Health Insurance Application Does Not Control Your Tax Deduction

If you are self-employed and buy your own health insurance, you may have noticed fine print on the application stating that the policy is not employer-sponsored and that you will not deduct the premiums on your tax return. 

That language can be alarming, but it does not take away your tax deduction.

The statement exists because Affordable Care Act rules penalize employers that improperly pay employees’ individual insurance premiums. It is an insurance rule about who sponsors the coverage, not a tax rule, and an insurance application cannot override the tax code.

Here is how the deduction actually works:

• If you’re a sole proprietor or a partner, you are not an employee of the business. You buy the policy as an individual and deduct the premiums on your Form 1040.
• If you are an S corporation owner (more than 2 percent), have the corporation pay or reimburse the premium and report it as W-2 wages. You then deduct it on your Form 1040. For health insurance purposes, the tax code treats you as a partner.

The following rules really can limit your self-employed health insurance deduction:

• The deduction cannot exceed your net earnings from the business. A loss year, or a zero S corporation salary, means no deduction.
• No deduction is allowed for any month you, your spouse, a dependent, or your child under age 27 is eligible for a subsidized employer plan, even if you or they decline that employer coverage.
• The deduction reduces income tax, not self-employment tax.

If you want to discuss the self-employed health insurance deduction, please call me on my direct line at 408-778-9651.