Self Employed Tax Breaks for Health Insurance Posted on () by Matthew Tae I’ll try to keep this super short and sweet. This is addressed to owners of companies and won’t cover all the situations, but you can use this as a general guide to understand the tax structure as it relates to health insurance deductions: S-Corporation (or taxed as an S-Corp) If you are taxed as an S-Corp… you exclude health insurance premiums from FICA (i.e. Box 3 & 5 of your W2). This can be done via payroll deductions, or alternatively making sure payroll deductions is $0 for owners (i.e. company pays 100% of premium for owners who pay themselves W2 wages). If no payroll deductions are taken, step 2 is a little different. You would then ADD back in any payroll deductions for health insurance into Box 1 of your W2, because those premiums are subject to income taxes. IF no payroll deductions were taken, each owner would add their share of health insurance premiums into Box 1 of the W2. IRS Notice 2008-1 states that health insurance premiums must be included in Box 1 of form W2 in order for Step 3 to be valid. NOTE: Adding back premiums into Box 1 of the W2 if often not done in practice. However, the same taxation effect occurs if premiums are treated as “profits”. This is done if the company does not take a PAYROLL deduction for owner’s health insurance, but instead adds that amount to “profits / income” via the year end tax return usually through Form K1. This method only works (neatly) if there is one owner IMO, due to differences in premiums paid by different owners (usually based on based on age / dependent enrolled). If premiums are to be attributed thru profits into Form K1, this creates a problem because one’s share of ownership determines profits taken. So this won’t lead to “equal” profits adjustments in light of premiums paid. But, I’ve seen it done this way, and at the end of the day, it’s probably not a big deal even with multiple owners. It’s not a lot of money and what’s a few dollars between partners. ALSO NOTE: Some payroll software systems do NOT allow for health insurance premiums to be added back into Box 1 of the W2. So the “Profits” method will have to be done or a manually overridden W2 will have to be produced. On your PERSONAL tax return (i.e. 1040), you use Line 16 of Schedule 1 (i.e. Self Employed Health Insurance Deduction) to REDUCE your federal income taxes. You can use your payroll deductions (i.e. or the amount you increased box 1 of your W2) as your entry onto Line 16 of Schedule 1 of Form 1040. Or you can pull the health insurance invoices and add up your health insurance premiums for the year. The net result of this is no federal income taxes or FICA taxes are paid. You may have some tax liability for state / local taxes. The business deducts all health insurance payments as expenses. Payroll deductions from employees, conveyed to the insurance company, is just re-labeling wage expenses as health insurance expenses… minus the FICA match, worker’s comp premiums, etc. LLC / LLP / Self Employed The taxation works much the same as an S-Corp in that the health insurance premium is reported on Line 16 of Schedule 1 to REDUCE your federal income taxes. However, because you do not pay wages and do not receive a W2… there is no mechanism to use health insurance premiums to reduce FICA… or “Self Employment Taxes”, which I just call FICA for LLC / LLP / Sole Proprietors. It’s much easier to think of it that way. The business itself does not deduct the health insurance premiums as an expense. Money spent on health insurance premiums for LLC, LLP, Sole Proprietor owners are considered income, profits, whatever you want to call them… and you reduce your income tax exposure via Line 16 of Schedule 1 of your personal tax return. This COULD be a substantial difference and a reason to choose LLC taxed as an S-Corp or some other Corp structure and pay yourself wages. Consider if your health insurance premiums are $14000 for the year, and self employment taxes are 15.3% (same as total FICA), then that’s $2142 a year that the S-Corp owner does not pay in taxes that the “self employed” non wage paid owner does pay. C-Corp Treat yourself just like any other employee when it comes to health insurance premiums. No adding things back into your W2, no flow through to “Profits”, etc. Make sure you meet the “Safe Harbor” rules around Section 125 Premium Only Plans. SIDE NOTE: A Subchapter T Election merges a C-Corp with pass thru elements of an LLC / S-Corp. However, unless every “employee” is an “owner & patron”, it’s difficult to manage IMO. The IRS doesn’t love it and unless everyone is an owner & employee in roughly equal parts, meh… I don’t think it’s worth the hassle. The benefit is that “wages” don’t get treated differently based on ownership status, AND excess money (i.e. profits) can be flowed thru the entity like an LLC or S Corp and skip Corporate taxation and therefore skipping double taxation (to an extent) while allowing some “profit” to be turned into “retained earnings” and taxed at the Corporate tax rate and stay in the company operating account for future expenses. It’s a lot of work so the juice better be worth the squeeze, and the lawyer / accounting fees.