Health insurance premiums are a personal tax deduction for self-employed individuals filing as Sole Proprietors, not a deduction directly for your business. Meaning that these premiums should be paid from a personal bank account.
The health insurance deduction is on Schedule 1, Line 17 of your 1040. This is where the total premiums paid for you, your spouse, and your dependents will appear. This will lower your overall adjusted gross income (AGI).
This deduction is limited to your net profit. Meaning that the deduction cannot be greater than the amount your business profited during the year.
How do I get covered?
A self-employed individual can purchase health insurance through the Individual Health Insurance Marketplace on HealthCare.gov. This is the primary way to access coverage if you don't have employer-sponsored health insurance. Feel free to shop around for a plan that best suits your needs!
You will be asked to include your estimated annual net profit during this process. You cannot use the profits from the prior year. The best way to calculate this is to navigate to Bookkeeping > Profit and Loss > and filter for the completed dates for the year. Use your net profit to divide by the number of months, then multiply by 12. This is a rough way to calculate your annualized net profit. If you project significant changes, then please use the method you prefer to calculate.
Since this is paid through my personal account, how will Heard know to include this on my tax return?
Here are a couple of things to keep in mind:
- If you OR your spouse has employer-based health insurance plan coverage, you no longer qualify for the deduction. This rule applies whether or not you opt in/out of that plan.
- The expense will not be included in the calculation of self-employment tax. While your Profit & Loss will be a certain amount, we will take your Profit and add back the health insurance expenses to get a greater value to calculate the estimated amount of self-employment taxes you may owe.
- If your business is operating at a net loss, then you will not be eligible for this deduction. This deduction is only limited to the annual net profit for the year. For example, if your business earned $10,000 in profit for 2024, but you paid $12,000 in health insurance premiums - then the deduction is limited to $10,000.
What happens if I paid this through my business?
That's okay! You will need to ensure that the health insurance premiums on your Transactions page (Bookkeeping > Transactions) are marked as “personal.” Your bookkeeper will mark these as personal each month, but it’s always recommended to double-check for accuracy.
Health insurance premiums can be costly, so we understand why you'd like the business account to pay for this. We still advise that this be paid through a personal account.