What is the self-employed health insurance deduction?

The self-employed health insurance deduction is a tax deduction that is available to certain self-employed individuals. Understanding who is eligible for this deduction can help when determining a fair rate of compensation for self-employed contractors.

Who is eligible for the self-employed health insurance deduction?

The self-employed health insurance deduction applies to anyone who meets the following two conditions:

• No other health insurance coverage  : If a person is eligible to participate in a health insurance plan run by his or her employer or his or her spouse's employer, he or she cannot take the self-employed health insurance deduction.
• Business Earns Income  : The self-employed health insurance deduction is tied to income from a single business owned by the self-employed individual that they choose as a health plan sponsor. The individual can only deduct as much as their business earns. If the business does not make a profit, the individual cannot claim the deduction.

How does the self-employed health insurance deduction factor into self-employed overhead costs?

Self-employed contractors demand higher pay rates than employees. This is due to their self-employment overhead — their financial responsibility to cover the full cost of benefits that employers typically provide for their employees, including medical insurance premiums.

When consulting on an appropriate pay rate for contract work, estimating these factors helps to get a more accurate idea of ​​the contractor's actual overhead for medical insurance:

• Estimate the average monthly premium for private health insurance.
• Estimate the maximum deductible the contractor can take (monthly premium x 12).
• Estimate the payroll tax the contractor will pay (20 to 30 percent of their salary).
• Determine how much the self-employed health insurance deduction will cut from the payroll tax liability based on the length of the contract and expected pay rate.

Can business owners take the self-employed health insurance deduction?

A business owner who receives a ""paycheck"" or guaranteed payment from certain business entity types, such as an LLC or sole proprietorship, may have to pay taxes on any insurance premiums paid on their behalf by the company, since these contributions are treated as personal income. These payments will be reported on the appropriate year-end income statement, such as a Form K-1.