Does Covered California Use Gross or Net Income?

Covered California uses neither your gross income nor your net income exactly as those terms appear on a pay stub. It uses your modified adjusted gross income, or MAGI, which is a federal tax figure. Whether Covered California relies on gross or net income depends on how you earn money: if you receive a W-2, the calculation starts from your gross wages before payroll deductions; if you are self-employed, it starts from your net profit after business expenses. Both figures then run through adjustments on your federal tax return to produce the MAGI that Covered California compares against the federal poverty level to set your premium tax credit.

What MAGI Actually Is

Federal law requires every health insurance marketplace, Covered California included, to measure household income using MAGI when calculating premium tax credits.¹ MAGI is your adjusted gross income (AGI), which appears on line 11 of your federal Form 1040, plus three specific add-backs:²

Non-taxable Social Security benefits — the portion not taxed on your federal return.
Tax-exempt interest, such as interest from municipal bonds.
Foreign earned income excluded from your U.S. tax return.

For most Californians without any of those three income types, MAGI is identical or very close to AGI. Covered California’s income estimator walks through the arithmetic: begin with your AGI, add those three items if they apply, and then adjust for changes you expect in the coming year.³

If You Receive a W-2: Start With Gross Pay

If an employer pays you and issues a W-2, report your gross wages — the total earned before taxes, retirement contributions, and health premiums are withheld. Use the “Total Gross” or “Gross Pay” line on your pay stub, not your take-home amount. Reporting take-home pay would understate your income and likely lead to an oversized subsidy that you would have to repay at tax time.

Gross wages are the starting point, not the final number. Above-the-line adjustments on your tax return — traditional IRA contributions, health savings account deposits, student loan interest — reduce gross wages down to AGI, which then becomes the base for MAGI.⁴ If you claim any of these, your MAGI will land somewhere below your gross pay.

You are estimating income for the whole coverage year, not projecting your current paycheck forward. Add any expected bonus to your annual figure. If you earn $2,000 per month ($24,000 annually) and expect a $4,000 year-end bonus, report $28,000.⁵ Commissions and tips count too. Seasonal workers should be careful: if the application extrapolates one month’s earnings across twelve, correct the annual figure to reflect only the months you actually work.

If You Are Self-Employed: Start With Net Profit

Freelancers, independent contractors, and small business owners report net self-employment income, not total revenue. Net income is the profit remaining after allowable business expenses come out of your gross receipts. It corresponds to what you report on Schedule C of Form 1040.⁶

Allowable business expenses — equipment, supplies, advertising, office space, professional services — all reduce your net figure. Reporting revenue rather than profit would overstate your income and could cost you financial help you qualify for.

Self-employed applicants can also take above-the-line deductions that lower AGI further: the deductible portion of self-employment tax and contributions to a SEP-IRA or solo 401(k) are common ones.⁴ If you pay for your own health coverage, you may be able to deduct those premiums as well, though the deduction and the premium tax credit interact in a circular way: the deduction reduces MAGI, which raises the credit, which changes the deduction. A tax professional can help you settle on the right amounts if both apply.

Other Income That Counts

MAGI is not limited to wages or business profit. Your Covered California application must also include:³

Social Security benefits — both taxable and non-taxable portions count toward MAGI, even if part is not taxed on your federal return.¹
Tax-exempt interest from municipal bonds or other tax-free accounts.
Foreign earned income, even if excluded from taxable income on your return.
Unemployment benefits, using the full weekly amount for the expected duration.
Investment income: interest, dividends, capital gains, rental income, and royalties.
Pension and retirement distributions from 401(k)s, IRAs, and pension plans.
Alimony received, if the divorce or separation was finalized before January 1, 2019.

Leaving any of these off creates a gap between your application and your federal tax return. When the IRS reconciles your subsidy at tax time, that mismatch triggers repayment of the excess credit.

What Doesn’t Count

Some money you receive is excluded from MAGI and should not appear on your application:⁷

Child support.
Gifts.
Supplemental Security Income (SSI).
Veterans’ disability payments.
Workers’ compensation.
Loan proceeds — student, home equity, or personal.
Child Tax Credit payments from the IRS.
Alimony for divorces and separations finalized on or after January 1, 2019.

Including these items would inflate your reported income and could reduce or eliminate the assistance you qualify for.

Why Your Estimate Matters More in 2026

The number you report at enrollment drives the advance premium tax credit that lowers your monthly premium. At tax time, the IRS reconciles the advance credit against the credit you actually earned based on your final income. You must file a federal return and attach Form 8962 to complete the reconciliation, even if your income would not otherwise require filing.⁸ Covered California sends you Form 1095-A each January with the figures you need.

If your actual income was lower than estimated, you may pick up additional credit that raises your refund or reduces your tax. If your actual income was higher, the advance credit exceeded what you were entitled to, and you owe the difference back.

For the 2026 tax year, there is no cap on how much excess credit you must repay — the full overpayment is added to your tax bill.⁹ That is a change from 2021 through 2025, when repayment was capped at $350 to $3,200 depending on income. Skipping reconciliation altogether can delay your refund and disqualify you from advance credits in future years.⁸

Because there is no ceiling on repayment now, a careful income estimate matters more than in recent years.

Reporting Changes During the Year

If your income shifts after you enroll, you must update your Covered California account within 30 days.¹⁰ You can log in online, call (800) 300-1506, or work with a local enrollment counselor.

Prompt updates protect you both ways. If your income drops, your monthly subsidy may increase right away. If it rises, updating spares you a larger reconciliation bill later. A significant change may also open a special enrollment period, letting you switch plans if the new financial picture calls for it.¹¹

Documents That Verify Income

Covered California may ask for proof of what you reported. Accepted documents depend on the income type:¹²

W-2 employees: a recent pay stub with your name, income amount, and pay period; a W-2 or other wage statement (1099-MISC, 1099-NEC); your most recent Form 1040; or an employer statement on company letterhead.
Self-employed applicants: a quarterly or year-to-date profit and loss statement showing your name, business name, dates covered, and net income; or your Form 1040 with the relevant schedules.
Unearned income: Social Security benefit letters, pension distribution statements, unemployment letters, interest and dividend statements, or other documentation matching the source.

If you cannot provide standard documents, Covered California accepts a written self-attestation of income signed under penalty of perjury, reviewed case by case. Respond to verification requests by the deadline; missing it can end your financial assistance.

1
Office of the Law Revision Counsel. 26 USC 36B – Refundable Credit for Coverage Under a Qualified Health Plan
2
HealthCare.gov. Modified Adjusted Gross Income (MAGI)
3
Covered California. How to Estimate Your Income
4
Internal Revenue Service. Definition of Adjusted Gross Income
5
CMS. Reporting Income on a Marketplace Application
6
HealthCare.gov. Reporting Self-Employment Income to the Marketplace
7
HealthCare.gov. What’s Included as Income
8
Internal Revenue Service. Premium Tax Credit: Claiming the Credit and Reconciling Advance Credit Payments
9
Internal Revenue Service. Updates to Questions and Answers About the Premium Tax Credit
10
Covered California. How to Update Your Account
11
Covered California. Special Enrollment
12
Covered California. Proof of Income