Since 2012, the IRS has allowed self-employed individuals to deduct all Medicare premiums from their federal taxes, including Medicare premiums for their spouses. | Image: Shutterstock
More than 63 million Americans are enrolled in Medicare. And although most of the cost of the program is covered by payroll taxes and general revenue, enrollees cover about 15% of the cost of Medicare with the premiums they pay each month. Those premiums can certainly add up over time. But unlike the employer-sponsored coverage that most Americans have during their working years, Medicare premiums are not typically paid with pre-tax dollars.
Let’s take a look.
Self-employed health insurance deduction for Medicare premiums
Self-employed people (who earn a profit from their self-employment) are allowed to deduct their health insurance premiums on Schedule 1 of the 1040, as an “above the line” deduction — which means it lowers their AGI.
Americans 65 and over are self-employed more than any other demographic, and with changes in retirement norms, the chances you could find yourself self-employed and enrolled in Medicare are greater than ever before. But did you know that if you are self-employed – anything from a consultant to a cupcake shop owner – you can deduct your Medicare premiums and potentially save yourself a pile of money?
Since 2012, the IRS has allowed self-employed individuals to deduct all Medicare premiums (including premiums for Medicare Part B – and Part A, for people who have to pay a premium for it – Medigap, Medicare Advantage plans, and Part D) from their federal taxes, and this includes Medicare premiums for their spouse.
The IRS considers you self-employed if you own a business as either a sole proprietor (Schedule C), partner (Schedule E), limited liability company member, or S corporation shareholder with at least 2% of the company stock.
As much as the IRS supports your dreams of opening that secret recipe barbecue sauce business, you must report a profit from your self-employment in order to be able to deduct your health insurance premiums using the self-employed health insurance deduction on Schedule 1 of your 1040. “You have to have business income,” cautions Steber. “You can only deduct your premiums as much as you earn from your business, so if your business earns no money – you don’t get a real benefit.”
You can deduct your premiums – even if you’re not self-employed
But the self-employed health insurance deduction isn’t the only way to deduct your Medicare premiums. You may be able to include them as an itemized deduction on your Schedule A instead. (Itemized deductions do not reduce your AGI.) But you can’t do both, as “double-dipping” is never allowed when it comes to taxes.
“Taxpayers should look at them with and without,” says Steber. “Try it both ways (ie, the self-employed health insurance deduction or an itemized deduction) and see which is a better bottom-line tax deduction.”
“If you’re a small business making money, the deduction out front reduces your income. That’s usually the better tax benefit. But if your company is marginal and your Medicare premiums push you into a loss, then you can be limited (with the self-employed health insurance deduction), but you can itemize.”
So you don’t have to be self-employed to itemize your deductions, including medical expenses – and your Medicare premiums count as medical expenses if you’re itemizing. But if you’re using the itemized deduction approach, you can only deduct medical expenses that exceed a certain amount, as explained below.
And it’s also important to understand that the Tax Cuts and Jobs Act, enacted in late 2018, increased the standard deduction significantly (more details below). This means that most people are unlikely to come out ahead with itemized deductions, and few tax filers choose to itemize their deductions. But it itemizing deductions is the more beneficial approach for you, know that you may be able to include some of your medical expenses among the deductions that you take.
Above-the-line deduction for people who are self-employed
If you’re self-employed, the self-employed health insurance deduction — putting your Medicare premiums on Schedule 1 of your 1040 — is the most direct way to reduce your tax burden. And as noted above, this is an “above-the-line” deduction, which means it reduces your adjusted gross income. But you can’t deduct more in premiums than your business earned during the year.
If you’ve established your business as an S corporation, the corporation can either pay your Medicare premiums directly on your behalf (and count them as a business expense) or the corporation can reimburse you for the premiums, with the amount included in your gross wages reported on your W2, and you can then deduct it on Schedule 1 of your 1040.
This premium deduction can be added to other qualified income adjustments on Schedule 1, including contributions to a Health Savings Account.
Itemized deduction: You don’t have to be self-employed, but limits apply
Any itemized deduction should be weighed against the standard deduction amounts. For 2021, the standard deduction is $12,550 for individuals, $25,100 for married joint filers, and $18,800 for those who file as head of household. Most people come out ahead with the standard deduction, but the best approach will depend on your specific circumstances.
If you are planning to itemize, you can include out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income (AGI). Your Medicare premiums, deductibles, coinsurance, and copayments can all be counted towards your total medical costs, as well as other medical costs that might not be covered by Medicare at all, such as dental, vision, hearing, and long-term care expenses.
So, let’s review: You’re self-employed, your business made money (congratulations!), and you’re ready to file. Here are few more things to remember before you get started.
- Establish your insurance under your business name. (Typically for self-employed people, that is your name.) “You need to make sure the most profitable company should be the designated company for health insurance,” warns Steber. “The IRS does not allow you to commingle your small businesses into one income.”
- Get your paperwork together. “People often overlook the Medicare Part A and B premiums they pay because they often don’t write a check; it just comes out of their Social Security check,” said Steber. “It doesn’t exactly pop out at you.” You’ll receive an SSA-1099 from the Social Security Administration which will have a summary of the Medicare premiums that were withheld from your Social Security check during the past year. And keep in mind that if you’re paying premiums directly to an insurance company for Medigap, Medicare Part D, or Medicare Advantage, you should tally up those amounts too. (In some cases, they might be withheld from your Social Security check as well, and will then be reflected on the SSA-1099.)
- Medicare premium deductions are for your income taxes (federal, state, and local). They do not impact your self-employment taxes, which include taxes to fund the Medicare and Social Security programs. So you’ll still pay the same amount in self-employment taxes, regardless of whether you deduct your Medicare premiums.
- You’ve been self-employed for years, but didn’t take the deduction. The IRS does allow amended returns for up to three years from the filing date, but all the same rules apply.
- If your business loses money and you don’t itemize – you will receive no tax benefit from self-employment Medicare premiums.
Another alternative: Using your HSA funds to pay Medicare premiums
If you have a health savings account (HSA), know that you can withdraw tax-free money from the account and use it to pay your premiums for Medicare Parts A, B, C, and D (but not Medigap premiums). This is an alternative to deducting your premiums on your tax return, since you can’t do both. (If you use tax-free HSA funds to pay the premiums, you can’t also deduct them as that would be double-dipping.) But it’s something to keep in mind if you would otherwise have to use after-tax money (without an option to deduct it on your tax return) to cover your Medicare premiums.
You can’t continue to contribute to your HSA after you’re enrolled in Medicare, but you can continue to withdraw funds from your HSA. As long as you use them for a qualified medical expense, which includes premiums for Medicare Parts A, B, C, and D, you don’t have to pay taxes on the money. (Note that other types of health insurance premiums generally cannot be paid for with tax-free HSA money.)
Seek out help if you have questions
“It’s pretty prudent to get some good tax guidance, particularly in the startup years, to make sure you’ve identified most if not all the tax benefits,” says Steber. “Those benefits can really jump-start your savings, they can help preserve retirement income, and put a lot of income on your bottom line if you know where to look.”
Taxes are intimidating to most of us, and each year brings changes in forms, new legislation, and a myriad of other alterations which seem to further complicate the process. Whether you file on your own, or seek the help of a tax professional – if you are self-employed and paying Medicare premiums, being able to deduct the cost of those premiums can help your bottom line.
“Start early, get your documents together, and if you had a life change – even just a small one – get some questions answered, it’s just a smarter way to save money.”
This information is provided as background only. As with any issue related to your taxes, you should seek advice from a tax professional if you have questions about your specific circumstances.
Jesse Migneault is a journalist and editor who has written about business, government and healthcare – including public and private-payer health insurance. His articles have appeared in HealthPayerIntelligence, the Hartford Courant, Portsmouth Herald, Seacoastonline.com, Foster’s Daily Democrat, and York County Coast Star.
In addition, his work has been cited by health industry stakeholders such as the Eugene S. Farley Health Policy Center, Association of Healthcare Journalists, American Academy of Actuaries, Kaiser Permanente, blueEHR, San Diego Law Review, Medicare Agent News, healthjournalism.org, and Concierge Medicine among others.