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An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

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Self-Employed Health Insurance Deduction

What Is the Self-Employed Health Insurance Deduction?

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

Who Qualifies for the Self-Employed Health Insurance Deduction? 

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

  • Has no other health insurance coverage: If an individual is eligible to participate in a health insurance plan maintained by their employer or their spouse’s employer, they may not take the self-employed health insurance deduction.

  • Earns business income: The self-employed health insurance deduction is tied to the income from a single business owned by the self-employed individual which they select as a health plan sponsor. The individual can deduct only as much as their business earns. If the business doesn’t turn a profit, the individual can’t claim the deduction. 

How Does the Self-Employed Health Insurance Deduction Factor Into Self-Employed Overhead Costs?

Self-employed contractors tend to ask for a higher pay rate than employees. This is due to their self-employment overhead—their financial responsibility to cover the full cost of benefits that employers usually cover for their employees, including medical insurance premiums. 

When consulting on a fair pay rate for contract work, estimating these factors helps provide a more accurate idea of the contractor’s true overhead for medical insurance:

  • Estimate the average monthly premium for private health insurance.

  • Estimate the maximum deduction the contractor can take (monthly premium x 12).

  • Estimate the payroll tax the contractor will pay (20 to 30 percent of their wages).

  • Determine how much the self-employed health insurance deduction will deduct from the payroll tax obligation based on the contract length and intended 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, like an LLC or sole proprietorship, may need to pay taxes on any insurance premiums paid by the company on their behalf, as these contributions are treated as individual income. These payments would be reported on the appropriate year-end earning statement, such as Form K-1.