Self-Employed Health Insurance (”SEHI”) Deduction

Tax Strategy
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Deduction
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Updated
2/18/2023

How It Works

To qualify for the SEHI deduction, you must either be self-employed through a sole proprietorship or partnership or own more than 2% of an S Corporation’s shares. You must obtain a health insurance policy that’s either in your name or the name of your business.

Your business must pay the policy premiums or, if you pay for the premiums, the business must reimburse you for the premiums. The premiums are deductible on Schedule 1 of your personal tax return (Form 1040).

In the case of a partnership or S corporation, the business deducts the health insurance costs on its tax return. The partner or shareholder reports the health insurance paid by the business as taxable income and takes an offsetting deduction on their personal tax return.

Here’s how this works for both types of entities.

Partnerships

When filing the partnership’s tax return, insurance premiums paid by the partnership on behalf of a partner must be deducted as “Guaranteed Payments” on the partnership’s tax return (Line 10, Form 1065).

The partnership will also report the premiums on lines 4a and 13 of the partner’s Schedule K-1, which is taxable to the partner. However, the partner will use the information on the Schedule K-1 to take an offsetting deduction for self-employed health insurance on Schedule 1 of their personal tax return.

S Corporations

Like sole proprietors or partnership members, S corporation owners also deduct premiums on Schedule 1 of Form 1040. However, in order to be deductible, the health insurance premiums paid by the S corporation must be reported through payroll.

The insurance premiums eligible for this deduction are considered taxable income and are reported in Box 1 of the shareholder-employee’s Form W-2. The shareholder-employee then deducts the premiums on Schedule 1 of Form 1040 to offset the taxable amount.

Eligibility

One of these statements regarding your business ownership must be true:

  • You were self-employed and your business had a net profit for the year reported on Schedule C  or Schedule F of Form 1040.
  • You were a partner with net earnings from self-employment for the year reported on Schedule K-1, box 14, code A of Form 1065.
  • You used an optional method to calculate your net self-employment earnings on Schedule SE.
  • You received wages from an S corporation of which you owned more 2% of the shares. The cost of health insurance premiums paid or reimbursed by the S corporation are reports on your Form W-2.

Additionally, the insurance plan must be “established” by your business in one of the following ways:

  • For self-employed individuals filing Schedule C, a policy can either be in the name of the business or in the name of the individual.
  • For partners, a policy can either be in the name of the partnership or in the name of the partner. If the partner pays for the premiums, the partnership must reimburse the partner.
  • For greater-than-2% S corporation shareholders, the policy must be either in the name of the S corporation or in the name of the shareholder. If the shareholder pays for the premiums, the S corporation must reimburse the partner.

The insurance plan must cover the following individuals:

  • You, your spouse, and your dependents.
  • It can also cover your child who was under age 27 at the end of the year, even if the child was not your dependent.
  • Lastly, you can’t deduct premiums for any month in which you were eligible to participate in an insurance plan provided by an employer of you, your spouse, dependent, or child under the age of 27.

Action Items

Follow these steps to use this strategy:

  • Enroll in a health insurance plan
  • Pay for the premiums . If you’re paying for them out-of-pocket, set up a recurring reimbursement from your business through an Accountable Plan.
  • When filing the S corporation and partnership returns (if applicable), report premiums paid by the business on the appropriate tax form (Form W-2 or Schedule K-1).
  • Claim the Self-Employed Health Insurance deduction on Schedule 1 of Form 1040. Use Form 7206 to calculate the deduction.

Limits (2023)

You can typically deduct the full cost of health insurance premiums.

However, you can’t deduct premiums for any month in which you were eligible to participate in an insurance plan provided by an employer of you, your spouse, dependent, or child under the age of 27.

You also can’t deduct any amounts paid from retirement plan distributions that were nontaxable because you are a retired public safety officer.

IRC References

26 CFR § 1.162(l)-1 - Deduction for health insurance costs of self-employed individuals.

Form 7206 - Self-Employed Health Insurance Deduction

This content is for informational purposes only and does not constitute legal, business, or tax advice. You should consult your own attorney, business advisor, or tax advisor regarding matters mentioned in this post. We take no responsibility for actions taken based on the information provided.

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