Health Care Write-Offs for Small Business

Health care costs are a major expense for small business owners and self-employed individuals. Fortunately, several tax provisions allow deductions that can significantly reduce your after-tax cost of coverage.

Self-Employed Health Insurance Deduction

Self-employed individuals can deduct 100% of health insurance premiums for themselves, their spouses, and dependents as an above-the-line deduction. This deduction is available to sole proprietors, partners, LLC members, and S-corporation shareholders owning more than 2%.

The deduction cannot exceed net self-employment income from the business under which the plan is established.

Health Savings Accounts (HSAs)

HSAs provide triple tax benefits: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. For 2024, contribution limits are $4,150 (individual) and $8,300 (family), plus $1,000 catch-up for those 55+.

You must have a high-deductible health plan (HDHP) to contribute to an HSA.

Medical Expense Deduction

Medical expenses exceeding 7.5% of adjusted gross income can be deducted if you itemize. This includes unreimbursed medical costs, dental expenses, vision care, prescription drugs, and long-term care insurance (with age-based limits).

Employing Your Spouse Strategy

Sole proprietors can employ their spouse and establish an employer-sponsored health plan that covers the family. This converts the self-employed health insurance deduction (which doesn't reduce self-employment tax) into a business expense that does reduce both income and self-employment tax.

Small Employer Health Tax Credit

Small businesses with fewer than 25 full-time equivalent employees and average wages below $56,000 may qualify for a tax credit covering up to 50% of employer-paid premium costs when coverage is purchased through the SHOP marketplace.