Can an independent contractor deduct monthly health insurance premiums?
I am a recent federal employee retiree. I may become a part-time individual contractor, self employed. I will have to do my own estimated taxes and probably have quarterly tax payments during the year. Under the new tax laws, 2019 health insurance premiums are deductible for self employment. So, as a federal retiree, I still have health insurance coverage. I make monthly payments so my family and I still have health insurance. The insurance is from my old job, and with or without the self employment job, I will still have health insurance anyway. When I do become an individual contractor, will I be eligible to deduct my monthly health insurance at the end of the year during tax season?
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Once you begin earning income as a self-employed individual, you effectively become a business, and businesses are eligible to deduct health insurance premiums for their employees (you) as an above the line deduction. It will be important you run your contracted work like a business, and keep records of transactions related to the business.
In order to claim the deduction you need to meet two (and a half) criteria. First, you can't use this deduction if you are eligible for a health insurance plan through another employer or your spouse's employer. Second, you need actual business income and need to be able to demonstrate you are running a business. The half criteria is that the business income must also be greater than the insurance premiums paid. If it is less, then you can only deduct up to the amount of business income your earned. (You may be able to deduct the rest as an itemized deduction if you meet other threshold criteria.)
Hire a CPA and a CFP
If you don't have a CPA, this is the year to start looking for one. Business owners have access to a lot of tax advantages, and a good CPA can help you find them. As your business grows, you will also want to get a financial advisor to look at other financial benefits you can gain access to as a business owner.
We specialize in financial planning for business owners. CPAs are great at filing taxes, but most don’t specialize in forward-looking tax planning. We can help you plan to reduce multi-decade tax liabilities, plan for selling the business or passing it to your children, prepare for your retirement, mitigate business risk, and much more.