5 Tax Tips on Health Insurance for the Self-Employed

Are you self-employed or thinking of becoming self-employed?

The Affordable Care Act has made health insurance available to anyone — regardless of current medical status. This means you can purchase coverage for yourself and/or your family on the individual health insurance market — even if you have a pre-existing medical condition.

But did you know today’s tax code can save you money if you’re self-employed and you buy health insurance?

Here are 5 things every self-employed person should know about health insurance and taxes:

1 – Premium Tax Credit (Subsidies)

Depending on your income, you may be eligible for financial assistance to help you pay for health insurance. The government subsidy comes in the form of a premium tax credit and can be paid directly to your insurance carrier to reduce your financial burden. (Subsidies are available to anyone who qualifies, not just the self-employed.)

2 – Self-Employed Health Insurance Premium Deduction

If you are self-employed and show a profit for the year, you can deduct 100% of your health insurance premium on your personal income tax return — Form 1040, Line 29. This reduces your adjusted gross income (AGI) for the year.

Tip: This means if you are self-employed and collected a subsidy to help pay for coverage, your AGI depends on the amount of health insurance premium you paid, and the amount of health insurance premium you paid depends on your AGI — a circular cycle with seemingly no end! The IRS released regulation 26 CFR 601.105 with instructions and examples of how to figure this out. It’s pretty tedious, so if in doubt, consult a tax professional. Also, some do-it-yourself tax programs can help.

Important: You can not take the Line 29 deduction if you were eligible for group coverage from your or your spouse’s employer.

3 – More-than-2% S-corp Shareholders

Since 2008, more-than-2% shareholders of an S-corp could buy individual health insurance in their own name, and then get reimbursed by the S-corp. The premiums would be included on the shareholder’s W-2, and then deducted on the first page of the 1040, resulting in a lower AGI.

However, a provision in the Affordable Care Act prohibits employers from reimbursing employees for individual health insurance premiums — and the IRS will assess a penalty for doing so.

Now what?

In February of 2015, the IRS released Notice 2015-17, and it’s good news for more-than-2% S-corp shareholders, as well other small business owners. Here’s what you need to know if you’re self-employed:

• Assessment of the penalties for reimbursing individual health insurance premiums has been delayed until June 30, 2015 for businesses with fewer than 50 FTE. (Penalties were supposed to start 1/1/14).

• More-than-2% shareholders are exempt from the Affordable Care Act’s market reforms at least through 2015.

• If a shareholder and his/her spouse are both employed by the corporation, AND they are covered together on one individual health insurance policy, they can continue to have the corporation reimburse their health insurance premiums and deduct them on their 1040. (As provided in IRS Notice 2008-1)

4 – Health Savings Accounts

If you are self-employed, it may be worthwhile to consider purchasing a high deductible health plan (HDHP), with a health savings account (HSA). If you are covered under an HSA-qualified HDHP, you can make pre-tax contributions to an HSA to pay for medical expenses.

Your HSA contributions are deducted on your personal 1040 – whether or not you itemize deductions.

5 – Deduction of Medical Expenses

If you itemize your tax deductions AND you paid a lot in medical expenses for the year, you may be able to deduct some of those medical expenses — and premiums you paid for health insurance and qualified long-term care — on Schedule A of your tax return.

But, you can’t both deduct your health insurance premiums as explained above AND include those premiums in your deductible medical expenses.

So it’s a good idea to keep track of your medical expenses for the year, just in case you hit that threshold and can deduct them on your income taxes.

Tip: Only medical expenses in excess of a certain percentage of your AGI can be deducted (7.5% through 2016 for filers age 65 and up, 10% for all other filers; 10% for all filers starting in 2017).

For More Information

If you are self-insured or are considering starting your own business and want to explore your options for health insurance on the individual market, please give our office a call at 703-707-8270.

For specific tax advice, it’s always best to consult a tax professional.