Everything You Need to Know About Tax Deduction on Health Insurance For Freelancers

Self-employment can be liberating in many ways, but it also comes with additional responsibilities such as paying quarterly estimated taxes and having to pay for your own health insurance. But the good news is that as a self-employed individual you can claim the health insurance deduction. Understanding this valuable deduction can save you a significant amount of money every year.

Self-Employed Health Insurance Tax Deduction

As a self-employed individual, you’re allowed to deduct your healthcare premiums, regardless of whether you itemize your deductions or not. However, you may be ineligible for this deduction if you are:

• Eligible to participate in another employer’s plan and elect not to
• Self-employed, but you have another job that offers a health plan
• Eligible to receive coverage through a spouse's employer-sponsored plan.

It’s also important to remember that a freelancer cannot deduct more than the amount of income they generate through their business operations.

Can freelancers deduct health insurance?

The Internal Revenue Service (IRS) defines the type of policy premiums you can claim as a self-employed health insurance tax deduction. To qualify for a self-employed health insurance deduction, the IRS states a policy must fall into at least one of the following three categories.

• Dental insurance
• Medical insurance
• Long-term care (LTC) insurance

You can qualify for the self-employed health insurance deduction if you are self-employed and not eligible for any other health insurance plan. So if you have another job that offers you health insurance or your spouse’s employer can cover you, you won’t be able to take this deduction, even if you didn’t enroll in the other insurance plan. Eligibility is month-by-month, so you can only claim the deduction for the months you qualify. These rules and eligibility for this deduction also apply to business partners or LLC members.

In addition, you can’t deduct more than what you earn from your business during that tax year. If your premiums cost more than your income, you can claim up to the income amount as your self-employed health insurance deduction, and you may be able to claim the excess costs as medical expenses in your Schedule A. If you had a tax loss for the year, you won’t be able to claim this deduction.

Who can take the self-employed health insurance deduction?

To claim the tax deduction for health insurance, you must be self-employed, own an S Corporation, or be a partner/member of an LLC.

Self-Employed

You can deduct your health insurance premium from your SE income as long as you have no other health insurance coverage.

S Corp

If you are an S Corporation owner, you can deduct health insurance premiums paid for shareholder-employees as a business expense. For shareholder-employees that own more than 2% of the corporation, you also can include the cost of those health insurance benefits as wages on the shareholder’s W-2.

However, if the health insurance premiums were paid by the S corporation and were reported as taxable compensation on the shareholder’s W-2, the shareholder-employee can also claim a tax deduction on their Form 1040.

To qualify for the ACA, S Corporations with 50 or more employees must provide group health insurance plans.

Partners and LLC members

Partners and LLC members are also considered self-employed. People who fall under this category can directly pay their own health insurance premiums and claim the deductions.

How much can a self-employed person deduct for health insurance?

As a self-employed individual, you are allowed to deduct 100% of your health insurance premiums for yourself, your spouse, your dependents, and any non-dependent children aged 26 or younger at the end of the year.

It's important to understand that the health insurance deduction isn't a business deduction. It is an above-the-line deduction that reduces your AGI.

If you qualify, you can deduct 100% of your health and dental premiums. You can also deduct qualifying long-term care insurance premiums; the maximum amount depends on your age and changes annually by the IRS.

Following are the deductibility limits for the tax year 2022:

How to calculate the self-employed health insurance deduction?

To calculate your health insurance deduction, You must report your health insurance amount on Form 1040 or 1040-SR. If you itemize your deductions and don't claim 100% of your self-employed health insurance costs on Form 1040 or 1040-SR, include any remaining premiums with all other medical expenses on Schedule A (Form 1040) subject to the 7.5% limit.

However, it is important to remember that if you are eligible for both the self-employed health insurance deduction and the premium tax credit, you cannot double-dip. According to the IRS, “Your combined insurance premium deductions and premium credits cannot be more than your total eligible insurance premiums.”

Calculating these deductions can be a complicated process. The IRS provides two calculation methods for figuring out the deduction – simplified and iterative.

The former method of calculation is said to be less exact but efficient and easier to calculate. The iterative calculation will result in a more exact answer, but it is a little more time-consuming to compute. You can choose either of the methods. In case of any confusion, feel free to consult a CPA or tax professional.

Conclusion

The deduction for self-employed health insurance premiums is highly beneficial especially if you consider the rising cost of health insurance. A tax deduction like this one can help you pay at least a portion of the premium cost.

You can deduct your taxes from a number of health insurance options. When it comes to calculating the deduction, you can use FlyFin. It is powered by AI and backed by CPAs who can help you figure out your taxes simply by asking you a few questions about your profession and tax filing status.

Moreover, FlyFin’s self-employed quarterly tax calculator can help you claim your self-employed insurance deduction with ease.