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How Self-Employed Workers Can Claim the Health Insurance Tax Deduction

Lauren Hargrave · August 6, 2020 · 6 min read


There’s a lot of perks to being self-employed. You get to be your own boss, set your own hours, and run the business how you see fit. But there can be some difficult parts too, especially when it comes to buying health insurance. The good news when it comes to health insurance for the self-employed is that there is a tax credit that may help relieve some of the financial burden of paying for your own insurance.

The basics for freelance taxpayers

If you have been getting your health insurance plan through your employer for your whole life, striking out on your own can come as a bit of a shock. Suddenly you have to purchase health insurance for yourself and make sure you have the coverage you need. It can be hard to know what your options are, but luckily once you learn the basics it can be a lot easier to understand what is right for you.

Shopping for health insurance coverage

First things first. When we talk about being self-employed, we are referring to individuals who have a business but don’t have any employees. You might operate using your social security number or as a Sole Proprietor, but the key thing is that you don’t have employees working for you. If you do have employees, you can shop for insurance as a small business owner. Typically you can only get a plan during the open enrollment period, but if you have a qualifying life event you can purchase a plan outside of this period.

If you are self-employed, it is likely that you will buy insurance through the Health Insurance Marketplace established by the Affordable Care Act. There is a federal health insurance marketplace, and some states have their own marketplace as well. When you shop on the individual marketplace you will be asked for your zip code, age, and income information. They will use this info to show you coverage options in your area, plus to see if you qualify for reduced premiums based on your income. If you don’t qualify for any reduced premium programs, you can always shop directly with a health insurance company as well. Sometimes they can offer you plans that aren’t available on the broader marketplace.

Freelancer considerations when buying health insurance

When shopping for coverage as a freelancer it is important to consider your health needs:

  • Do you go to the doctor often?

  • Do you see specialists?

  • Do you mind having a smaller network of doctors if it means saving on your costs?

  • Do you have a lot of prescriptions?

  • Do you anticipate needing more or less healthcare in the coming year?

  • How much can you afford in monthly premiums?

These are all important considerations as you shop around and ultimately choose a plan. You may have a wide variety of plans to choose from, including PPOs, HMOs, and High Deductible Health Plans (HDHPs), so it pays to know what is important to you.

Once you’ve chosen the right health plan, make sure you set up a method to pay your premiums on time. You may want to set up auto-pay directly from your bank account, or set a calendar reminder for when to mail in a check. Some providers even have a mobile app where you can pay your premiums. If you don’t stay up-to-date on your premiums you will lose your coverage, which could lead to big bills if you have a medical emergency.

The Self-Employment Health Insurance Deduction

Health insurance premiums can feel like just another in a long line of expenses if you are self-employed. But unlike other bills coming in, there is a way to save money on your health insurance premiums — and it’s just for the self-employed. It’s called the Self-Employed Health Insurance Deduction.

Qualifying for the deduction

Before we get into the details of claiming this tax deduction, it is first important to define who is eligible for it. This is a tax deduction just for self-employed people who are not eligible for any other health coverage, through their own employer or through a spouse’s employer. That means if you have another job that offers you health insurance, but you have declined that insurance for any reason, you are not eligible for this deduction. This is important to keep in mind as many people are self-employed as a side hustle, or they have multiple jobs to make ends meet. But for the purposes of this deduction, you can’t be eligible for any other coverage.

Another key thing to keep in mind is that the IRS determines your eligibility by month. For example, if you had a job that offered insurance during January and February, but you quit and struck out on your own in March, then you would be eligible for the tax credit for ten months of the year. So you may be able to claim some of your premiums if you were eligible for some portion of the year.

Claiming the deduction

Once you’ve made sure that you are eligible to claim the Self-Employed Health Insurance Deduction, it’s time to claim it when you file your taxes. You can claim this deduction on page one of your Form 1040, as it is an above the line deduction. That means this deduction will reduce your adjusted gross income (AGI).

You can deduct premiums paid for medical and dental insurance for the months you were eligible. You can also deduct premiums for long-term care insurance, but the IRS does limit how much you can deduct based on your age. You cannot deduct premiums for life insurance or short term medical coverage.

The deduction can’t be more than the earned income from your business for the year. So if you only earned $5,000 for the year, but paid $7,000 in premiums, you are only allowed to deduct $5,000. Unfortunately you can’t get any deduction if your business made nothing or incurred a loss for the year. You also cannot combine income from multiple businesses — you must choose one business as your plan sponsor for the year.

Making the most of your options

As always, it pays to take a big picture view when you are running your own business. Health insurance premiums may seem like a costly expense up-front, but paying for them yourself can come with a big tax break. Plus, health insurance can be a great way to save money on healthcare costs and preventative care, especially if you pair it with a tool like an HSA or an FSA. As you shop for health insurance coverage as a self-employed individual, keep in mind the all-in cost you will have for premiums and healthcare expenses, and you will be able to make a smart financial decision for the year to come.

Lauren Hargrave

Lauren Hargrave

Lauren Hargrave is a writer from San Francisco who focuses on technology, finance and wellness. She follows comedians like most people follow bands and believes an outdoor sweat session can cure almost any bad mood. She’s also been writing her first novel for so long, her mom doesn’t ask about it anymore.

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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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