(Editor’s note: Today we hear from Derek Davis, CEO of Shared Economy CPA, which focuses on the tax and financial needs of individuals working in the sharing economy. Tax issues are complicated, so please be sure to consult a tax advisor about how the information below applies to you.)
The Affordable Care Act requires most individuals to have ‘minimum essential [health insurance] coverage’ or face a sizeable penalty – at least $695 for every person in your household. Fortunately for independent contractors, health insurance premiums, including vision and dental insurance, are 100% tax deductible.
As a self-employed person, you’re able to deduct 100% of your health insurance premiums, including dental and vision insurance. To explain: if you are an employee in a “traditional” job, you can deduct your health insurance premiums and most other medical expenses, providing you meet a series of income floors and assuming you actually itemize your taxes (file a Schedule A instead of taking a standard deduction). But as a self-employed individual, you can bypass all of the minimums and deduct 100% of your premiums on your tax return, whether you itemize or not! (You can deduct the Health insurance premiums that you pay on behalf of yourself, the sole proprietor, on page 1 of IRS Form 1040.)
This insurance can cover you, your spouse, your dependents or any of your children who are under age 27 at the end of 2015, even if they are not listed as dependents on your tax return. The policy can be in the name of either your business or yourself. This means that the premiums you pay directly reduce your adjusted gross income and reduce your ordinary taxes.
In addition, insurance premiums can also include qualified long-term care insurance premiums, and Medicare premiums. It should be noted, that this “above-the-line deduction,” or in other words, direct deductions from your adjusted gross income shown on page 1 of Form 1040, is limited to the net profit from Schedule C minus the deductions for self-employment tax. What does this mean? If your business has an overall net loss, the health insurance premiums are not deducted on page 1 of your tax return. In other words, you get to deduct your health insurance premiums on page 1 of your tax return to the extent of your profits. If your net profit is less than your premiums paid, or if you have a loss in your business, the premiums can still be deductible, but not on page 1. The premiums will be reported on Schedule A (itemized deductions) subject to deduction thresholds. But, when your business turns a profit, the ability to deduct the health insurance premiums that you paid really reduces that tax bottom line!
Overall, the peace of mind that comes from having health care coverage, the potential tax benefits of coverage, and avoiding expensive penalties, make a strong case for investing in good health insurance. If you have any other questions about health insurance and taxes in the sharing economy, you can contact the Shared Economy CPA.