Can I deduct my health insurance if I'm the sole owner of an LLC?

Yes, in most cases. If you own an LLC by yourself and have no W-2 employees, you can usually write off what you pay for your own health insurance. How you take the deduction, and where it shows up on your return, depends on how the IRS taxes your LLC. This FAQ walks through each setup.

Quick answer

• Single-member LLC taxed as a sole proprietor (the default): You deduct your premiums on your personal Form 1040 as the self-employed health insurance deduction. It is not an expense on your business books.
• LLC that elected S corporation status: The business must pay or reimburse the premiums and add them to your W-2 wages. You then take the same self-employed health insurance deduction on your personal return.
• LLC that elected C corporation status: The corporation can generally deduct the premiums as an employee benefit.

Not sure which one you are? If you never filed IRS Form 2553 (S corp election) or Form 8832 (entity classification election), a single-member LLC is taxed as a sole proprietor by default.

Default single-member LLC (Schedule C)

A single-member LLC is a "disregarded entity" for income tax purposes. Its profit flows onto Schedule C of your personal return, and you are treated as self-employed.

You can claim the self-employed health insurance deduction (IRC Section 162(l)). You figure it on Form 7206 and report it on Schedule 1 (Form 1040), line 17. It is an "above-the-line" deduction, so you get it whether or not you itemize.

What it covers: Medical, dental, and vision insurance premiums, plus qualified long-term care premiums (up to age-based limits), for you, your spouse, your dependents, and children under age 27 at the end of the year. Medicare premiums can count too.

Key rules:

• Profit limit. The deduction can't be more than the net profit from the business, reduced by the deductible part of your self-employment tax and any self-employed retirement contributions. If your new business shows a loss, the deduction may be limited or unavailable for that year.
• No other employer plan available. You can't take the deduction for any month you were eligible to join a subsidized health plan through another employer, including your spouse's employer. Eligibility is what matters, even if you didn't enroll.
• Income tax only. The deduction lowers your income tax but not your self-employment (Social Security and Medicare) tax.
• The policy can be in your own name. An individual plan bought on HealthCare.gov, a state exchange, or directly from a carrier qualifies.

LLC taxed as an S corporation

If you own more than 2% of an S corporation, you are not treated as a regular employee for fringe benefit purposes. To get the deduction, follow these steps (from IRS Notice 2008-1):

1. The S corporation pays or reimburses the premiums. It can pay the carrier directly or reimburse you. The policy can be in your name or the company's name.
2. The premiums are added to your W-2, Box 1 wages. They are generally not subject to Social Security and Medicare tax, so they do not belong in Boxes 3 and 5.
3. The S corporation deducts the premiums as wages.
4. You take the self-employed health insurance deduction on Form 7206, limited to the W-2 wages you received from the S corporation.

The most common mistake: paying premiums from a personal account and never running them through payroll. If the premiums don't show up on your W-2, the IRS doesn't treat the plan as established by the business, and the deduction can be lost. Ask your payroll provider or CPA to set this up before year-end.

LLC taxed as a C corporation

If your LLC elected to be taxed as a C corporation, you are an employee of the corporation. The corporation can generally deduct health insurance premiums it pays for you as an ordinary business expense, and the coverage is usually tax-free to you. Rules about how the company pays for individual coverage can be technical, so have your CPA confirm the setup.

What about the ACA premium tax credit?

If you buy a Marketplace plan and receive a premium tax credit (subsidy), you can only deduct the part of the premium you actually paid yourself. Because the deduction lowers your income, and your income affects your subsidy, the two calculations depend on each other. Tax software handles this automatically, and IRS Publication 974 explains the method. See also: How do you calculate MAGI on healthcare.gov if you're self-employed?

Can I use a QSEHRA or ICHRA instead?

Generally not if you are the only person in the business. Sole proprietors, partners, and more-than-2% S corporation shareholders can't be covered as "employees" under these reimbursement arrangements. They are a better fit once you hire W-2 employees.

Bottom line

• As a single-member LLC, you can almost always deduct your health insurance premiums, but usually on your personal return, not as a business expense.
• If you elected S corp status, the premiums must run through payroll and appear on your W-2.
• The deduction is limited to your business profit (or S corp wages) and isn't available for months you could have joined an employer-subsidized plan.

For more on deducting health costs, see Is my health insurance tax deductible?

Need a health plan for your new business?

We're independent, licensed health insurance brokers. We can compare individual and family plans from multiple carriers, check whether you qualify for a subsidy, and help you choose the right coverage for a one-person business, at no cost to you. Call us at 855.847.7020 or email help@ihealthagents.com.

This article is general information, not tax or legal advice. Independent Health Agents does not provide tax advice. Tax rules change and depend on your situation, so please confirm your deduction with a CPA or tax professional. Sources: IRS Form 7206 and its instructions, IRS Publication 974, and IRS Notice 2008-1.