State Requirement

• If your state requires you to purchase workers' compensation insurance for your employees, you may deduct the cost of workers' compensation insurance premiums from your federal taxes each year. However, if you are not required to purchase insurance---for example, if your state doesn't require businesses with less than five employees to purchase insurance and you only have three employees---you cannot deduct the cost of insurance, as it is an optional cost.
  
  

Partnerships and Corporations

• If your business is a sole proprietorship, you can deduct the entire cost of your workers' compensation premiums from your federal taxes. If your business is a partnership or corporation, however, the amount you can deduct depends on who is covered by workers' compensation insurance. If your partnership pays premiums to cover the partners, you may deduct those premiums. If a corporation pays workers' compensation insurance on its more-than-2-percent stockholders, it may deduct those premiums but must also list them as wages to stockholders.
  
  

Year of Deduction

• In most cases, you deduct premiums for workers' compensation insurance in the year that you pay them. However, if you use the accrual method of accounting, you cannot deduct your worker's compensation premiums until the year in which you pay them. In addition, if you prepay workers' compensation insurance rather than paying it on time, you cannot deduct premiums until the year in which the payments apply.
  
  

Other Premiums

• You may deduct premiums for other types of insurance that you purchase for your business. Casualty and loss insurance, credit insurance against bad debts, contributions to the unemployment fund and liability or malpractice insurance are all fully deductible. You may deduct the cost of health insurance premiums both for yourself and for your employees as of June 2010.