Health insurance is expensive, and making sure it’s a write-off in your business is a big deal. Regrettably, it’s not as easy as just putting it on your P&L and treating it like office supplies. Health insurance premiums can be deductible. However, they must be reported in a specific way based on your type of business and how it’s structured.
No Side-Hustle or Small Business?
Health Insurance is 100% deductible for the small business owner, but not for the average wage-earning American. Thus, this is a huge benefit for the small business owner that the average American can’t take advantage of.
A non-business owner would have to try and itemize on Schedule A, and typically to no avail. If you’re not self-employed and you have to pay your own personal health insurance, good luck writing it off.
Good news…remember, a side-hustle or side-gig IS a small business!! Read on to know what your options are as a small business owner.
What Types of Small Business Owners can Write-off Health Insurance?
Some small business owners can write off health insurance, but only in certain cases. Read below as I outline examples of a few:
Rental Property Owners
If you own a rental property, personally or with an LLC, you may think that you have a ‘small business.’ You might also think you would and should be able to write-off your health insurance against your rental income. However, that is a mistake.
Health insurance is not an allowable deduction for the owners of a rental property business. Yes…I teach that having a rental property is essentially having a small business. I want you to deduct every possible expense related to that rental. There is an exception.
If you have an employee managing your rental properties, their health insurance premiums are deductible as an employee benefit. BUT, you can’t deduct premiums for the owner on a Schedule E, reported on their 1040 Tax Return. The technical reason being, a business owner can only write-off health insurance premiums against self-employment income. A rental property does not generate self-employment income (thankfully), it produces passive income or losses.
You can’t deduct health insurance premiums through your rental property business unless you have a management company and report it on Schedule C or 1120S. Without this setup, the self-employed health insurance deduction usually doesn’t apply to rental income. Most landlords won’t qualify unless they run rentals as a formal business.
Sole-Proprietorship, Side-Hustle, and Single Member LLC Business Owners
If you own and operate a small business, writing off health insurance is much more straightforward and easier to do. In this situation, you would be filing a Schedule C, on your 1040 Tax Return.
You won’t find a line for owner health insurance premiums on Schedule C.
Instead, it appears on Schedule 1, Part II, Line 16 of the 1040. That line is clearly marked as the Self Employed Health Insurance Deduction.
When it comes to paying the premiums, you have options. Your small business can pay, OR you can pay them personally. Either way works. You simply report it on Schedule 1, Line 16 (not Schedule C). Moreover, the policy doesn’t have to be in the name of the business. It can be a ‘personal’ policy you pay for by your small business.
To claim the self-employed health insurance deduction, you only need one thing—net income from your business.
If you don’t have net income, you can’t take the deduction. The business must have a profit greater than the amount of health insurance premiums you are trying to write-off!
EXAMPLE:
Assume your Schedule C small business has $16,000 in Gross Income, $8,500 in Expenses, and thus $7,500 in Net Income (Line 31). On top of this, you have $10,000 in health insurance premiums. You figure out how much of your health insurance premiums you can deduct only after you calculate your net income.
The self-employed health insurance deduction depends on that final net income amount.
In this Example, you can only deduct $7,500 of your health insurance premiums (only Schedule 1 Line 16). If you had $17,000 in Net Income, you could write-off the entire $10,000 in premiums. Net Income needs to exceed the amount of premiums you want to deduct.
Essentially, if you aren’t paying self-employment tax, you’re not writing off health insurance premiums.
S-Corporation Owners
If you run a business as an S-Corporation or an LLC taxed as an S-Corporation, you need to follow certain steps.
Health insurance deductions in this setup follow different rules than sole proprietorships. Otherwise, you don’t get the write-off for health insurance premiums. First, understand that your business will file a Form 1120S and issue you a W-2 as the owner and operator.
This step is required when handling LLC health insurance or S-Corp health benefits. Make sure you understand this process AND how to create the maximum tax savings when issuing your W-2. See my article “Maintaining Your S-Corporation”.
Being an S-Corporation doesn’t mean you must offer health insurance to every employee.
Even if your business has employees, you don’t have to provide them health insurance. Offering LLC health insurance for owners doesn’t mean you must offer it to everyone else. The Affordable Care Act (ACA) lets you pay for your own health insurance and deduct 100% of the cost.
You can do this without providing coverage to any other employees. This supports the self-employed health insurance deduction even if you’re the only one covered.
The IRS considers you an Applicable Large Employer if you have 50 or more full-time or equivalent workers. This status brings different health insurance rules compared to smaller businesses. Applicable Large Employers must offer health insurance to all full-time workers. This is a legal requirement under the ACA’s employer shared responsibility rules.
If You Have Employees
If you have employees and offer health insurance, whether you cover it fully or partly, you can deduct the premiums you pay for them.
This is one way health insurance is tax deductible for small business owners. Except, NOT for anyone that owns 2% or more of the Corporation directly on the 1120S Tax Return. Under IRS Regs, the owner/operator of the S-Corp needs to follow a different procedure… But don’t worry – YOU
DO get the deduction! Here are the steps:
- Have two categories in your ‘books’ (i.e. QuickBooks) for health insurance premiums: 1) Employee Health Insurance, 2) Owner’s Health Insurance
- Make sure the S-Corporation pays for your health insurance, EVEN IF it is a ‘personal policy’. Make sure the S-Corporation pays the bill. This is a critical step in the process.
- At year-end, record a journal entry to move “Owner’s Health Insurance” from an expense to an “Owner Draw” under equity. Specifically, this would be a Debit to Owner’s Draws, and a Credit to the expense Owner’s Health Insurance. Don’t worry…you’ll be able to deduct the insurance premiums at a different point in the process.
- Next, report the amount of Health Insurance Premiums paid in Box 14 of the W-2 with the indication ‘Health Ins.’
- Confirm that your W-2 Gross Wages (Box 1) exceeds your Health Insurance Premiums paid (Box 14). DO NOT increase Gross Wages with Premiums Paid, it’s just required that you have FICA wages that exceed Premiums Paid. More specifically, the Premiums paid are subject to Federal and State withholding, but not subject to FICA.
- The final step is when the owner/operator of the S-Corporation files their personal 1040. They capture the Health Insurance Premiums noted on their W-2, and separately state it on Schedule 1, Part II, Line 16 of the 1040. This line is clearly labeled: Self Employed Health Insurance Deduction.
Frequently Asked Questions
Can I Deduct My Health Insurance Premiums if I Am Self-employed?
Yes. If you have net income and meet IRS rules, your premiums may qualify. The answer to is health insurance tax deductible for self-employed is yes, but under the right conditions.
How Does Health Insurance Work for Self-Employed?
You buy your own coverage, often through a marketplace or private insurer. If you qualify, you can deduct those premiums. This applies to health insurance for LLC owners too, if the LLC is treated as a disregarded entity or S-Corp.
What Is the 20% Self-Employment Deduction?
It’s a tax break on qualified business income. Many self-employed people can deduct up to 20% of their net earnings, separate from health insurance deductions.
What Is Deductible for Self-Employed?
You can deduct business expenses like supplies, mileage, and professional fees. If eligible, premiums for health insurance for LLC owners are also deductible. This falls under the is health insurance tax deductible for self-employed rule.
Bottom Line of Writing-off Health Insurance
Bottom line, make sure your accountant, bookkeeper, and payroll reporting company ALL know your plan. They need to coordinate the payment and reporting of your health insurance premiums. If done correctly, it’s a fantastic tax deduction!
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