How to Save Money with the Self-Employed Insurance Deduction?

self employed health insurance tax dedcution

How to Save Money with the Self-Employed Insurance Deduction?

If you’re self-employed and carry health insurance, you are entitled to a health insurance tax deduction. You can use this deduction to reduce your insurance costs as well as your tax burden. Read on to learn more.

What Health Insurance Expenses Can I Deduct on Taxes?

With this special healthy insurance deduction, you can deduct the following from your taxable income:

  • Health insurance premiums (including long-term care and dental care coverage)
  • Health insurance plans for your children (aged up to 27 years) whether they are your dependents or not.

Can I Deduct Health Insurance for my Kids and Spouse?

This special deduction for self-employed people applies to you, your spouse, as well as your dependents. It can also cover your kids (aged 26 or younger). You can use this deduction if you’re a sole proprietor, a partner in a partnership, an LLC member, as well an S corporation shareholder whose stockholdings exceed two percent of the business. This deduction also applies both when you purchase the health insurance coverage individually and when your business purchases it for you.

An Example of Self-Employed Health Insurance Deduction

Say you’re a sole proprietor and your annual health insurance cost is $10,000. If your annual business profit was $50,000, you’ll deduct your $10,000 yearly health insurance costs from your gross income when calculating your state and federal income taxes. If the state and federal income tax rate amount to, say, 30 percent, this deduction can save you $3,000 in annual income taxes. However, you must meet these two requirements for you to qualify for a self-employed insurance deduction:

  • You shouldn’t have other health insurance plans.
  • You must have business income.

Is Health Insurance a Business Cost for the Self-Employed?

Your health insurance costs can be considered a deductible business cost when your enterprise pays them for your workers. However, if your business pays for your health insurance, you can deduct the insurance premiums as business costs. However, you can get around this by employing your spouse and then providing them with health insurance coverage for your family. In this case, your health insurance costs can be deducted as business expenses.

Deducting Health Insurance as a Business Expense

Say you run a successful bakery and hire your spouse as your operations manager. You pay them $25,000 annually and offer them health insurance coverage. The policy covers you and your spouse and your kids. If your annual premiums for the health insurance coverage are $10,000, you can deduct that amount as your bakery’s business expense. This means you can deduct the $10,000 from both your $100,000 income that’s subject to tax as well as self-employment income and therefore, this deduction will ultimately save you $4,500 in state and federal taxes.

Business or Personal Deduction?

Business deductions reduce the sum of your income that’ll be used to calculate your self-employment taxes. Your self-employed health insurance deductions are considered personal deductions. This means they don’t impact the business income that’s used to calculate self-employment tax.

How Club Agency Can Help

For you to be able to deduct self-employed insurance as a business expense, your spouse should be a bona fide employee, which means you must pay the necessary payroll taxes and treat them as any other worker. For more information on how to get cost-effective persona and business insurance, contact Club Agency today.



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