Tax Deduction and Savings

Self Employed

You can take a deduction for health insurance expenses incurred for yourself, your spouse, and your dependents, and employees.

Who Can Claim the Self Employed Health Insurance Deduction?

• Business owners reporting income on Schedule F or Schedule C.
• Partners in a partnership and actively participating members in an LLC.
• Employees of an S-corporation who own 2% or more of the s-corporation’s shares.

Tax Savings Benefits For Employees

It is possible to set your group health insurance up so that your employees can save money on taxes. We can help you do the right paperwork so that an employee can contribute to the costs of their and their dependents health insurance premiums on a pre-tax basis. That means you deduct the cost of the premium from the employee’s paycheck before state and federal taxes are deducted. This usually increases the employee’s take-home pay and lowers the amount of their taxable income.

What is the Maximum Limit for the Self Employed Health Insurance Deduction

Before claiming this tax deduction, you must calculate your allowable health insurance deduction. Take your self-employment income, and subtract the 50% deduction for self-employment taxes, and subtract any retirement contributions you make to SEP-IRA, SIMPLE-IRA, or Keogh plan. The remainder is your allowable deduction for health insurance expenses.

Health Insurance Deduction in a Loss Year

If you are reporting a loss from your self-employed activity, then you are not eligible to deduct your health insurance costs since this particular deduction is limited by your self-employment income. You can however still claim the health insurance expenses as an itemized medical deduction on your Schedule A.

Eligibility for Group Insurance Limits Your Deduction

You can deduct the full cost of health insurance you purchase for yourself, your spouse, and/or your dependents. However, you cannot deduct any insurance costs for any months you were eligible to participate in a group health insurance plan through your or your spouse’s employer. For example, if you paid for 12 months of health insurance coverage for yourself and your family, but you became eligible to participate in your spouse’s group health insurance in December, then you can deduct only 11 months worth of insurance premiums.

Where to Claim the Deduction

You claim the health insurance deduction as an “above the line” tax deduction on Form 1040. It’s line 29 on the 2009 form. You will need to use the worksheet provided in the Instructions for Form 1040 (it’s on page 28 of the 2010 version of the pdf document).

Any health insurance premiums that you cannot deduct directly on Form 1040, you may be able to deduct as a medical expense on Schedule A.