The Self-Employment Health Insurance Deduction

Image shows a girl on her laptop looking frustrated. Beside her is a pile of books, a plant, and a cup of hot coffee. Text reads: "You can't deduct costs of self-employed health insurance if...1) You or your spouse were eligible to participate in a subsidized group health plan through an employer 2) Your self-employment income doesn't equal or exceed the amount of your health insurance deduction"

The Balance / Jo Zhou

One of the many perks of being self-employed is that you can deduct what you spend on health insurance premiums "above the line" on the first page of your tax return.

Employees can claim medical expenses as deductions, too, including health insurance premiums. This tax perk was on the chopping block for a while as Congress mulled over the provisions of the Tax Cuts and Jobs Act that went into effect in the tax year 2018. Ultimately, the deduction survived, but employed taxpayers must itemize on their tax returns to claim it.

This isn't always a good deal for everyone, particularly because the TCJA virtually doubles standard deductions and taxpayers must choose between itemizing or claiming the standard deduction for their filing status. Taxpayers often don't have enough itemized deductions to exceed the standard deduction, so it's more advantageous to take the standard deduction and forget about itemizing medical and insurance expenses. This may be even more the case going forward with the increased standard deductions. 

That said, the self-employed get to keep their deduction on the first page of their tax returns, and overall, this deduction is a nice perk of self-employment.

How to Claim the Deduction If You're Self-Employed

If you have self-employment income, you can take the deduction for health insurance expenses incurred for yourself, your spouse, and your dependents. Self-employment income is reported on Schedule F if you're a farmer or Schedule C for other sole proprietors. General partners in partnerships and actively participating members in LLCs that are treated as partnerships can claim the deduction if they have any self-employed income, as can employees of S-corporations who own 2 percent or more of the corporation's stock.

What Policies Are Eligible? 

The entire cost of premiums paid for medical insurance, dental insurance, and long-term care insurance are deductible for policies that cover you, your spouse, your dependents, or adult children who have not reached the age 27 as of the last day of the tax year. If you're self-employed and pay supplemental Medicare premiums, such as for Part B coverage, you can deduct these premiums as well. The policy can be in the name of your business if you don't operate under your own name.

There Are Some Limitations

  • You can't deduct the costs of health insurance if you or your spouse were eligible to participate in a subsidized group health plan through an employer. This might be the case if you work a regular job and have your own business on the side, or if your spouse becomes employed and is eligible for family coverage under a group plan. If she takes the job and qualifies for the plan in December, for example, you might have paid for 12 months of health insurance coverage for yourself and your family but you can deduct only 11 months' worth of premiums from January through November because you were eligible for another plan in the last month of the year.
  • Your self-employment income is calculated on Schedule C or F and it must be equal to or exceed the amount of your health insurance deduction. For example, if your business earned $12,000 but premiums cost you $15,000, you can't claim the entire $15,000. You can only take the $12,000. And if your business reports a loss, you're not eligible for the deduction at all.
  • You could still claim your health insurance expenses as a medical deduction on Schedule A if you itemize, but the above-the-line adjustment to income for self-employed people is usually more advantageous. It affects your adjusted gross income, a detail upon which several other tax breaks depend. Some credits are reduced or eliminated if your AGI is too high, so the more above-the-line deductions you're entitled to claim, the better.
  • Your self-employment taxes are based on the totality of your business income less other expenses—the income you calculate on Schedule C—but not less your insurance premiums. That would be something of a double tax break. You must calculate your income after business expenses on Schedule C, then enter this income on your Form 1040. The self-employed health expense deduction is then subtracted from this amount further down on the 1040. 

Some Other Tips for Claiming the Deduction 

  • Enter your self-employment health insurance deduction on line 29 of Form 1040.
  • A worksheet is provided in the Instructions for Form 1040 to calculate the deduction, and a more detailed worksheet can be found in Publication 535.
  • Use Worksheet P found in Publication 974, Premium Tax Credit if you obtained insurance through a health insurance exchange and received a premium assistance tax credit