Self-Employed Health Insurance Deductions and Tax Breaks Explained

As a self-employed worker, you’re in charge of handling everything in your business. That often means securing your own health insurance coverage and paying for it, too. The good news is there are lots of ways to reduce the cost of health care expenses. Did you know self-employed workers can deduct 100 percent of health insurance premiums as well as other medical expenses come tax time?

Plus, through Covered California, you can find high-quality health insurance and financial help to lower the cost of your health plan all year round. Many people pay $10 or less per month for their coverage.

Read on to learn how to make the most of the self-employed health insurance deduction and medical expense tax deduction — and get financial help for health insurance through Covered California, too.

Financial Help for Health Insurance

The first step in your health insurance journey is finding affordable coverage. When you sign up for a health plan through Covered California, you can get financial help to lower the cost. Nine out of 10 people who sign up for health insurance through Covered California receive help to reduce the cost of their plan. Financial help comes in two forms — premium tax credits and cost-sharing reductions. Here’s how that works:

Premium Tax Credits

Premium tax credits reduce the cost of your health insurance premium, with many people paying $10 or even $0 per month. You can choose to take your credit as an advanced premium tax credit to lower the cost of your monthly payment. Alternatively, you can pay the full sticker premium and get a refundable tax credit when you file your taxes. The amount you qualify for depends on your income. Get a quick quote here to see how much help you can get.

Cost-Sharing Reductions

Cost-sharing reductions (CSRs) help lower the amount of out-of-pocket costs, such as deductibles, copays, and coinsurance, when you receive care. To take advantage of CSRs, you need to choose a Silver plan. A new state-enhanced cost-sharing program makes getting care even more affordable — Silver CSR plans (also known as Enhanced Silver plans) now have no deductible and provide even more financial help on primary care copays, specialist visits, and emergency care. Plus, they’re now available to more Californians.

Enroll with Covered California

Having health insurance is an important part of staying healthy while protecting your finances. Plus, in California, it’s the law. Enroll in health insurance through Covered California online, by phone, or in person.

Everyone can sign up during open enrollment (November 1 through January 31). Outside of open enrollment, special enrollment is there when you experience a qualifying life change. You can enroll online or through the help of certified enrollers.

The Self-Employed Health Insurance Deduction

Along with the financial help available through Covered California, there are more ways to ease the financial burden of owning your own business when tax season rolls around. The self-employed health insurance deduction is one of these benefits. Read on to learn more about this deduction, who qualifies, and how to take it.

What is It

The self-employed health insurance deduction is a federal tax deduction that reduces your annual income. Through this deduction, self-employed workers who have a net profit for the year can write off 100 percent of their health insurance premium. They can also deduct premium costs for any spouse or dependents. Keep in mind, though, the deduction is limited to how much you pay out of your own pocket. If you use premium tax credits to lower the cost of your monthly payment, you can only deduct the portion of that premium you actually pay.

In addition to health insurance premiums, through the self-employed health insurance deduction, you can also deduct dental insurance premiums (which you can also get through Covered California) and a capped amount of long-term care insurance (which Covered California does not offer).

Who Qualifies

This deduction is for self-employed workers. To qualify, you need to meet all of the following criteria:

• You make a net profit, meaning you generate an income and do not operate at a loss.

• You don’t have other health insurance options. In other words, you can’t use this deduction if you are eligible for coverage through your or a spouse’s employer.

Some additional circumstances allow for this deduction. For example, if you’re a shareholder in an S corporation, own more than 2 percent of the business, and get your health insurance through the company, you may qualify too. Learn more here.

How to Take the Deduction

Since the self-employed health insurance deduction counts as an adjustment to your income, you can take it whether you choose to take the standard deduction or itemize your deductions. Here’s how:

1. Tally the full amount of your self-employed health insurance deduction. You can include 100 percent of what you paid for health insurance premiums, dental insurance premiums, and a limited amount of long-term care insurance premiums for yourself, your spouse, and your dependents. You can use this form to calculate your total.

2. Subtract the total amount from your income on your individual income tax return form.

Medical Expense Tax Deductions

There’s another way to deduct health care costs called medical expense tax deductions. This is separate from the self-employed health insurance deduction. While the self-employed health insurance deduction is an adjustment to your income and can only be taken by self-employed workers, medical expenses tax deductions are itemized deductions and can be taken by anyone. Even better, self-employed workers can take both deductions if they qualify. The only requirement is that the total amount of medical expenses must add up to 7.5 percent or higher of your adjusted gross income.

What Medical Expenses are Tax Deductible

Tax-deductible medical expenses are costs that go toward the prevention or treatment of an illness. You can take expenses for yourself as well as any spouse, dependent, or certain relatives who rely on you for support. Health insurance costs count as medical expenses — copays, deductibles, and premiums you don’t deduct as part of the self-employed health insurance deduction count. Medical expenses can also be other out-of-pocket costs your insurance doesn’t cover. Think visits to the acupuncturist or transportation to the doctor’s office. Here’s what you can deduct:

• Prescription medications

• Doctor’s visits (medical doctors, acupuncturists, chiropractors, physical therapists, etc.)

• Hospital services

• Ambulance services

• Eyeglasses, contact lenses, and vision-correcting surgery

• Dental care

• Transportation to and from medical care

• Laboratory fees

• Nursing homes and in-home care

• Reproductive care (fertility treatments, birth control, vasectomies, and abortion care)

• Weight loss programs for medical needs

• Guide dog or other service animal

See the full list of qualifying expenses here.

What Medical Expenses are Not Tax Deductible

The Internal Revenue Service (IRS) has boundaries for what you can and can’t claim as medical expenses. Generally, costs must be associated with a medical condition, and you can’t claim any expenses paid for by your health plan. Medical expenses that are not tax deductible include:

• Child care for a healthy child

• Vitamins and supplements not prescribed by a doctor

• Cosmetic surgery

• Gym costs or health club dues

• Personal care items (e.g., toothpaste, toothbrush, deodorant)

• Weight loss programs for cosmetic desires

• Teeth whitening

• Swimming or dancing lessons

• Veterinary fees

Check out a more complete guide here.

How to Deduct Medical Expenses

To deduct medical expenses, you need to itemize your deductions rather than take the standard deduction. Here’s how to deduct medical expenses:

1. Add up all of your qualifying out-of-pocket medical expenses for the year and see if this total is higher than 7.5 percent of your adjusted gross income (AGI).

2. If it is, you can deduct the total amount of expenses that exceed your AGI on the itemized deductions form.

Learn More

When you have questions about your options for finding health insurance coverage, getting financial help to lower the cost, and more, Covered California can help. Our blog and Learning Center are full of information for self-employed workers and anyone else who needs insurance. Plus, we’re there when you need us when it’s time to get covered or change your plan. Get assistance any time in person, on the phone, or through live chat with a certified enroller.

Please consult the Internal Revenue Service, a tax advisor, or a tax professional for any questions about your tax return. The information in this article is not intended as tax advice, and your situation may vary.