Can I Deduct Health Insurance Premiums From Taxes – Health insurance premiums – Are they deductible if paid by an LLC of which I am a member?
‘Health insurance’ for the purposes of this discussion, refers to all health, dental and long-term care insurance premiums paid for you, your spouse, your dependents and/or children under the age of 2 (even if those children are not depends on your income tax return). Medicare premiums paid to obtain health insurance are also included.
Can I Deduct Health Insurance Premiums From Taxes
OK, here’s the scenario: you’re a member of an LLC and your LLC pays the health insurance premiums for you and your family. You want to know if, how, when and where you can deduct these expenses on your personal tax return.
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Before we get to that, you will need to identify what ‘type’ of LLC you are a member of and whether you are an active or passive member. Next, we’ll explain what is and isn’t deductible.
This is the standard tax treatment for LLCs. LLCs treated as partnerships are flow-through entities for which the IRS requires the filing of a federal Form 1065. Partnership LLC members receive a K-1 to report their portion of the income/(loss) on their personal tax return – after which that income/(loss) is applied to 1040 members.
A single member LLC is an entity that is disregarded for tax purposes, i.e. a business entity that is not recognized by the Tax Administration and is automatically treated as a sole proprietor and is registered on Sch. C of your 1040.
In order for an LLC to be treated as a corporation, an entity type selection change must be made. There are 2 choices: C-Corp. or S-Corp. In both cases, the member of the LLC is treated as an employee of the business and the employment tax rules must be followed.
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If you ‘materially participate’ in the work of the business, you are an active member, if not, you are passive. (There are guidelines and tests around this, one article documented here.) Active members of an LLC partnership are treated as ‘self-employed’. Passive members are not.
When an LLC is treated as a partnership, health insurance payments on behalf of members are treated as guaranteed payments and reported to the partner on the member’s K-1. Therefore, premiums paid on their behalf are treated as the member’s income. Even if the member pays the premiums out of personal funds, the member must seek reimbursement from the partner LLC or the plan will not qualify for the premium deduction.
Here’s some tricky stuff. A typical single member LLC files taxes as a sole proprietorship, using Schedule C (or Schedule F for agriculture) on the member’s personal tax return (Form 1040). However, because an SMLLC is, by default, treated as self-employed, their health insurance premium expense does not need to be reported on Schedule C with other business expenses, but is taken directly on line 29 of Form 1040, as for a self-employed person.
For members of both LLCs treated as partnerships and as single-member LLCs, the deduction for health insurance expenses is taken as an adjustment to income on page 1 of Form 1040, line 29.
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In order to use the deduction, it is important that your LLC be profitable. The health insurance deduction cannot be greater than the net profit from the business on which the health insurance premiums are paid. In the fancy words used by the IRS, it’s called the “earned income limitation.”
If your LLC shows a loss for the year, you may still be able to take a deduction, but in a limited way. You can take a deduction on Schedule A under medical expenses if your expenses are greater than 7.5% of your adjusted gross income (AGI).
Also, in both cases above, remember that “eligibility for deduction is determined on a month-to-month basis.” What it means? Let’s say you were employed during the first six months of the year and quit to start your own business. You actually became ineligible for any employer-provided health plan for the last six months of the year because you left your job and started your own business. Technically speaking, you have become “self-employed” and are entitled to claim a deduction for the premiums you paid for coverage during the second half of the year, not the first six months. The IRS calls this the “month-to-month eligibility rule.”
An S-corp can deduct premiums paid as compensation paid to shareholders/employees who own more than 2% of the S-corp, i.e. the premiums are included in the salary paid. An S corporation must report accident and health insurance premiums paid or reimbursed as wages on the shareholder-employee’s W-2 form at 2 percent.
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For 2% S-corp shareholders the health insurance premium paid by the S-corp is included as wages on Form W-2, and then the 2% shareholder can deduct the health insurance premiums on Form 1040, line 29. Again, please note, your health insurance deduction cannot be more than your wages from an S-corporation
However, nothing comes without obligations from the Tax Administration. As a greater than 2% shareholder of an S-corporation, to qualify for the deduction, the plan must be “established” by the S-corporation.
Note: If you don’t qualify for an above-the-line deduction for premiums you paid out of pocket, you can claim the premiums you paid on Schedule A as an itemized deduction). Importantly, in order to qualify for the deduction (on Form 1040, line 29), the plan must be “established” by an S-corporation.
If the individual is not self-employed (or does not own more than 2% of the S-corporation’s stock), he cannot deduct health insurance premiums on Form 1040, line 29, instead, he only gets a limited deduction for health insurance premiums along with other medical expenses as an itemized deduction on Schedule A greater than 7.5% of their adjusted gross income.
The Self Employment Health Insurance Deduction
Bottom line: If you qualify, the self-employed health insurance premium deduction is a valuable tax break. With the rising cost of health insurance, a tax deduction can help offset some of the premium costs. And remember, health insurance premiums are not deductible on your Schedule C, your 1065 partnership income tax return, or your 1120S S-Corp. income tax return (if you were a shareholder owning more than 2% of the shares). The only time a corporation can deduct health insurance premiums is when your company is registered as a C corporation. Being self-employed gives you a lot of freedom and flexibility when it comes to setting your own schedule and choosing the jobs you want to take on. However, self-employment also comes with several challenges, one of which is finding self-employed health insurance policies. Since the self-employed are not offered individual health insurance options from their employer (as they are their own boss), seeking out health insurance is essential. With self-employed health insurance today, however, it is also possible to find a self-employed health insurance deduction that can provide you with tax relief at the end of each fiscal year.
The self-employment health insurance deduction is extremely beneficial for those who are self-employed and do not qualify for any other type of health insurance. When you buy your health insurance as a self-employed professional, you can deduct 100% of your health insurance premiums when you file your taxes.
Those who are self-employed already understand the requirements of paying additional self-employment taxes along with state and federal taxes, which is why the self-employed medical expense tax deduction is so valuable. You can use your tax deduction to cover the cost of premiums for yourself and your dependents. You can generally deduct qualified medical and dental expenses that are more than a certain percentage of your adjusted gross income. If all of your medical expenses are more than 7.5% of your adjusted gross income, you can deduct that total expense from your taxes.
If you are self-employed or if you own your own small business, the self-employed health insurance deduction may apply to you. To qualify for the self-employed health insurance deduction, you must meet the following requirements:
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Before you search for the health insurance policy and self-employed health insurance deductible that’s right for you, it’s important to familiarize yourself with some of the deductible medical expenses. Some medical expenses that can be deducted with the self-employed health insurance deductible include, but are not limited to:
Whether you’re in the market for short-term health insurance or long-term insurance as someone who is self-employed, understanding how health insurance deductibles work is essential. A health insurance deductible is the amount of money that is required upfront from the policyholder before the insurance company will begin providing coverage.
For example, if an individual’s deductible is $1,500, they will be required to pay $1,500 for the medical services they need before their current insurance plan begins to provide coverage and financial assistance. Once your insurance policy deductible has been paid in full (for each calendar year), then you will only be responsible for covering coinsurance or copayments, depending on your current insurance policy.
There are some situations where your individual health insurance plan may not be tax deductible and it is important to be aware of these situations so that
