Medicare Premium Deduction for Self-Employed Individuals

By Maribeth Quilao, Irvine, Calif.

Editor: Mark G. Cook, CPA, MBA



On July 13, 2012, the IRS Chief Counsel’s Office released Chief Counsel Advice (CCA) 201228037, which clarified that all Medicare premiums (Parts A, B, C, and D) are insurance constituting medical care and may be deducted under Sec. 162(l) as an above-the-line deduction by self-employed individuals. Self-employed individuals for the purposes of the Sec. 162(l) deduction include sole proprietors, partners, and more-than-2% shareholders of an S corporation. The CCA determined that Medicare is insurance constituting medical care under Sec. 162(l); therefore, Medicare premiums paid may be deducted on line 29 of Form 1040, U.S. Individual Income Tax Return, just like other health insurance premiums.

The 2010 Form 1040 instructions and Publication 535, Business Expenses (2010), were amended to include Medicare premiums as a qualified insurance deduction under Sec. 162(l), but no reason for the change was provided at the time of release. Previously, the Form 1040 instructions stated that Medicare premiums could not be used in computing the self-employed health insurance deduction. Taxpayers who failed to deduct Medicare premiums may file an amended return to claim a refund for open tax years.


Sec. 162(l) allows a deduction from gross income for medical insurance paid during the tax year for self-employed individuals, their spouses, and their dependents, including their children under age 27. However, the deduction may not exceed the taxpayer’s earned income (within the meaning of Sec. 401(c)(2)) from the trade or business with which the plan is established (Sec. 162(l)(2)(A)). Furthermore, the deduction only applies for months when the self-employed taxpayer is not eligible to participate in a subsidized health plan maintained by an employer of either the taxpayer or the taxpayer’s spouse (Sec. 162(l)(2)(B)).

The CCA provides guidance on additional requirements for self-employed individuals to claim the Medicare premium deduction under Sec. 162(l). Sole proprietors must pay the Medicare premiums directly. Two percent S corporation shareholders and, by extension, partners in a partnership must meet requirements outlined in Notice 2008-1. For income tax purposes relating to employee fringe benefits, the S corporation is treated as a partnership, and any 2% shareholder is treated as a partner of the partnership (Sec. 1372). A 2% shareholder is a shareholder owning more than 2% of the outstanding stock or total combined voting power of all stock on any day in the current tax year (Sec. 1372(b)).

In Notice 2008-1, a 2% shareholder who meets the requirements under Sec. 162(l) must be covered by a health insurance plan established by the S corporation. The plan is considered to be established if either (1) the premiums are paid out-of-pocket by the 2% shareholder and then reimbursed by the S corporation upon providing proof of payment in the current tax year, or (2) the premiums are paid by the S corporation on behalf of the 2% shareholder in the current tax year. The premiums must be reported as wages on the 2% shareholder’s Form W-2, Wage and Tax Statement, and reported as gross income on the 2% shareholder’s Form 1040.

Similarly, Medicare premiums may either be paid directly by the partner and then reimbursed by the partnership upon providing proof of payment or paid by the partnership. Premiums reimbursed to a partner or paid by a partnership must be treated as guaranteed payments to the partner and reported as gross income on the partner’s Form 1040.

Finally, the CCA reiterates that self-employed individuals who failed to deduct Medicare premiums in prior years may file an amended return to claim a refund (subject to the statute of limitation).


Mark Cook is a partner at SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-261-8600, ext. 2143, or

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.

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