Health insurance and medical expenses are complicated. Having to navigate both your own taxes and own health insurance premiums without much external help can be a nightmare if you’re disorganized.
Fortunately, the IRS offers many advantages for self-employed folks when it comes to paying for your own health policies instead of having an employer subsidize these expenses for you. While the federal government is currently debating how to overhaul both the U.S. tax code and health insurance legalities, here are the most-recent guidelines on health-related deductions for self-employed individuals.
Deducting Health Expenses
Who Qualifies for the Health Insurance Premium Deduction?
Thanks to the Small Business Jobs Act, self-employed individuals could be eligible for a tax deduction when it comes to paying for their own health and dental insurance premiums. According to Publication 535 (2016) from the IRS, you might be able to deduct your health and dental insurance premiums on your taxes if your situation fulfills at least one of the following criteria established by the IRS.
- You were self-employed and had a net profit for the year reported on Schedule C, Schedule C-EZ, or Schedule F.
- You were a partner with net earnings from self-employment for the year reported on Schedule K-1, box 14, code A.
- You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
- You received wages in 2016 from an S corporation in which you were a more-than-2% shareholder. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2.
If you meet one of these guidelines, then you could deduct up to 100% of your health and dental insurance premiums for yourself, your spouse, and your dependents under the age of 27. Additionally, you’re not explicitly required by the IRS to take out health insurance in your business’ name. You could also take out health insurance under your own name and still qualify for the deduction.
However, if you have job in addition to your self-employment income and your current employer offers subsidized health insurance policies, then you might not qualify for this deduction.
Do Health Insurance Deductions Lower Your Self-Employment Tax?
In short, no. But, there are other advantages involved here. According to the IRS, “you can’t subtract the self-employed health insurance deduction when figuring net earnings for your self-employment tax from the business under which the insurance plan is established.”
In other words, you still need to pay your full self-employment taxes on your net business income before deducting health insurance premiums. Fortunately, this deduction still allows you to reduce your income tax burden. Plus, you can further mitigate your income tax obligation by deducting the employer portion of the self-employment tax. For reference, the current self-employment tax rate is 12.4% for Social Security (6.2% employer portion), and 2.9% for Medicare (1.45% employer portion).
Deducting Long-Term Care Insurance
Do you have a long-term care insurance policy as well? If so, you might be able to deduct this expense. Although, you might be limited in how much you’re allowed to deduct based on the following criteria.
- Age 40 or younger–$390
- 41 to 50–$730
- 51 to 60–$1,460
- 61 to 70–$3,900
- 71 or older–$4,870
If your long-term care insurance costs less than the above amounts, then the IRS mandates that you deduct the smaller amount you actually paid. Additionally, the IRS has a list of criteria that your long-term care insurance contract must fulfill. So, be sure to review the guidelines before adding the deduction to your tax forms during the next filing season.
Is Life Insurance Deductible for Self-Employed Individuals?
The IRS says you cannot deduct life insurance policies that cover you or your spouse. While this is unfortunate, this benefit typically isn’t covered by many employers, so this situation isn’t unique to self-employed workers.
Instead of holding out for the possibility of the IRS allowing life insurance deductions in the future, look for other ways to save money on life insurance premiums instead.
If you’re disabled and require extra equipment to perform your work, the IRS allows for these expenses to be deducted as business expenses rather than medical expenses. To qualify for this deduction, you must meet all of the following guidelines.
- Your work requires the expense for you to satisfactorily complete your job assignments.
- The goods/services purchased are clearly not needed or used, other than incidentally, in your personal activities.
- Treatment for your disability isn’t specifically provided for under other tax law provisions.
Concluding Thoughts on Health-Related Deductions
Being self-employed can make tax season incredibly difficult. But, at least there are several legal provisions in place to help you cushion the blow of higher tax rates compared to regular employees working for companies.
If you’re earning an irregular income but you maintain organized business records for all of your self-employed income and keep track of your health-related expenses, then you could be in a good position to reduce your income tax burden during the next tax filing season.