Q: What’s the Self-Employed Health Insurance Deduction?

If you’re self-employed, buying health insurance on your own can be a costly venture. But we’ve got good news: there’s a self-employed health insurance deduction that can help soften the sting.

In a nutshell, the self-employed health insurance deduction allows eligible self-employed folks to deduct up to 100% of health, dental, and long-term care insurance premiums for themselves and for their spouses, dependents, and non-dependent children under age 27.

If you qualify, this deduction will reduce your adjusted gross income (AGI). And the lower your AGI, the lower your overall taxable income.

self-employed health insurance deduction

Okay, so how do I qualify for the self-employed health insurance deduction?

There are generally two requirements that you must meet to qualify for the self-employed health insurance deduction. (There’s also a third special requirement related to long-term care insurance premiums, but we’ll go over that later.)

Requirement 1: You weren’t eligible for any other health insurance plan

The deduction is only available if you had to buy health insurance on your own.

That means you didn’t have access to any group health insurance plans.

If you were eligible to participate in a subsidized employer health insurance plan at any point in a month, then you can’t take the deduction that month—even if you didn’t actually enroll in the plan. This includes plans from your employer as well as your spouse’s, dependent’s, or non-dependent child’s employers.

For example, let’s say you have a full-time job as well as a small catering company on the side. You bought individual health coverage in January because you weren’t eligible for your employer’s plan. In May, you become eligible for the employer-sponsored plan at your full-time job, but you chose not to enroll in it.

In this scenario, you can only take the deduction for your premiums from January through April. The deduction was off the table once you were eligible to join your employer’s plan in May.

Note: If you’re on COBRA insurance after leaving a job, you won’t qualify for this deduction even if you’re paying for the premiums yourself. That’s because COBRA plans are considered part of your previous employer’s group plan.

Requirement 2: You have a net profit from self-employment.

To take the self-employed health insurance deduction, you must also make a net profit from your self-employment.

The amount you can deduct depends on how much of a net profit you make.

If your net profit is… Then you may be able to deduct…
More than the amount paid in insurance premiums Up to 100% of health, dental, and long-term care insurance premiums
Less than the amount paid in insurance premiums Your premiums up to the amount you made in net income

Here’s a scenario:

  • Amount paid in health insurance premiums: $9,000
  • Net profit from self-employment: $3,000

In this case, you can only deduct up to $3,000 worth of premiums.

Caveat: You may also be able to take the self-employed health insurance deduction if you:

  • Have self-employment net earnings as a partner of a business,  
  • Own more than 2% of an S corporation’s outstanding stock and were paid wages, or  
  • Used an optional method of accounting to calculate your self-employment net earnings.

These situations can be complex, though, so consult your accountant if you think you may qualify under one of these caveats.

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What is the special requirement for long-term care insurance?

You only have to meet those two main requirements if you want to deduct health and dental insurance premiums.

If you want to deduct long-term care insurance premiums as well, there’s one additional requirement: age.

The older you are, the more you’ll be able to deduct in long-term care insurance premiums. Here are the 2019 limits:

AgeMaximum Deductible Amount
40 or under$420
41-50$790
51-60$1,580
61-70$4,220
70 or older$5,270

What if I don’t qualify for this deduction?

Even if you don’t qualify for the self-employed health insurance deduction, you may still be able to get some tax benefits.

If your premiums and other medical costs are more than 10% of your adjusted gross income, then you may be able to deduct those costs. This is known as the medical expenses deduction, and it is available if you take itemized deductions on your tax return.

The self-employed health insurance deduction can be complicated, so if you’re not sure if you qualify, talk to an accountant who can review your situation.

Comments

  • John Stanfield

    Great article! I have a question. I have a wife and children, and I am self-employed. My business generates a profit, so I meet the second requirement described in your article. The family’s health insurance is presently through COBRA from my wife’s previous employer, and it runs through April 2022 (we pay 100% of the premiums starting in October 2021). I have no eligibility for any plan from any previous employer. With all of that in mind, if my company began to offer a family health insurance plan to its one employee (me), would I be eligible for the deduction?

    Reply
    • Gusto Editors

      Hi John, thanks for writing in! Since regulations change over time and can vary by location and employer size, we recommend you consult a licensed broker.

      Reply

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