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Accounting and Tax Tips Blog

health insurance deduction

Working as a 1099 contractor isn’t always easy, but it comes with some tax benefits that aren’t available to W4 employees. Healthcare is a huge expense for millions of Americans, but most employees can’t deduct the expense on their taxes. However, self-employed workers get special treatment in this regard. Qualifying independent contractors can claim a 100% health insurance deduction on the cost of their insurance premiums. This write-off can make a huge difference at tax time, so you need to take advantage of it if you can. We’ll show you everything you need to know to claim the health insurance tax deduction and much more.

How to Find Self-Employed Healthcare Insurance

There are lots of companies that offer self-employed health insurance plans, so you have a lot of options. Healthcare.gov is a great place to start. It’s the federal government’s official online health insurance marketplace. You can shop hundreds of plans on the site and each has a wide variety of coverage options. Some states also have their own health insurance exchanges, so residents of certain states have even more options.

You have to answer some questions about your health and living arrangements in order to receive a quote. In most instances, you have to provide your family size, annual income, and other relevant information. Once you submit this info, the marketplace will search for suitable plans that meet your requirements. When you see a plan that fits your needs, you can enroll entirely online. Many of these websites have tools to help you compare plans, and some can even tell you if you qualify for government aid programs!

There are also hundreds of private exchanges that sell self-employed health insurance. Most of these websites earn a commission for every user they signup, so they’re usually free to use. Search for ‘self-employed health insurance’ and you’ll immediately see dozens of options. If you’re involved in a trade organization or union, you can usually find information about insurance plans through them too.

Health Savings Account (HSA)

You can also use a healthcare savings account to manage your healthcare expenses outside of insurance. These accounts allow you to save and spend on healthcare costs without paying taxes. However, you have to spend the money on qualified healthcare expenses in order to avoid penalties. You can also use your HSA account to invest so you can generate profits with your contributions. In order to qualify for an HSA, you must have a High-Deductible Health Plan (HDHP). According to healthcare.gov, any plan with a deductible of at least $1,400 for individuals ($2,800 for families) is classified as an HDHP. If you’re covered under Medicare, you can’t get an HSA.

Opening an HSA account is easy. Many of the same companies that offer retirement accounts also offer HSAs, so check with your IRA bank to see if they offer them. You can check with your insurance company to see if they will help you set one up.

With an HSA, you can deduct health insurance premiums and HSA contributions on your tax return. If you still have money left in the account at the end of the tax year, it rolls over automatically. If you take full advantage of an HSA, you can save on taxes and generate tax-free growth on your investment.

Check out IRS Pub. 969 for a detailed explanation of these tax-advantaged health plans.

Health Insurance Penalty:

Under the original terms of the ACA, the government could penalize you for not having sufficient health insurance. However, the penalty was eliminated in 2019 after the Trump Administration changed the regulations. As of 2019, there are no penalties for not having insurance.

Health Insurance Tax Benefits

​As a self-employed individual, you can claim a 100% health insurance deduction, including dental and vision. W4 employees aren’t so lucky. They can only deduct health insurance expenses that exceed 10% of their adjusted gross income if they’re under age 65. For example, if your AGI for the year is $100,000, you can only deduct medical expenses that exceed $10,000. If you spent $10,100 in combined insurance and medical expenses, you could only claim a $100 health insurance deduction under those rules. Conversely, a self-employed worker can claim the entire $10,100 deduction.

You can claim the health insurance deduction on page 1 of Form 1040. The insurance can cover you, your spouse, your dependents, and any of your children who are under 27 years old. Your adult children can qualify even if they’re not listed as dependents. You can put your policy under your name or the business. Any premiums you pay directly reduce your AGI and lower your tax bill.

More Answers to Your Tax Questions

Planning for healthcare expenses can help you save tons of money on taxes, but it can get really complicated if you’re unfamiliar with tax concepts. If you really want to maximize your tax savings, you should talk to a professional tax advisor. Shared Economy Tax has been closely serving the self-employed business community for years, so we understand the tax challenges your business is facing. We can help you develop a cohesive plan to minimize your tax bill and keep more of what’s yours. Get started today with a one-on-one consultation with one of our certified tax professionals and we’ll show you exactly how we can help. You can also signup for our complimentary newsletter using the form below for more small business tax tips.