Self-employed individual's insurance deduction on the rise (again)
I am self-employed'If companys can give health insurance to their employees and take a tax deduction for the insurance costs, can I buy health insurance for myself in my company name and take a tax deduction for it on my Schedule C?
Logically, it seems that if some types of businesses get to deduct health insurance for their employees, all businesses should have this right'But logic never plays a very big part where tax laws are concerned'As the law stands right now, your business cannot take a deduction for your own health insurance costs, even if you are paying yourself as an employee'Health insurance you pay on behalf of employees other than yourself is a deductible business expense.
Congress has been under pressure to right this inequity and is doing so reasonably quickly'As a self-employed individual, you have the right, on your 1998 tax return, to deduct 45% of health insurance costs for yourself and your family as an adjustment to income on page one of your Form 1040'The deductible amount of health insurance for the self-employed is on the rise and will go to 60% for 1999 through 2001, then to 70% in 2002, and, finally, 100% in 2003.
There's one thing to watch out for when taking the health insurance deduction on page one of your tax return: your health insurance deduction cannot exceed the amount of income you report on your Schedule C'This rule prevents people from using a Schedule C to report a tiny amount of income, just so they can take a juicy deduction for their health insurance costs.
Any health insurance cost that is not taken as an adjustment to income on page one of your tax return still qualifies as an itemized medical deduction on Schedule A'That, of course, is not saying much, since few people get to claim medical deductions on Schedule A'Nevertheless, the deduction is available.
Also, I pay all of my workers on a contract basis and some of them work 40 hours per week'Can I buy group insurance that would cover myself and these workers and take the deduction that way? D.I., Indianapolis
If don't treat your workers as employees for purposes of tax withholding, then you can't cover them under a group medical insurance plan and call it a deductible expense.
But your question raises a deeper issue'If you are paying workers who work essentially full-time for you, and are considering offering them medical insurance as well, it seems as if these workers actually may qualify as employees'If that is the case, you should really be paying them as employees, withholding appropriate taxes from their pay, and making unemployment tax and Social Security and Medicare tax contributions on their behalf.
When determining if a person is an employee or an independent contractor, the IRS looks at several factors, some of which include whether the worker is working exclusively, full-time, and on a continuing basis for the same person or company'The more control you exercise over when, where, and how your workers perform their jobs, the more likely it will be that these workers should be treated as employees.
And the fact that you are considering paying for their medical insurance would indicate that you expect to keep these people around for the foreseeable future.
I would suggest rethinking the nature of your relationship with your workers and considering setting them up as employees'Then, the answer to your question about health insurance will change 'certainly you can set up a medical plan that covers your employees, and the cost of this plan will be a deductible business expense.
If you do determine that your workers are employees, and you set up a company-sponsored group health insurance plan to cover them, you can include your own coverage in this plan'The cost of the premiums you pay for yourself and your family, however, will still not be considered a deductible business expense, and will still need to be split between your adjustments on page one of your 1040 and your Schedule A for itemized deductions.