Is a Health Insurance Premium Tax Deductible With LLC?

By Laura Payet

Is a Health Insurance Premium Tax Deductible With LLC?

By Laura Payet

Health insurance is expensive. The good news is that health insurance premiums offer a potentially substantial tax deduction for limited liability companies (LLCs). If you meet the requirements, you can deduct the cost of premiums for medical, dental, and some long-term care insurance for yourself, your spouse, your dependents, and your children up to age 27, even if they are not dependents.

Document labeled "health insurance"

Single-Member LLC Taxed as a Sole Proprietorship

If you own a single-member LLC that is taxed as a sole proprietorship, the IRS considers you to be self-employed for tax purposes and therefore eligible to take all the deductions available to self-employed people. Such taxpayers can deduct 100 percent of their health insurance premiums, with certain limitations.

You can only take the deduction for months during which you were not eligible to participate in another employer-sponsored health plan, even if you chose not to participate. In other words, you cannot take the deduction if you were eligible for coverage under an insurance policy provided by your spouse's employer or under a policy provided to you by an employer other than your LLC. You cannot take the deduction if the amount you paid in insurance premiums exceeds the earned income you received from the business.

If you are eligible for a premium tax credit or subsidy under the Affordable Care Act, you can only deduct the premium amount you paid yourself. Note that you do not need to itemize your deductions to take advantage of this option.

Multiple-Member LLC Taxed as a Partnership or S Corp.

If you are a member of a multiple-member LLC taxed as a partnership, the IRS also considers you self-employed and therefore able to deduct your health insurance premiums, again as long as you weren't eligible to participate in another insurance plan and the deduction doesn't exceed your earned income. There are two ways to handle it:

  • If the policy is in your name and you pay the premium yourself, the business reimburses you and includes the premium as guaranteed income on your Schedule K-1. You then claim the deduction on your tax return.
  • If the policy is in the company's name and it pays premiums, the amount of the premium payment appears as guaranteed income on your Schedule K-1. Again, you claim the deduction on your individual tax return.

If you are a shareholder in an LLC taxed as an S corporation, you can deduct health insurance premiums as long as you own at least 2 percent of the company's shares and receive a salary from the company. If you pay the premium yourself, the company should reimburse you and include the amount as income on your W-2, and you can then claim the deduction on your individual tax return. Alternatively, the company can pay the premium and include the amount as income in your W-2. Again, you would claim the deduction on your individual tax return.

Insurance Premiums for Employees

If your LLC provides group health insurance for its employees, the business can deduct the premium payments from its earnings as a business expense, regardless of whether it is taxed as a sole proprietorship, partnership, or corporation. Note that a corporation can only deduct the cost of insurance for bona fide employees, not for nonemployee shareholders.

If you're ready to get your company off the ground, consider the many benefits of forming an LLC. The ability to deduct health insurance premiums is just one benefit of establishing your business under this type of structure.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.