If you’re a freelancer, you have to get your own health insurance.
No more being able to take advantage of an employer’s plan.
Well, unless your spouse has access to a good one.
But, in general, you’re on your own, and it sucks.
Not only are premiums rising each year, but so are deductibles.
Add to that the lack of help and affordable options the marketplaces provide, and the whole thing makes you want to scream.
Enter the self-employed health insurance deduction.
With this little gem, you may no longer have to itemize in order to deduct your premiums.
You may no longer have to meet certain minimums before your medical expenses qualify for deducting.
That’s a huge benefit.
It’s not, however, without it’s drawbacks and confusing rules…
Must Have Business Profits
There isn’t anything wrong with reporting a loss on your Schedule C business.
At least not when it comes to your tax return.
It happens very often, and realistically, it’s part of doing business.
There are certain times when you must show a profit, however.
One of those times is to be qualified to deduct self-employed health insurance premiums.
If you are reporting a net loss on Schedule C, you cannot deduct any part of the health insurance premiums you paid.
No deduction can be taken at all without reporting profits.
And, it’s not one of those grey areas, where you can choose to be as cautious or aggressive as you feel comfortable.
This is taken verbatim from IRS Publication 535, Business Expenses (even keeping the exact punctuation!)
You were self-employed and had a net profit for the year reported on Schedule C (Form 1040), Profit or Loss From Business; Schedule C-EZ (Form 1040), Net Profit From Business; or Schedule F (Form 1040), Profit or Loss From Farming.
One thing to be aware of is that the health insurance premiums are not a business expense, and therefore don’t get reported anywhere on the Schedule C, so even if you pay the premiums from the business’ funds, it has no impact on the business’ taxable income.
[This comes into play a little later in the article.]
There is a ray of hope though.
If you have some income, but not enough to match the amount of premiums paid, you can still get a little benefit.
You are allowed to deduct the amount of self-employed health insurance premiums to the extend that it brings your Schedule C net income to $0.
Here are a couple examples:
One thing that can be done, if you itemize deductions and have enough in qualified medical expenses, is to report the disallowed portion of insurance premiums on Schedule A.
The deduction isn’t an all-or-nothing proposition, you can deduct everything you are entitled to as an adjustment to income on page 1, and report the rest with your other medical expenses and it will be totally allowable.
Can’t Be Eligible For Group Coverage
This is where it gets a bit tricky….
You cannot take the deduction for any month you were eligible to participate in any employer (including your spouse’s) subsidized health plan at any time during that month, even if you did not actually participate.
The simple part of the equation is this: if you are covered by a group plan through an employer, you cannot take your insurance premiums as the above-the-line deduction; you can only claim it as part of your Schedule A itemized deductions (if you itemize).
Almost as simple is this fact: if your spouse is covered by an employer plan, you can’t take the self-employed health insurance deduction.
Now, for the tricky part.
Even if you or your spouse are eligible for group coverage via either ones employer, you cannot take the deduction for self-employed health insurance; again, it would have to go on Schedule A if you itemize.
It doesn’t matter if your spouse takes no part in your business, or vice versa, the only option you have is to itemize if possible.
Now for the really tricky part.
This can change from month-to-month.
For any month during which either you or your spouse are eligible for coverage, you lose the self-employed health insurance deduction.
You can claim the deduction for any month during which neither party was eligible for group insurance.
That means you have to be very diligent when it comes to record keeping.
First, you don’t want to mess up by claiming amounts you aren’t entitled to, which would be bad.
At the same time, you have to pay attention so you don’t miss out on claiming a huge benefit by being able to deduct portions of your insurance under the self-employed deduction option.
Here are a few examples:
A Word On Insurance & Estimated Taxes
In the first section about business profits, I mentioned health insurance payments not being a “business expense” even if it gets paid out of a business account.
I said that it will come up again at a later time, and this is that time.
The health insurance premiums paid aren’t considered in any capacity for the purpose of tax calculations.
That’s the reason they don’t appear on Schedule C.
In fact, the line for insurance specifically states “other than health”.
This can cause some confusion among people who try to calculate their own estimated tax payments.
Generally, people will look at their income statement and take a percentage of the net income from that report to remit for their estimates.
Some people may take it a step further and use that figure combines with the IRS Self-Employment Tax worksheet or some website calculator to come up with the exact amount they should pay for estimated taxes.
The thing that people without a background in accounting or tax preparation do wrong is they don’t add back the health insurance payments to the income statement’s net income figure before doing the calculation.
This is important to know because in both of those cases that figure would be short, and you would end up owing more than you thought when it came time to file your tax return.
It’s important to understand that these are only the most basic explanations and examples of how the self-employed health insurance deduction work and apply to different situations.
There may be other limitations on your ability to claim all or part of the deduction based on your particular circumstances.
It’s always my recommendation that you consult a qualified tax professional when it comes to anything tax-related, especially if you don’t have a background in taxation; if for nothing else, you can always hire one just to double-check your own calculations.