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, even if the child was not a dependent.
Requirements for the Taxpayer
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 from an S corporation in which they were 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:
- Self-employed taxpayer filing Schedule C or Schedule F - The policy can be either in the name of the business or in the name of the taxpayer.
- Partner - 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 as guaranteed payments. If the policy is in the partner's name and the partner pays the premiums, the partnership must reimburse the partner and report the premium amounts on Schedule K-1 as guaranteed payments. Otherwise, the insurance plan won't be considered established under the business.
- More-than-2% shareholder - 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. If the S corporation pays the premiums, they must be reported on Form W-2 in Box 1 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 Form W-2 in Box 1 as wages. Otherwise, the insurance plan won't be considered established under the business.
Effect on Itemized Deductions
If the taxpayer is itemizing deductions, on Schedule A they will need to reduce the amount of medical insurance premiums by the health insurance deduction taken on Schedule 1.
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.