Tax Explainer: How to Deduct Health Insurance
Angie M Grainger
The Self-Employed Health Insurance Deduction is available to individuals who meet certain criteria set forth by the IRS which can allow your health insurance to be deductible.
For Self-Employed (Sole Proprietors)
Self-Employment Status: You qualify if you work for yourself (like freelancers, sole proprietors, partners, or LLC members, and even S-Corp owners can qualify).
Business Profit: You can only deduct health insurance costs if your business makes a profit; it doesn't work if your business operates at a loss.
No Employer-Sponsored Plan: You can't have access to health insurance through an employer, even through a spouse's plan, to claim this deduction.
Who's Covered: You must have paid health insurance premiums for yourself, your spouse, dependents, and certain children.
Tax Filing: This deduction applies whether you itemize or take the standard deduction, but it can't exceed your business's net profit.
Where to Claim: You can claim this deduction on Form 1040, Line 16, and it reduces your taxable income by 100% of your health insurance premiums if you qualify.
S-Corporation (S-Corp) Owners:
S-Corporation (S-Corp) owners who meet certain criteria can also be eligible for the Self-Employed Health Insurance Deduction under specific circumstances. Here's how S-Corp owners may qualify:
Health Insurance Premium Payments: S-Corp owners who own more than 2% of the corporation's stock are considered employees for tax purposes and can receive health insurance coverage from the S-Corp.
Treatment of Premiums: The S-Corp can pay the health insurance premiums on behalf of the owner-employee. These premium payments are considered wages for the owner-employee and should be included on their W-2 form.
Deduction Type: The owner-employee can deduct the health insurance premiums paid by the S-Corp as an adjustment to income on Form 1040. This deduction is taken whether or not the owner-itemizes deductions.
Limitations: The deduction for the S-Corp owner cannot exceed their earned income from the S-Corp. Additionally, if the owner-employee is eligible for health coverage through another employer or a spouse's employer, the deduction might not be available.
For C-Corporation Owners:
The process for deducting health expenses differs from deductions available to self-employed individuals or S-Corporation owners. Generally, C-Corporations can deduct health expenses as a business expense, but it works differently compared to deductions for individuals.
Health Expenses as Business Expenses:
Employee Health Benefits: C-Corporations can offer health benefits as part of an employee compensation package. The premiums paid by the corporation for employee health insurance are generally tax-deductible as a business expense.
Other Health-Related Expenses: The corporation can also deduct other health-related expenses, such as contributions to Health Savings Accounts (HSAs), medical expenses for employees, and certain wellness programs, as business expenses.
Limitations and Qualifications: Generally, these expenses must be considered reasonable, ordinary, and necessary for conducting business. The corporation should keep detailed records and properly document these expenses.
Tax Reporting: The deduction for health expenses is claimed on the corporation's tax return (Form 1120 for federal income tax) as part of the business expenses.
Proper documentation and compliance with IRS regulations are essential to ensure the deductibility of health expenses for a C-Corporation.
As tax laws and regulations can be complex and subject to change.
This is NOT considered advice, this is just an explanation. Advice requires analysis of your specific situation and knowledge of your goals and objectives.