When you own a business, your tax situation is very different from that of a traditionally employed individual.
Not only are you responsible for paying self-employment tax as well as income tax, but you’re also responsible for finding and buying your own health insurance coverage.
While assuming the responsibility for your own health coverage can seem daunting, the good news is that health insurance premiums are tax deductible for most self-employed individuals.
Wondering if you qualify for this deduction?
Keep reading to find out.
Getting Insurance When You’re Self-Employed
The Affordable Care Act of 2010 requires some employers to provide health coverage to their employees, including companies with 50 or more full-time employees, health insurance companies, and self-insuring companies (a system of coverage in which an employer collects premiums from employees and uses pooled funds to pay employees’ medical bills.)
If you work for a medium-to-large sized company, this is well and good. Do your job, don’t get fired, and enjoy your company healthcare benefits! Easy peasy.
But what if you’ve decided to brave the wilds of entrepreneurship, setting out on your own to find fame and fortune from the great world of business beyond? (Or maybe you just got really tired of your HR rep. Either way…you’ve gone solo.)
Because most Americans make a living as employees for companies, they’re usually not well versed in the ins and outs of how health insurance works independent of an employer.
But if you’re self-employed, you’ll need to assume responsibility for your own health coverage and the resulting tax implications. This can seem a bit overwhelming at first, but rest assured, it’s not as complicated as it seems.
You Have The Freedom To Choose Your Coverage
Because you aren’t tied to any particular health insurance policy or company when you are self-employed, you’re free to choose your own insurance coverage, provided they offer plans in your state.
Choosing your own coverage means you can opt to spend as little or as much as you want on your plan. It also means you’re free to purchase whatever plan you think best meets your needs, rather than having to choose from a pre-selected, limited number of employer-sponsored plans.
A few resources for finding insurance coverage include Healthcare.gov, your state’s official insurance department website, or even a quick search of the trusty old Google machine.
Local insurance representatives are usually helpful, too.
Access To Aca Credits
There’s no denying that the Affordable Care Act was a polarizing law–and still is for many.
But one benefit most people would agree upon is that the ACA made it easier for would-be entrepreneurs to pursue their business dreams, since the Marketplace offered affordable plans to be purchased independently of job status.
Anyone can buy insurance through the Marketplace, but those meeting certain financial requirements may qualify for a premium tax credit, a credit that helps eligible people afford health insurance.
To learn more about eligibility, visit the IRS page about the premium tax credit.
And something to be aware of: you don’t have to be self-employed to qualify for these credits, but they can be a useful tool for helping business owners afford quality coverage.
Can I Deduct My Health Insurance Premiums?
In general, self-employed business owners can deduct health insurance premiums for themselves, their spouse, their dependents, and non-dependent children under the age of 27.
But, like all things tax, there are a few rules.
- You must meet the IRS definition of “self-employed.”
- You can only claim the health insurance premium write-off if neither you nor your spouse is eligible for employer-sponsored health insurance. So if you’re an entrepreneur, but your spouse works a traditional 9-5 that offers coverage for both of you, you cannot claim the write-off.
Also – note that the key word here is “eligible.” If you’re eligible for employer-sponsored health coverage, you cannot opt-out in favor of a self-covered plan for the self-employed health deduction, even if you don’t actually enroll in the employer plan on offer. - You must have a net profit for the year and your premium deduction cannot be greater than your business income.
If you pay health insurance premiums for your employees…
You can deduct the premiums as business expenses.
If you own an s-corporation…
The rules are a little bit different. You can deduct health insurance premiums as business expenses, just like the example above.
If you work for your s-corp and own 2% or or more of the company’s stock, you’re required to report the cost of your health insurance premiums as wages subject to income tax on box 1 of your W-2, but the cost is not subject to FICA tax. The health insurance premiums are then deducted from income tax on Schedule 1 on the shareholder’s 1040.
Keep in mind that IRS family attribution rules apply to 2% shareholders. This means that S-Corp stock owned by an individual is also considered to be owned by the shareholder’s spouse, child, parent, and grandparent and they’re also subject to those limitations.
Hire An Expert Tax Strategist To Optimize Your Health Insurance Deductions
Navigating the health insurance system in the U.S. can be hard. It’s even more difficult when you’re self-employed and trying to do it on your own.
Tax Savvy Jessica has 13+ years of experience helping her clients navigate complex tax issues like understanding the tax implications of buying health insurance when you’re self employed.
If you’re overwhelmed by the insurance issue and want help understanding which options would net the greatest tax savings for you, reach out to us ASAP!
