As a business owner, you can deduct up to 100% of your healthcare expenses and significantly reduce your taxable income. This article explores eligibility, deduction rules, reporting requirements, and how health insurance premiums differ from out-of-pocket expenses for self-employed healthcare deductions.¹
Healthcare deductions can save businesses a lot of money.
If you pay self-employment taxes, you can take the deduction.
Sole proprietors and single-member Limited Liability Corporations (LLCs) can deduct medical expenses and health insurance premiums, significantly reducing adjusted gross income (AGI).²
Deductions extend to multi-member LLCs or S corporations—any legal entity that is a pass-through entity.³ In pass-through entities, the owners or investors claim the income of the business on their personal income tax returns. Of course, the forms you will use and how you report healthcare expenses vary based on the structure, but in keeping pass-through entities, you will deduct the cost on your individual tax return.⁵
Health insurance premiums and medical expenses are subject to eligibility requirements.
Business owners can deduct health insurance premiums most of the time. One big exception involves the premiums for long-term care insurance, which may be subject to limitations based on age. Additionally, premiums paid for a spouse’s employer-sponsored plan are not deductible.⁶
Most out-of-pocket medical expenses may also be deducted, including the following:
- Co-pays
- Medical supplies
- Prescription medications
- Mileage for medical appointments
- Payments for diagnostic services
- Dental and vision care expenses
The Internal Revenue Service (IRS) provides detailed guidelines on self-employed healthcare deductions, making it easy for you or your financial representative to deduct eligible expenses.⁷
Get your documents organized before filing.
1. Make sure you complete the correct forms to claim health insurance tax deductions.
Sole proprietors use Schedule C (Form 1040) to report income and expenses.⁸
- Report your health insurance deduction on Line 17 of Schedule 1, which then carries over to your Schedule C.⁹
- Record the health insurance premium deduction on Line 29 of Schedule C, reducing your net income from the business.⁹
- Ensure you keep receipts, invoices, and insurance policy documents. These documents are your proof that you’re following the law.
2. Plan ahead to maximize your healthcare expense deductions.
Proactively plan for medical and dental expenses. That way, you can choose a health insurance policy to maximize tax savings.
3. Coordinate with other tax benefits.
Combine the self-employed health insurance deduction with other tax benefits to boost your savings. For example, you may be able, in some circumstances, to take advantage of the premium tax credit if you purchase insurance through the marketplace established by the Affordable Care Act (ACA).¹
4. Utilize Health Savings Accounts (HSAs).
HSAs allow you to set aside pre-tax money for medical expenses other than health insurance. Contributions to an HSA are tax-deductible, and withdrawals for eligible medical expenses are tax-free. HSAs grow tax-free, and there are no minimum distributions, so they’re a powerful tool for minimizing both healthcare costs and taxes.⁵
5. Explore Flexible Spending Accounts (FSAs).
FSAs enable you to use pre-tax dollars for medical expenses. Contributions to FSAs are not deductible on your tax return, but that’s because they reduce your taxable income. In other words, they give you immediate tax savings. You don’t have to wait until you file your return.
It’s important to note that FSAs typically have a “use-it-or-lose-it” rule, meaning you must use the funds within the plan year. This rule does not apply to HSAs.
6. Don’t miss opportunities by overlooking specialized deductions.
Commonly missed deductions include:
- Premiums for long-term care insurance
- Dental and vision care expenses
- Preventive care costs
- Transportation expenses related to medical care
- Home improvements for medical purposes (such as ramps, widening doorways, and walk-in tubs).⁶
7. Audits and penalties can rack up fast if you misreport expenses.
The IRS keeps an eye out for specific mistakes and abuses that tend to happen the most.⁵ These include:
- Failing to differentiate between personal and business transactions,
- Overstating expenses without proper documentation,
- Double-dipping deductions (claiming the same expense in multiple categories),
- Misclassifying non-deductible expenses as deductible, and
- Inconsistent reporting across different tax forms.
One of the best ways to ensure you get all the paperwork filed properly is to work with a qualified CPA. otherwise, you will not qualify for self-employed healthcare deductions.
Ready to save on taxes?
Let’s get aggressive on our approach to healthcare deductions and take a look at lowering expenses, too. Schedule a discovery call today.
Talk soon,
Jeremy A. Johnson, CPA
References
- Forbes. Health Insurance Tax Benefits for Small Business Owners [Internet]. Forbes. 2023 [cited 2024 Jun 4]. Available from: https://www.forbes.com/sites/forbesfinancecouncil/2023/03/23/health-insurance-tax-benefits-for-small-business-owners/?sh=749f8df41191
- Internal Revenue Service (IRS). Instructions for Form 7206: Deducting Health Insurance Premiums [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/pub/irs-pdf/i7206.pdf
- Internal Revenue Service (IRS). Partnership [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/businesses/partnerships
- Internal Revenue Service (IRS). S Corporations [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
- Internal Revenue Service (IRS). Publication 334: Tax Guide for Small Business [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/pub/irs-pdf/p502.pdf
- Internal Revenue Service (IRS). About Publication 334 [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/forms-pubs/about-publication-334
- Internal Revenue Service (IRS). Instructions for Form 8941: Credit for Small Employer Health Insurance Premiums [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/instructions/i8941
- Internal Revenue Service (IRS). Health Coverage Tax Credit [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/pub/irs-pdf/p502.pdf
- Internal Revenue Service (IRS). Schedule 1 (Form 1040) Additional Income and Adjustments to Income [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
- Internal Revenue Service (IRS). Schedule C (Form 1040) Profit or Loss from Business [Internet]. 2023 [cited 2024 Jun 4]. Available from: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf