What is the Self-Employed Insurance Deduction and How Do You Calculate It?

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If you’re working as a freelancer or contractor, then the government considers you self-employed. This status will set you apart from standard employees when tax season comes around. One of the biggest differences is that self-employed workers can deduct their health insurance premiums from their taxable income, allowing them to pay less in federal income taxes. In this quick guide, we’ll answer some of your basic questions about what the self-employed health insurance deduction is and how to calculate it.

Who can claim a self-employed health insurance deduction?

You’ll qualify for the self-employed health insurance deduction if you meet two key criteria. First of all, you need to have a net profit from your self-employed work. Also, you can’t have the option of receiving health insurance from (a) your employer or (b) your spouse’s employer. If you earn a profit from your self-employment and you had to find your own health insurance, then you qualify for the deduction. 

How do I file health insurance costs paid for myself and my family?   

You can file your health insurance costs with your personal tax returns. You’ll claim the self-employed health insurance deduction on the schedule 1 portion of Form 1040. 

Are health insurance premiums tax deductible? 

Yes, health insurance premiums are tax deductible for self-employed workers. That’s why you should calculate the premiums paid during the year for yourself, your spouse, your dependent children, and non-dependent children who are 26 or younger. 

Can I qualify for both the premium deduction and a premium tax credit offered through the Affordable Care Act (ACA)?

It is possible to qualify for the premium deduction while also receiving a premium tax credit through the ACA. Just remember one key rule: The premium deductions and the premium credits can’t add up to more than the combined value of your eligible insurance premiums.

How to deduct health insurance premiums for the self-employed

Once you’ve determined that you’re eligible for the self-employed health insurance deduction, you should add up the total amount you’ve spent on premiums for yourself, your spouse, and any eligible children. Then, you must file this total as a deduction on Form 1040 of your personal federal tax return.

Getting help with claiming the self-employed health insurance deduction

Claiming deductions on your tax forms can be difficult—and you don’t have to do it on your own. Many online tax services guide users through the process of claiming their deductions. Tax professionals can also help with the process.  

How to calculate self-employed health insurance deduction

Let’s imagine you’re a family of four with an income of $80,000 that pays $12,000 each year in health insurance premiums. Here’s how you’d compute your deductions:

Step 1: Subtract the money you’ve paid in premiums from your total income.

80,000 – 12,000 = 68,000

Step 2: Use your adjusted income to determine your poverty level.

68,000 (adjusted income) / 27,750 (poverty line for family of four) X 100 = 245%

Step 3: Use Table 2 from the instructions for Form 8962 to match your federal poverty level to the proper rate.

245% = .0380

Step 4: Multiple your adjusted income by the assigned rate to determine your allowable premium tax credit

68,000 x .0380 = 2,584

Step 5: Subtract the allowable credit from the total premiums paid.

12,000 – 2,584 = 9,416

Step 6: Use the premium tax credit to calculate household income

82,000 (original income) – 9,416 = 72,584

Step 7: Use new adjusted income to determine the federal poverty level.

72,584 / 27,750 X 100 = 262%

Step 8: Use the instruction from form 8962 to determine the proper rate.

262% = .0448

Step 9: Calculate the premium tax credit.

72,584 X .0448 = 3251.76

In this case, your allowable deduction is $9,416 and your premium tax credit is $3,251.75. Since they add up to less than your total amount of premiums paid ($12,000), you’d be able to file for both. 

Other frequently asked questions about self-employed health insurance

What is the special requirement for long-term care insurance?

For long-term care insurance to be tax deductible, the plan must meet certain eligibility requirements. These requirements include, among others, that the plan covers “activities of daily living” and “cognitive impairment” triggers.” 

What if I don’t qualify for the self-employed health insurance deduction?

You may still get certain tax benefits from your health care costs even if you don’t qualify for the self-employed deduction. If your medical costs, including insurance premiums, add up to more than 10% of your adjusted gross income, then you can deduct the costs. You’ll just have to take itemized deductions when you fill out your tax forms.

Is health insurance tax deductible for freelancers?

Most freelancers will qualify for the self-employed health insurance deduction. As long as you meet the main requirements—earning a profit from your freelance work and having no option for employer-sponsored insurance—you shouldn’t have a problem deducting your premiums. 

Can a 1099 employee write off health insurance?

1099 workers are considered self-employed. Therefore, they are entitled to the self-employed health insurance deduction. If you’re a freelancer who receives 1099 forms from your clients, you are most likely eligible to deduct your expenses from health insurance premiums.

About the Author: Ben Clabault is a freelance writer from Sandwich, Massachusetts. He has spent much of his adult life traveling through Latin America. He currently lives with his fiance in Santiago Atitlan, Guatemala. His areas of expertise include travel, marketing, SaaS, and global cultures. You can find his work on Copyfolio and reach out to him on LinkedIn.

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