Is Health Insurance a Business Expense?

The debate continues to rage in Washington, D.C. over the federal government's role in providing or mandating health insurance coverage for Americans. Tax laws regarding how health insurance premiums are treated are subject to change, but as recently as the 2009 tax year, employed taxpayers were permitted to deduct at least a portion of the money paid toward health insurance premiums, while small businesses and self-employed taxpayers could claim health insurance premiums as a business expense.

Function

• A health insurance policy is a contract between the insuring company and the individual. The insuring company promises to pay certain expenses incurred for the diagnosis, treatment or preventative care of specific medical conditions in exchange for the payment of a regular premium by the insured individual. The policy may cover the individual only, or the individual and his family.

Features

• U.S. tax laws and regulations as administered by the Internal Revenue Service (IRS) allow taxpayers to reduce their taxable income by a portion of the amount they paid toward their medical expenses, including their health insurance premiums. Employed and retired individuals who elect to itemize their deductions can include health insurance premiums that they paid on Schedule A of IRS Form 1040. Small businesses can deduct premiums paid for group hospitalization, medical and long term care insurance for their employees as a business expense. Self-employed taxpayers may be able to deduct up to 100 percent of the premiums they paid for health and dental insurance for themselves, their spouse and their dependents.

Considerations

• Taxpayers who itemize their deductions on Schedule A of IRS Form 1040 can add the portion of their health insurance premium that they paid to their other qualifying medical expense, but only the amount of medical expenses that exceed 7.5 percent of their adjusted gross income may be deducted. Self-employed taxpayers must file a Schedule C of IRS Form 1040 to deduct their health insurance premiums as a business expense. The amount of the deduction for health insurance premiums cannot exceed the amount of the taxpayer's net profit from the business.

Time Frame

• Taxpayers can usually only deduct expense that were incurred and paid during the tax year, but there are some exceptions. Taxpayers cannot deduct expenses for health insurance premiums that were paid in advance of the current tax year. IRS Publication 334, Tax Guide for Small Businesses notes that a multi-year health insurance policy that was paid in full during the first year would not be fully deductible in that year. Only the portion of premiums that paid for coverage during the current tax year is deductible in that year. The following year's premium could be deducted in the following year, even though it was paid in the previous year.

Benefits

• Taxpayers who deduct all or a portion of their health insurance premiums from their taxable income may reduce their total federal income tax liability. The reduction in their adjusted gross income may be significant enough to move them into a lower income tax bracket, which may reduce their tax burden even more. The reduction in their income tax obligation can help offset the taxpayer's cost of health insurance.