The government outlines certain expenses that a self-employed person is allowed to take against their earnings, some explained explicitly and some implicitly.
The general rule is that any expense is allowable if it is “ordinary and necessary” to that person’s trade or business. As you can see, that is vague.
However, health insurance is something that, up until recently, not only felt like a necessity, but if you wanted to avoid a tax penalty it was a necessity. So, obviously, there were and are certain things that the government allows to help with the high cost of obtaining health insurance.
Most people in the United States obtain their health insurance through the workplace, where it is not only much cheaper for group rates, individuals and their businesses are allowed to pay for the health insurance expenses on a pre-tax basis, meaning essentially that the money used for the health insurance premiums are not taxed.
So, if you are not employed through a normal workplace, and instead are either a contractor, are self-employed, or otherwise own a business, what are your options?
You can’t necessarily easily obtain group health insurance coverage, so that is likely not an option. You can’t pay on a pre-tax basis, because you don’t have an employer paying you a wage to not withhold taxes from, so you can’t do that.
So what kind of benefits for health insurance has the government concocted for you?
Now, as a self-employed person, you can’t take health insurance expenses like a normal expense on your Schedule C, or partnership return, or S-Corporation return.
However, you still can deduct the expense. Health insurance premiums are taken as an adjustment to income, not as an expense on the business part of a tax return. The reason for this is, you cannot deduct more health insurance expenses than you have net self-employment income.
In other words, the deduction for health insurance for a self-employed person is limited to their net business income. Essentially, the expense of health insurance cannot create a business loss, only reduce business income to $0.
While it is great that health insurance for the self-employed has some tax advantages, self-employed people generally still lose out on preferential group rates. However, if you do a little digging, you can find groups that band together self-employed individuals, freelancers, and contractors to receive the group rates for insurance.
For questions or further discussion, please leave a comment below.
This article does not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.