costs. You quit your job on July 1 and promptly signed up for health insurance. For the last six months of the year, you would be able to can claim the deduction for premiums you paid for coverage during the second half of the year.

In addition, let’s say that you experience some growing pains as you build your business over those six months. You end up losing money for the year. If that is the case, you will not be able to take a deduction for healthcare premiums you paid, as the deduction you claim cannot be more than the earned income you collect from your business.

Lastly, the health insurance plan must be established under your business.

If you are a sole proprietor or an LLC using Schedule C or C-EZ, the policy can be either in your name or in the name of your business.

If you have a partnership, it can be in your name or the name of the partnership.

However, if you have a partnership and the policy is in your name and you pay the premiums, the partnership must reimburse you and report the amount you paid on Schedule K-1 as amounts to be included in gross income.

If you have an S corporation, the policy can be in your name or the name of the S corporation. If it is in your name and you pay the premiums, the corporation needs to reimburse you and report those amounts on as wages on a W-2.

Related: What you need to know about deducting startup costs

Hope this helps when it’s time to deduct health insurance costs!

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Image by: a.drian via Visual Hunt / CC BY-ND