Being self-employed sometimes means paying for health insurance out of your own pocket. The self-employed health insurance deduction can help offset some of those costs.
This deduction isn't strictly limited to health insurance, and it's not available to all self-employed people. Read on to learn more about who can claim this deduction, what it includes, and how to claim it.
What Is the Self-Employed Health Insurance Deduction?
The self-employed health insurance deduction allows some self-employed individuals to deduct the premiums they pay for:
- Medical insurance
- Dental and vision insurance
- Qualified long-term care insurance
- Medicare premiums
If you qualify, you can deduct the premiums you pay for yourself, your spouse, dependents, and children under age 27, even if they aren't dependents.
You must meet at least one of the following requirements to claim the deduction:
- You're reporting a net profit for the year on Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming.
- You're a partner or member in a pass-through business with net earnings from self-employment on Schedule K-1 (Form 1065).
- You are a more-than-2% shareholder in an S Corporation, and health insurance premiums paid or reimbursed by the company are included in your W-2 wages.
In addition, to qualify for the deduction, you can't be eligible to take part in any employer-sponsored health insurance plan. For example, say you are self-employed, but your spouse has a full-time job, and her company allows spouses to participate in the plan. In that case, you can't claim the self-employed health insurance deduction, even if you chose not to enroll in the employer-sponsored plan.
The IRS determines your eligibility on a monthly basis. So if you could participate in your spouse's employer's plan for the first five months of the year, but weren't eligible for the remaining seven months, you could deduct seven months of self-employed premiums.
Self-Employed Health Insurance Deduction Limits
There's no dollar limit for the deduction, but it is limited to your net profit from self-employment. In other words, if your business doesn't earn a profit, you can't take the deduction.
For example, say you paid $12,000 for your health insurance coverage for the year, and the net profit from your sole proprietorship was $20,000. You could deduct 100% of your premiums. On the other hand, if you paid $12,000 for health insurance coverage but only netted $5,000 from your business, you could only deduct $5,000 worth of premiums.
The remaining deduction may not be lost—you can claim any premiums you can't deduct as self-employed health insurance as out-of-pocket medical expenses on Schedule A, Itemized Deductions. However, you'll have to itemize deductions to get a benefit, and you only get to deduct out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income (AGI).
Also, while there's no limit to the amount of medical, dental, and vision insurance premiums you can deduct, the IRS limits deductions for long-term care insurance premiums. That cap is based on the person's age at the end of the tax year.
For 2021, those limits are:
- 40 or younger: $450
- 41 to 50: $850
- 51 to 60: $1,690
- 61 to 70: $4,350
- 71 and older: $5,640
The IRS adjusts those limits each year for inflation.
How to Claim the Self-Employed Health Insurance Deduction
The self-employed health insurance deduction is an adjustment to income, also known as an “above-the-line deduction" because you don't need to itemize to claim it.
Instead, you claim the deduction in Part II of Schedule 1, Additional Income and Adjustments to Income. The IRS Instructions for Form 1040 include a worksheet to help you calculate your deduction.
Claiming the self-employed health insurance deduction can be complicated—especially if you're also eligible to claim the Premium Tax Credit because you purchased coverage through the Health Insurance Marketplace. If you need help, be sure to reach out to a qualified tax professional.