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. In order for health insurance premiums to be deductible, 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. Stated otherwise, if you’re not self-employed and you have to pay your own personal health insurance, good luck trying to write it off.
But 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?
Rental Property Owners
If you own a rental property either personally, or with an LLC (always a smart move), you may think that you have a ‘small business’ and you would and should be able to write off your health insurance against your rental income. However, you would be mistaken.
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, and it’s true that I want you to deduct every possible expense related to that rental.
However, there is an exception. If you have an ’employee’ running and managing your rental property portfolio, in that situation you could write off THEIR health insurance premiums as an employee benefit if you wanted to. 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.
In sum, unless you set up a management company, reported on a Schedule C or 1120S, to “manage” your rentals (something I generally don’t recommend), you’re not going to be able to deduct the premiums in your rental property 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 easy to do. In this situation, you would be filing a Schedule C, on your 1040 Tax Return. However, you’ll be surprised to see that there isn’t a ‘line’ on the Schedule C for health insurance premiums for the owner, it is actually separately stated on Schedule 1, Part II, Line 16 of the 1040, and the line is clearly labeled: Self Employed Health Insurance Deduction.
Regarding the actual payment of the premiums, let your small business pay for it, OR pay for it personally- it doesn’t matter. 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 paid for by your small business.
The only requirement to deduct health insurance premiums as a small business owner in this situation is that you have ‘net income’. The business has to 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. The calculation and determination regarding how much of the health insurance premiums you can deduct comes into play after Net Income is calculated. 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.
If you own and operate a business and report it as an S-Corporation (or an LLC ‘taxed’ as an S-Corporation), then you have to follow specific procedures or you don’t get the write-off for health insurance premiums.
First, recognize your business will be filing a 1120S Business Tax Return AND issuing you a W-2 as an owner/operator. 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”.
Next, realize that just because you are an S-Corporation doesn’t require you to provide health insurance for all the other employees of the business (if you even employ any). Under the Affordable Health Care Act (“ACA”), you ARE allowed to pay for your own health insurance, deduct 100% of it, and not cover any of the other employees.
However, an employer with 50 or more full-time or full-time equivalent employees is considered to be an Applicable Large Employer and is legally required to offer health insurance to all of its workers, as per the ACA’s health insurance requirements related to the employer shared responsibility provisions.
If You Have Employees
Nonetheless, IF you do have employees and provide any health insurance benefits (in part or in full), you can deduct the health insurance premiums you pay for your employees, but 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 the end of the year do a journal entry to convert the category for “Owner’s Health Insurance” as an expense to an “Owner Draw” (typically an Equity account). 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.
Bottom line, make sure your accountant, bookkeeper, and payroll reporting company ALL know your plan and coordinator the payment and reporting of your health insurance premiums. If done correctly, it’s a fantastic tax deduction!
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Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP.