Is Self Employed Health Insurance Deductible?
For years I’ve had an entrepreneurial itch warring with my practical desire for a steady paycheck and employer provided benefits. Finally, though, I decided it was time to jump all the way into the entrepreneurial pool. And one of my very first thoughts was, “is self employed health insurance deductible?”
Health insurance for my family is absolutely do or die. Potentially literally, considering all the crazy things that have come up. So I knew I needed health insurance. But our US system heavily encourages employer sponsored health insurance. It’s a historical quirk that’s unlikely to go away any time soon.
But what about me on my own?
So I dug into my many years of tax accounting experience, combined with some digging into the Internal Revenue Code and a look at the IRS material. And here’s the answer:
Is self employed health insurance deductible?
YES! It is! But it’s complicated.
Way too friggin’ complicated.
Potential Traps With the Self Employed Health Insurance Deduction
Issue #1: Income Must Be Truly Self Employed Income
Way back in my student days, I helped manage the payroll for my university’s School of Music. It allowed me to be talent adjacent (much like growing up with a musically talented older brother), but still have a practical job.
Once a month, we would pay our adjunct faculty, who were paid as independent contractors rather than employees.
I’m now an adjunct professor (not at my alma mater nor in music). I was excited to use my university earnings to offset health insurance expense for tax purposes.
But, it’s not to be.
Even though I work part time, even though I do not qualify for any benefits like health insurance, I’m still paid as an employee rather than a contractor. So I can’t offset teaching income with my health insurance premiums.
If all my income came like these W-2 wages, it would mean the health insurance would be completely non-deductible (See potential exception to this below).
So any income needs to actually be self employed income. That can be as an independent contractor or 1099 employee or anything you do on your own.
Side Note: This is a potential issue with the calls to make Gig workers into employees. Bills like AB5 will give full time Uber drivers company benefits. Which is good! It will also make it impossible for part time Uber drivers from deducting health insurance they get on their own. Which is bad!
Issue #2: Limited to Amount Earned in Self Employed Activity
Your self employed health insurance is deductible ONLY to the extent of your self employment net income. If your new business nets $10,000 this year, but your insurance costs $20,000, you can only deduct up to $10,000.
This, again, links back to Issue #1. I’m currently running The Indiepreneur (self employed), a partner at LDGR (qualifies as self employed for health insurance purposes), and teaching (an employee, doesn’t qualify). If most of my money from that part time teaching, I may be limited on my health insurance deduction.
Issue #3: If ELIGIBLE for a Subsidized Plan, It’s a No Go
For whatever reason, Congress REALLY wants you to get insurance through an employer. So much so that if you even ELIGIBLE for employer plan, your self employed health insurance will NOT be deductible.
This is most likely to arise if you’re starting a business but your spouse still works. More and more companies are trying to get spouses off insurance plans by disallowing coverage if the spouse qualifies for any other health insurance, so that exception might get you out of it, but make sure to carefully read the company’s policies. If you are eligible and decline using that coverage, you cannot deduct that self employed plan.
Note that this would be a month by month issue. If you qualify for some months and not others, the deduction is only allowed in the months you do not qualify.
Relevant Side Note On Why This is Frustrating
This policy can be EXTREMELY frustrating, and not just for the self employed. My son had to receive certain treatments, and his provider only accepted certain health insurance plans. When my company at the time decided to change to a new, unaccepted health insurance plan, my options were (1) not get my son the treatment he needed, (2) pay for the treatments as out of network coverage…which had a limit so high that he might as well have not been insured, (3) pay for other insurance out of pocket and get no deduction, (4) find another provider and get on their 6 month to 1 year wait list for someone who my son may not even like, or (5) quit and find another job with different health insurance. I ended up choosing option 5.
Practical Considerations
Yes, The Insurance Can Be In Your Name
For the vast majority of those seeking self employed health insurance, you’ll get coverage by loading up the relevant health insurance market and picking the best fit for you and yours. When you sign up, by default it will be in your own name.
That’s totally fine.
Most self employed individuals will put their business tax information on the Schedule C, which doesn’t even need a separate business name. But even if you do get another business name (for example, by setting up an LLC), that’s not a problem. The self employed health insurance will still be deductible.
Partnership & S Corp Trickery
For various tax reasons, you may have decided to set up your self employed effort as an S Corporation. Or maybe you have a partner so you set up a partnership. Will you still qualify for a health insurance deduction?
Yes, but it gets a little bit tricky.
In either case, you can set up the health insurance in your name. And in either case, you can pay the premiums, or you can have the business pay the premiums.
In both cases, you’ll have to run the expense through the business then treat it as income to you, which you can THEN deduct.
Why the extra step? Because Congress is really, really obsessed with making the employer pay for health insurance, even if it ends up being accounting fiction.
Yes, Medicare Payments Do Qualify
If you qualify for Medicare and are paying premiums, those premiums qualify for this deduction. It’s treated the same as any other self employed health insurance premiums.
What If The Issues Above Mean You Do Not Qualify?
If, for whatever reason, you do not qualify for the self employed health insurance deduction, there’s some good news: you can still treat the premiums as an itemized deduction.
The bad news? The premiums will be treated as itemized medical expenses, which has some really, really terrible limitations.
First, you need to actually itemize your deduction. Thanks to TCJA and the high Standard Deduction, your other itemized deductions need to be in excess of about $12k if you’re filing Single or $25k if you’re Married Filing Jointly. Which is a lot of deductions.
Second, your aggregate medical expenses are not deductible until they are in excess of 7.5% of your Adjusted Gross Income (at least as of this writing). So, for example, if you make $50,000 this year, your medical expenses will only be deductible if they are over $50,000 x 7.5% = $3,750. Which is a pretty significant threshold.
Conclusion
So is self employed health insurance deductible? Absolutely. And if you’re making a good amount of money through contractor or similar work with no other potential employer sponsored plans hanging over your head, you can absolutely deduct it.
Just watch out for the weird rules that favor employer coverage. If you’re self employed, they’re not your friend and could end up getting you in a lot of tax trouble.
