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Is health insurance considered a business expense?

Keep in mind...
  • Health insurance deductions are for the self-employed
  • Employers, partners, and S-corporations may qualify for these deductions
  • Net profits is one of the fundamental qualifications for these deductions
  • Deductions for long-term care are also available
  • The IRS provides instructions for performing all insurance deductions

When companies provide employees with group health coverage, the organizations can write off the cost as a business expense. Individuals without insurance through an employer can reduce personal incomes taxes by investing in a health savings account.

Generally speaking, deducting the cost of insurance as a business expense is primarily designated for taxpayers who are self-employed.

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Qualifying for Insurance Deductions

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People who are in a partnership are permitted to deduct health insurance premiums as a personal deduction in the same way sole proprietors write it off as a business expense.

The health insurance premiums of shareholders with over 2 percent stake in an S corporation are treated similarly to partnerships. When the S corporation pays the premiums, they are deducted as a personal expense from the income tax form.

Insurance Deductions for the Self-Employed

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Individuals who are self-employed are permitted to deduct premiums for dental, medical and long-term insurance care used for their own benefit, for a spouse or for any dependents up to age 27.

The insurance policy should be in the name of the business or the individual and the Profit and Loss From a Business Schedule C Form should show a net profit. The deduction doesn’t occur as a business expense on Schedule C, it’s taken from the individual tax return Form 1040.

The health insurance deduction for the self-employed limits taxpayers to deducting no more than the income earned by the business. In order to be deducted as a part of the business, the cost of health insurance needs to be considered to be an ordinary and necessary expense by the IRS.

Necessary expenses are appropriate and helpful for the business, not to be confused with personal expenses, capital expenses or those related to costs of goods sold.

In order for sole proprietors, partners, and S-corporations to make any insurance deductions, the account must by filed under the name of the business or the individual taxpayer. Showing net earnings or profits for the year is also essential for deducting health insurance premiums as a business expense on your taxes.

Medicare premiums paid voluntarily for obtaining insurance can also be calculated into the deduction if the account’s in the taxpayer’s name.

Long-term Care Deductions

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Long-term care insurance contracts may qualify to be deducted as a business expense as well. The deduction for this care can equate to the lesser amount of either what was paid for the person covered during the year or a predetermined limit established by the IRS.

People 71 or older can have their long-term care expenses deducted by up to $4,870, but in contrast, people 40 or younger can only deduct up to $390.

Qualifying long-term care is defined by the IRS as services that are prescribed by a licensed health care practitioner and required by an individual who is chronically ill.

The IRS defines chronically ill individuals as those who have been certified within the past year to have a severe cognitive impairment creating threats to safety and health that requires substantial supervision or those who’ve lost functional capacity within the past 3 months and are unable to perform two daily activities without considerable assistance.

Not Qualified for Deductions

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When filing for health insurance deductions, taxpayers are instructed not to include any amounts for months when the taxpayer, spouse or dependents were eligible for a plan subsidized by an employer.

Any non-taxable amount paid to retirement plan distributions by retired public safety officers should also not be included. Certain payments associated with the Health Coverage Tax Credit (HCTC) program may not be deducted as a business expense.

It’s also worth noting that health insurance deductions for the self-employed should not be subtracted from the business named when calculating net earnings for self-employment tax. Most people can use the Form 1040 worksheet instruction to calculate these deductions.

If you have multiple sources of income subjected to self-employment tax, file Forms 2555 or 2555-EZ or use deductions long-term care, use Worksheet 6-A. Anyone claiming the HCTC should complete Form 8885 before calculating any deductions.

Taxpayers with multiple plans corresponding to multiple businesses within the same year must complete individual worksheets to calculate the net earnings of each plan.

Taxpayers will need to disclose the premiums for each health plan and the net profits for each business. When long-term care services are a factor, the appropriate limits for the year still apply for each individual covered by the plan.

Deducting Insurance Premiums

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It’s also worth noting that taxpayers are typically limited to deducting health insurance premiums during the year they occur. With the cash method, insurance premiums are typically deducted during the year they are actually paid, not incurred.

With the accrual method, health insurance premiums cannot be deducted before the year that the taxpayer incurs the liability for them and pays for them, except with recurring items.

Even if the premiums are paid for in advance, they cannot be deducted in advance. Generally speaking, health insurance premiums are business expenses limited to being allocable for the period of time, or taxable year, in which they are used.

Many self-employed people are unaware how much tax savings this valuable write-off can provide when filed correctly.

Final Notes on Insurance Deductions

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It’s important to remember that the deductions are available whether the policy is started under the name of the individual or business. This is true for members of an LLC, partnership, S corporate’s action shareholders and sole proprietors. It’s also worth noting that earnings can’t be pooled together or commingled in order to meet the income limit for claiming deductions.

The health insurance deductions provided by the IRS are designed to apply match each plan with one source of income.

For employers providing employees with health insurance coverage, the premiums can be deducted as a business expense. For sole proprietors, premiums may be filed as a personal deduction or as a business expense. Some sole proprietors have been able to reduce the amount of income subjected to self-employment taxes by hiring a spouse or dependent on as a legitimate employee with health coverage.

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