health insurance costs: the self-employed’s guide


Health insurance premiums are an often overlooked business write-off for the self-employed. Just as a corporation can write-off the amount they pay each month in health insurance coverage for employees, so can the self-employed.

Self-employed = employer (you) + employee (you).

Remember: when you’re self-employed you act as both the employer and the employee.

So let’s dive in to what is and is not a business write-off and when it comes to your healthcare costs. Find out if you’re missing any write-offs by scheduling your free consultation!

Health Insurance Premiums

100% Write off
Report total in line __ on Schedule C
Explained

The IRS considers health insurance premiums an employee benefit with favorable tax advantages for both the employer and the employee.

The IRS defines a list of benefits employers can provide to employees without reporting the cost of those benefits as ‘earned income’. To get the long list of these, check out IRS publication 15-b. That means the employee receives the benefit tax-free and the business claims a write-off on their taxes for the cost of the benefit.

For example, if an employee receives the equivalent of $3600 a year in addition to their salary BUT that $3,600 is in the form of paid health insurance premiums; then that benefit is tax-free to the employee.

If an employee receives a $3,600 trip to Hawai’i as a bonus, the IRS considers that $3,600 an income-equivalent and the employee pays taxes on that money – even though they never received the actual money.

So you (as the employer) can provide you (the employee) with paid health insurance premiums. Your business can write-off 100% of the cost of the premiums as a business expense. You – the employee – don’t pay any personal taxes on that benefit.

However, there is a reason companies often times use benefits to subsidize employee compensation; because employers are able to broker cheaper health insurance for a group of people, they can provide health insurance at a lower cost to them than what an employee would have to spend to purchase their own individual plan.

But because you’re self-employed, you (the employer) only has one employee (you) so you’ll end up paying for an individual healthcare plan. The IRS has a lot of guidance on this topic. A few resources for your reading pleasure:

Chapter 6 of IRS publication 535 is a detailed guide to business expenses

IRS topic 502 does a good summary of which healthcare costs are deductible or get into the nitty gritty with the full IRS publication 502.

Copays, prescription drugs, etc

0% write off
Not reportable anywhere*

Consider an HSA or FSA. See my article on these two programs and how they could save you money!

Explained

Let’s revisit the concept of the employer and employee. An employer doesn’t pay for copays or any other healthcare costs other than the health insurance premiums. So you can apply the same rule for you (the employer) when you’re self-employed. Your employee’s healthcare expenses are not your responsibility nor are they a business write off.

So what about the employee? Do they get to write these expenses off? Here we get into personal taxes rather than business taxes and a whole different set of rules. The easy answer is no, people cannot write-off their healthcare costs on their taxes. There are exceptions; I list one below. If you want to know more, I urge you to discuss with a licensed professional and take a gander at IRS publication 502

Looking for ways to get affordable health insurance? Not sure if you qualify for subsidies? Check out my article on health insurance options for the self-employed.

*Unless your health care costs exceed 7.5% of your adjusted gross income; then everything over the 7.5% threshold is a personal write-off. You’ll report this write-off on your personal taxes (Form 1040 and Schedule A), not your business taxes (Schedule C).