For small business owners, providing health insurance for employees can be an important way to attract and retain talent.
It’s also a costly necessity for themselves and their families. Fortunately, there is a health insurance tax deduction and a tax credit that can help lighten the financial load for small businesses. In today’s article, I’ll explain everything you need to know to claim this money.
What is the health insurance deduction for the self-employed?
First, let’s discuss the most common deduction for small business owners providing health insurance. The IRS refers to this as the “health insurance deduction for the self-employed.” If you’re self-employed and end the year with a net profit, you’re likely eligible to take the self-employed health insurance deduction.
Depending on your business type and insurance plan, this deduction can apply to premiums paid for health insurance, dental insurance, Medicare insurance, term life insurance, and a portion of long-term health insurance coverage.
Additionally, this deduction can apply to health insurance premiums paid for the self-employed, their spouse, and their dependents. However, if you could participate in an employer-sponsored health insurance plan through another company where you or your spouse works, then you won’t be eligible for the health insurance deduction for the self-employed.
How you’ll take the health insurance deduction for the self-employed depends on which type of business structure you have, so I’ve provided information for each business type below.
Sole Proprietor and Single-Member LLC Health Insurance Deduction for Self-Employed
If you are a sole proprietor or own a single-member LLC, you’ll deduct the amount you paid in health insurance premiums on your individual income tax return. This is not an itemized deduction; you’ll just adjust your income by subtracting the amount you paid for health insurance premiums.
Partnership Health Insurance Deduction for Self-Employed
If you are an owner in a partnership, you’ll report the amount you paid in health insurance premiums on your Schedule K-1 (as will all other partners). Then, you’ll deduct that amount from your annual income when filing your individual income tax return.
C-Corporation Health Insurance Deduction for Self-Employed
If you own a C-corporation, the business can deduct the full cost of health insurance premiums paid for employees and shareholders. Additionally, don’t forget that your business can establish health reimbursement agreements to allow tax-free reimbursements of medical costs.
S-Corporation Health Insurance Deduction for Self-Employed
For S-corporation owners, things get a little more complicated depending on whether or not your business has non-shareholder employees, so I’ve broken that down into two sections below. I’ve also answered more questions specific to S-corp and health insurance in this article.
S-Corporation Health Insurance Deduction for S-Corps without Employees
If your S-corp’s only employees are shareholders, then the S-corp can’t provide health insurance as a tax-free benefit. Instead, any health insurance premiums paid by the S-corp for a shareholder that holds more than 2% of shares is treated as taxable income. Fortunately, Social Security and Medicare taxes aren’t taken out of that portion of the shareholder’s taxable income.
You’ll report your premiums as taxable income no matter if you purchase a health insurance plan on your own or if the S-corp purchases the plan for you. One thing to note is that if you are the S-corp’s only shareholder and employee, then you obviously can’t participate in a group health insurance policy, so you’ll need to purchase the insurance under your name rather than your company’s name.
Another important note is that if you choose to have your S-corp reimburse you for your health insurance premiums, then you’ll want to maintain accurate records by submitting your receipts and an expense report to the business.
The good news is that you and your S-corp will receive tax benefits for having health insurance paid for by the business. The business receives a tax deduction like it would for any other employee compensation, and the shareholder deducts the health insurance on their personal income tax return. You’ll just need to make sure that the premiums are reported correctly on the shareholder’s Form W-2.
S-Corporation Health Insurance Deduction for S-Corps with Employees
If your S-corp has non-shareholder employees, a group health insurance plan can be used. If that’s the route you take, just remember that even though shareholders can usually be included in that group plan, the health insurance can’t be a tax-free benefit for shareholders.
Instead, shareholders’ premiums must be reported as compensation on their Form W-2. Fortunately, Social Security and Medicare taxes aren’t taken out of that portion of the income as long as the S-corp provides the other non-shareholder employees with health insurance.
Additionally, shareholders will report their health insurance premiums on their personal income tax return in order to receive the self-employed health insurance deduction. This deduction will help offset the income taxes paid for health insurance premiums.
What is the Small Business Health Care Tax Credit?
Another option available to entrepreneurs is the Small Business Health Care Tax Credit. Your business can claim this credit if:
- You have less than 25 full-time equivalent employees,
- Your business covers at least 50% of the premium costs of a health insurance plan provided by the Small Business Health Options Program (SHOP) Marketplace, and
- Your employees’ average annual wages are below a certain threshold.
The amount of the credit your business will receive is based on a sliding scale where the smaller the employer, the bigger the credit. The maximum credit amount is 50% of health insurance premiums paid by the business, and for tax years after 2013, the credit can be claimed for two consecutive years.
The Small Business Health Care Tax Credit can also be carried forward or backward to other tax years if your small business doesn’t end up owing tax during the year. Additionally, eligible businesses can still claim a business deduction for the health insurance premiums it paid that were in excess of the credit. But wait, there’s more! If your business is tax-exempt and has no taxable income, your business may be able to receive the credit as a refund.
You’ll use IRS Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate your credit. You’ll then include the credit amount as a general business credit on your income tax return. If you run a tax-exempt organization, you’ll include the credit amount on line f in Part III of your Form 990-T.
Understanding and claiming the health insurance tax deduction for the self-employed or the Small Business Health Care Tax Credit is important for any small business owner who is providing health insurance. If you have questions about this deduction or credit or aren’t sure if you’ve been claiming the right amount of money, make sure to contact an accountant that can walk you through the process.
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