A self-employed taxpayer may be able to deduct the amounts paid for medical and dental insurance, as well as the premiums for qualified long-term care insurance. The deduction may be taken for the insurance premiums covering the taxpayer, spouse, dependents, and children under age 27 at the end of 2018, even if the child was not a dependent.
For the taxpayer to be eligible for the deduction, one of the following statements must be true:
- The taxpayer was self-employed and had a net profit for the year reported on Schedule C (Form 1040) or Schedule F (Form 1040).
- The taxpayer was a partner with net earnings from self-employment for the year reported on Schedule K-1 (Form 1065), box 14, code A.
- The taxpayer used one of the optional methods to calculate net earnings from self-employment on Schedule SE.
- The taxpayer received wages in 2018 from an S corporation in which he / she was a more than 2% shareholder. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2.
Requirements for the Insurance Plan
The insurance plan must be established under the business and satisfy the following
- For self-employed taxpayers filing Schedule C, or Schedule F, the policy can be either in the name of the business or in the name of the taxpayer.
- For partnerships: the policy can be in the name of the partnership or in the name of the partner. If the partnership pays the premiums, the premium amounts must be reported on Schedule K-1, Form 1065, as guaranteed payments included in the partner's gross income. If a taxpayer/partner pays the premiums, and the policy is in the taxpayer/partner's name, the partnership must reimburse the taxpayer and the premium amounts will be included in gross income as guaranteed payments on Schedule K-1. Otherwise, the insurance plan won't be considered established under the business.
- For more-than-2% shareholders: the policy can be either in the name of the S corporation or in the name of the shareholder. The shareholder can pay the premiums or the S corporation can pay them and report the premium amounts on Form W-2 as wages. If the policy is in the shareholder's name and the shareholder pays the premiums, the S corporation must reimburse the shareholder and report the premium amounts on the W-2 in Box 1 as wages. Otherwise, the insurance plan won't be considered established under the business.
Effect on Itemized Deductions
The taxpayer will need to subtract the health insurance deduction from individual medical insurance when calculating medical expenses on Schedule A (if the taxpayer is itemizing deductions).
Effect on Self-Employment Tax
The taxpayer cannot subtract the self-employed health insurance deduction when calculating net earnings for self-employment tax from the business under which the insurance plan is established.
Information Prior to 2018
In 1987, Congress implemented a 25% deduction on self-employed health insurance premiums, and made it permanent in 1994. In 2003, the self-employed premiums became 100% deductible. The deduction, located on Line 29 for 2014, allows self-employed taxpayers to reduce their adjusted gross income by the amount they pay in health insurance premiums during the year. 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.
According to IRS Tax Tip 2013-43:
"If you are self-employed, the IRS wants you to know about a tax deduction generally available to people who are self-employed. The deduction is for medical, dental or long-term care insurance premiums that self-employed people often pay for themselves, their spouse and their dependents.
You may be able to take this deduction if one of the following applies to you:
- You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
- You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.
- You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.
- You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation.There are also some rules that apply to how the insurance plan is established. Follow these guidelines to make sure the plan qualifies:
- If you’re self-employed and file Schedule C, C-EZ, or F, the policy can be in your name or in your business’ name.
- If you’re a partner, the policy can be in your name or the partnership’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the partnership must reimburse you and include the premiums as income on your Schedule K-1.
- If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2."