Medical Insurance Deduction for the Self-Employed – Monterey Herald
Question: I recently started my own business as a sole proprietorship and will be filing a Schedule C with my Form 1040 accordingly. I offer a group medical insurance plan for my two employees and my family. Can I deduct all medical insurance premiums from my business income?
Answer: Medical insurance premiums you pay on behalf of your employees can be deducted as ordinary and necessary business expenses on your Form 1040, Schedule C, thereby reducing your taxable business income.
However, premiums paid for you and your family are not deductible from your business income as shown on your Schedule C. Instead, medical insurance premiums receive special tax treatment. Premiums paid are deducted from your gross income to arrive at your adjusted gross income.
To deduct your premiums on your Form 1040, you must meet the following conditions:
You must have sufficient income from your independent business, and
· Neither you nor your spouse have medical insurance through your employment with anyone else.
This special treatment is especially important to you if you do not itemize your deductions (take the standard deduction) or if your total medical expenses (including medical insurance premiums) do not exceed the adjusted gross income limit of 7 .5% for the deductibility of medical expenses. As a self-employed person, this particular treatment will allow you to deduct the premiums paid.
Question: Are the rules the same if my wife works for someone else and receives a W-2 form?
Answer: If you are self-employed and you or your spouse have insurance through an employer program, the special self-employed tax treatment described above does not apply to you. The health insurance premiums you pay for yourself and your family are treated as if you were not self-employed. Therefore, if you itemize your deductions, you will still be able to deduct insurance premiums paid as medical expenses.
Please note that partnership partners, members of LLCs, and shareholders of more than 2% of S corporations are generally subject to the same health insurance deduction rules as sole proprietors.
Barry Dolowich is a CPA and owner of a full-service accounting and tax practice in Monterey. He can be reached at 831-372-7200. Please direct questions to Barry at PO Box 710 Monterey, CA 93942 or email: [email protected]