Can a statutory employee who mostly earns self-employment (Schedule C) income still deduct his own share of health insurance premiums when his employer pays part of the premium?

Plain-English summary

An independent insurance agent asked whether he could deduct his own share of health insurance premiums from his Utah taxable income. His situation was a hybrid: he received a W-2 as a "statutory employee" of one insurance company (which paid part of his health premium and required him to pay the rest), while the bulk of his actual income came as self-employment income on Schedule C, both from that company and others, reported on Form 1099-MISC. He argued this should work like the well-known rule for a 2%-or-greater S-corporation shareholder, who must add the company-paid health premium to his own W-2 but can still deduct it on his return.

The Commission disagreed and denied the deduction. Utah Code Ann. § 59-10-114(2)(h) generally allows a deduction for health insurance premiums, but § 59-10-114(3)(e)(ii) shuts that deduction off whenever the taxpayer is "eligible to participate in a health plan that is funded in whole or in part by the taxpayer's employer." Because the agent's insurance-company employer genuinely paid part of his premium, that disqualifying condition was met — regardless of how much of his overall income came from self-employment.

The Commission distinguished the S-corporation shareholder comparison: in that scenario, the shareholder is required to report the company-paid premium as income on his own W-2, meaning he — not the S-corporation — is economically bearing the entire premium cost even though the company physically writes the check. Here, by contrast, part of the premium's actual economic burden was genuinely carried by the employer, so the same "it's really all mine" reasoning didn't apply, and the statutory bar controlled.

What this means for you

Statutory employees and insurance agents with mixed W-2/1099 income

Having most of your income on Schedule C doesn't exempt you from § 59-10-114(3)(e)(ii)'s bar — what matters is whether any employer is partially funding a health plan you're eligible to participate in, not what fraction of your total income that employer relationship represents.

2%-or-greater S-corporation shareholders

Your situation remains distinguishable: because you're required to include the company-paid premium as W-2 income, you're treated as having paid the whole premium yourself, which is why the deduction survives for you but not for a genuinely employer-subsidized statutory employee.

Accountants and tax professionals

This ruling is a clean illustration of Utah's "eligible to participate in an employer-funded plan" bar under § 59-10-114(3)(e)(ii) — the test looks at whether the plan itself is partially employer-funded, not at the taxpayer's overall income mix or entity structure. Don't extend the S-corp shareholder analogy to statutory employees without checking whether the taxpayer's own W-2 reporting mirrors the shareholder's full pass-through treatment.

Common questions

Q: Does it matter that most of my income is self-employment income?
A: No — the statute's bar turns on whether you're eligible to participate in an employer-funded health plan, not on your income mix.

Q: Why does the S-corp shareholder get to deduct the premium but this taxpayer doesn't?
A: Because the S-corp shareholder must report the entire premium as his own W-2 income, making him the true economic payer even though the company cuts the check. This taxpayer's employer genuinely bore part of the cost, which the statute treats differently.

Q: Can I structure my arrangement to avoid this result?
A: This ruling doesn't address restructuring options — consult a tax professional about your specific facts.

Citations and references

Statutes:

• Utah Code Ann. § 59-10-114(2)(h) (health insurance premium deduction)
• Utah Code Ann. § 59-10-114(3)(e)(ii) (deduction barred if employer partially funds the plan)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/02-003.htm

Original ruling text

REQUEST LETTER

02-003

DATE

NAME

COMPANY

ADDRESS

Re: NAME

Filing Period: #####

On behalf of the above named taxpayers, they received a notice (copy enclosed), requesting verification to determine the health care insurance premium deduction. I talked with TP REP and her supervisor and they recommended I corresponded with you regarding the facts relating to this deduction.

NAME is an independent insurance agent who receives a W-2 from an insurance company as a statutory employee. NAME also files a Schedule C and reports self-employed income from this same insurance company as well as other insurance companies. The company that provides NAME with his W-2 also pays a portion of his health insurance premiums and requires NAME to pay a portion due to the fact that he is a statutory employee and receives income from this company that is reported on a Form 1099-MISC.

I recognize that the Utah law eliminates the deduction for health insurance premiums when it is partially reimbursed or funded by an employer. However, the majority of NAME income is reported on his Schedule C and his insurance premiums are paid in relationship to that income. This seems quite similar to a two percent (2%) shareholder of an S Corporation that is required to add the company paid health insurance premiums to his W-2 and is allowed deduction on his federal and state income tax returns.

It is informally requested that you review this information and inform us as to how the Utah State Tax Commission might rule on this issue. If this isn�t possible we understand. We are trying to comply with this state rule as it relates to statutory employees that for federal purposes are deemed to be self-employed.

Your response to this matter is greatly appreciated so that a determination can be made as soon as possible if additional tax is due or the return will be accepted as filed.

Kindest personal regards,

NAME

RESPONSE LETTER

DATE

NAME

ADDRESS

Re: Advisory Opinion � Health insurance deduction from income tax

Dear NAME

You have requested the Commission to address whether health insurance premiums may be deducted from income when those premiums are partially paid by an employer to an independent contractor insurance agent. Your client, the insurance agent, receives a W-2 from the insurance company (�Company�) he represents. Your client and the Company each pay a portion of the health insurance premium, in proportion to the amount of income paid by that employer relative to the employee�s total income.

Utah Code Ann. �59-10-114 (2) (h) allows certain amounts paid for health care insurance to be deducted from taxable income. However, under Utah Code Ann. �59-10-114 (3) (e) (ii), the deduction is not allowed if the taxpayer is eligible to participate in a health plan that is funded in whole or part by the taxpayer�s employer. Your client is not only eligible, but participates in a health plan that is partially funded by his employer. Accordingly, subsection 114 (3) (e) (ii) provides that your client may not deduct the amounts he paid for health insurance from his taxable income.

The situation where a two percent (2%) shareholder of an S corporation adds health insurance premiums to his W-2 and still takes a deduction from taxable income is not analogous. Because the shareholder must report the premiums on his W-2, the shareholder, not the S-corporation is effectively paying the entire premium, even though the check is written by the S-Corporation. In your situation, part of the economic burden is actually borne by the employer and the statute, disallows any deduction. Accordingly, the pass through principles regarding income and deductions do not apply to him.

Should you need further clarification from the Commission, you may contact us.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/PL

02-003