Independent Contractor Health Insurance Deduction
An independent contractor is entitled to claim deduction on account of health insurance expenses incurred by her on the insurance of her own self and family. This benefit is separate from the expenses on account of health insurance payments made for her employees, and can be claimed either as part of itemized deduction (subject to the limits prescribed by IRS) or separately.
Claim of deduction of contribution for Health Insurance of your employees
If an Independent contractor is employing other workers on a regular pay-roll and incurring expenses on their health insurance, that would be a business expense that she can claim according to specific provisions in this regard, issued by the IRS. These expenses can be included in the expenses reported on Line 14 of the Schedule SE (Form 1040). As per Instructions to Schedule SE (Form 1040), expenses on account of contributions to employee benefit programs that are not an incidental part of a pension or profit sharing plan, like accident and health plans can be added on Line 14.
One can not include contributions made on one’s own behalf as a self-employed person to any accident and health plan in this category (at Line 14), though such deductions can be claimed separately, as discussed later. Any credits for small employer health insurance premiums determined on Form 8941 must be reduced from the amount claimed in this category. For details of such credit, one should refer to Instructions for Form 8941.
Claim of deduction for your own Health Insurance
Payments made for your own Health insurance can be claimed as deduction subject to the various conditions and limitations prescribed in this regard. It can also serve to reduce the net self-employment income for the purpose of determining one’s self-employment tax.
Payments eligible for deduction
(i) Payments made to Health Insurance established under own business
An independent contractor can claim as deduction premiums or contributions paid for his own health insurance as well as for his spouse and dependents. Beginning from March 2010, this benefit has been extended to include children under the age of 27 years, even if they are not dependent. Moreover, for this purpose, ‘child’ includes son, daughter, stepchild, adopted child or foster child.
To avail this benefit, one must be either self employed with a net profit during the year, or else should have used one of the optional methods to figure out the net earnings from self-employment on Schedule SE. The insurance must be established under own business and the personal services of the independent contractor herself must have been a material income producing factor in the business.
(i) Payments made to Long Term Care Insurance
An independent contractor can claim deduction for premiums paid on a Qualified Long-term Care Insurance Contract for self, spouse and dependents subject to certain limitations related with age of the person covered. For those up to 40 years of age, $ 320 is allowed, which increases to $ 600 for age group 41-50 years, $ 1190 for age group 51-60 years, $ 3180 for age group 61-70 years and $ 3980 for those older than 71 years.
A Qualified Long-term Care Insurance Contract can be eligible for payments in this category only if it satisfies certain conditions prescribed by the IRS, which can be found in its Publication 525.
Payments that cannot be claimed
While claiming deduction under this category, one must also be aware about the payments that cannot be claimed.
In case the independent contractor is also eligible to participate in any subsidized health plan maintained by her spouse or her spouse’s employer for any month or part of month in that year, amounts paid for health insurance coverage for that month cannot be used to figure the deduction. Similarly, amounts paid for coverage of any period during which one is eligible to participate in any subsidized health plan maintained by the employer of either her dependent or her child under the age of 27 should also not be taken to figure the deduction. Medicare Part B payments are not considered Medical Insurance premiums for purpose of the self employed health insurance deduction. Any amounts paid of any non-taxable receipts like non-taxable retirement plan distribution cannot be included in deduction. More details can be found in the Publication 535 of IRS. The advance payments made for this purpose that are shown in box-1 of Form 1099-H should also not be included. Those claiming health coverage tax credit should subtract the amount shown on Form 8885, Line 4 from the total insurance premiums paid.
How to calculate the deduction
The calculation can be done using one of the worksheets provided by the IRS in its publications, along with the instructions given for it. Instructions to Form 1040 provide a detailed worksheet to figure out the deduction. However, in case the independent contractor is receiving self employment income from more than one sources, or if she wishes to use amounts paid for qualified long term care insurance to figure the deduction, or if she intends to file Form 2555 or Form 2555-EZ, she should use the worksheet 6A in Publication 535 of IRS to determine the deduction.
Where to report the deduction
The deduction is to be reported inForm 1040, line 29.
For the year, 2010, it can be reported in either the Short or Long Schedule SE (Form 1040) at Line 3 for reducing the self employment income for the purpose of determining the Self Employment Tax. However, it can be claimed only if there is a profit or an income reported in Line 1a and / or 2 of these schedules.
If deductions are itemized and 100% of self-employed health insurance deductions are not claimed on line 29, any remaining premiums can be included with other medical care expenses in Schedule A (Form 1040), subject to the overall 7.5% limit.