See if You Qualify for This Self-Employed Health Insurance Deduction before Tax Time

What is the Self-Employed Health Insurance Deduction?

When you’re self-employed, it’s on you to take care of all the tiny (i.e., big deal) stuff that most people’s employers do for them. One of these tasks is purchasing your own health insurance policy to cover you and your family.

However, to make this a little easier on the self-employed, a deduction is available. Surprising no one, it’s called the self-employed health insurance deduction, or SEHID, to those in the industry.

This includes medical and dental insurance, Medicare premiums and qualified long-term care insurance for yourself, your spouse and your dependents. The health insurance can also cover your child who was under age 27 at the end of 2021, even if the child wasn’t your dependent.

Let’s explore this deduction and see if it can put more money in your pocket.

Do I qualify for the SEHID?

You qualify for the deduction if one of the following applies:

• You file a Schedule C (or Schedule F) and have a net profit for the year.
• You were a partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), box 14, code A.
• You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
• You received wages in 2021 from an S corporation in which you were a more-than-2% shareholder. Health insurance premiums paid or reimbursed by the S corporation must be shown as wages on Form W-2.

The health insurance plan must be in the name of the business. Your plan is considered to be in the name of the business if the following is true:

1. If you file a Schedule C (or Schedule F), a policy can be either in the name of the business or in the name of the individual.

2. For partners, a policy can be either in the name of the partnership or in the name of the partner.

• You can either pay the premiums yourself, or the partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income.
• However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business.

3. For more-than-2% shareholders, a policy can be either in the name of the S corporation or in the name of the shareholder.

• You can either pay the premiums yourself, or the S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income.
• However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts in box 1 of Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business.

However, you will not qualify for the SEHID if you were eligible for group insurance from your spouse’s employer (or your own employer, if you have another job in addition to your self-employment).

This rule is applied on a month-to-month basis. An individual eligible to participate in an employer plan for only part of the year is only disqualified from claiming the SEHID for the part of the year they are eligible for employer plan coverage.

This rule may be applied separately to policies that include long-term health care coverage and those that do not. That means a taxpayer who has subsidized employer-provided health care may still be eligible to deduct long-term health care coverage if the employer policy did not cover long-term care.

How do I take and apply the SEHID?

The medical premiums are deductible from your gross income, on Schedule 1, Line 17, Form 1040. You will not need to itemize  to take this deduction.

The deduction is limited to the smaller of:

• the health insurance premiums, or
• net earnings from the business minus the deduction for half of SE taxes and any deduction for contributions made to retirement plans such as a SEP, SIMPLE or qualified plan.

In most cases, use the Self-Employed Health Insurance Deduction Worksheet in the Form 1040 Instructions.

However, use Worksheet 6-A in Pub. 535, Business Expenses, to figure the deduction if one of these three is true:

• the taxpayer had more than one source of income subject to SE tax,
• the taxpayer files Form 2555 or
• amounts paid for qualified long-term care insurance are used to figure the deduction.

If the plan in question was acquired through the Health Insurance Marketplace and advance payments of the premium tax credit were made or the taxpayer plans to take the credit, use the worksheet in Pub. 974, Premium Tax Credit, to figure the credit.

If the taxpayer itemizes deductions and does not or is not able to claim 100% of the self-employed health insurance on Schedule 1, include any remaining expenses as “medical expenses” on Schedule A, subject to the AGI threshold for medical expenses.

What about the Premium Tax Credit and the SEHID?

Self-employed taxpayers may claim the premium tax credit and the self-employed health insurance deduction in the same year as long as the taxpayer qualifies for both provisions and does not take a double tax benefit.

Note: A qualifying taxpayer may also choose to receive the premium tax credit as an advance premium tax credit resulting in reduced out-of-pocket premiums.

The self-employed health insurance deduction is limited to the premiums paid by the taxpayer during the year (and not the total premiums charged for the health insurance plan, which may have been reduced by advance premium tax credit).

The total amount of the premiums paid by the taxpayer would be the total premiums of the health insurance plan reduced by the amount of any premium tax credit received on the year’s income tax return. 

Getting help with small business taxes

Navigating health care tax benefits can get complicated, especially when you are self-employed.  A small business tax expert can help claim the benefits available to you.

Block Advisors tax pros specialize in small business taxes and are ready to help you with all your small business tax needs.