Does Covered California Use Gross or Net Income?

Covered California does not use your gross income or your net paycheck directly. It uses your modified adjusted gross income, or MAGI, which is a figure built from your federal tax return. If you receive a W-2, the calculation starts with your gross wages before any paycheck deductions. If you work for yourself, it starts with your net profit after business expenses. Both numbers then run through adjustments on your Form 1040 to produce the MAGI that Covered California uses to set your premium tax credit and cost-sharing reductions.

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), the figure on line 11 of your federal Form 1040, plus three specific add-backs:²

Non-taxable Social Security benefits — the portion of Social Security that isn’t taxed on your return.
Tax-exempt interest, such as interest from municipal bonds.
Foreign earned income you excluded from your U.S. 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 same steps: start with AGI, add those items, and adjust for expected changes in the coming year.³

If You Get a W-2: Start With Gross, Not Take-Home

If an employer pays you and gives you a W-2, report your gross wages — the total you earn before taxes, retirement contributions, or health insurance premiums are withheld. On your pay stub, this is the line labeled “Total Gross” or “Gross Pay,” not your take-home amount. Using take-home pay would understate your income and could produce an inflated subsidy that you’d have to pay back at tax time.

Gross wages are only the starting point. Certain above-the-line adjustments on your tax return reduce gross wages down to AGI, which then becomes the base for MAGI. Common adjustments for employees include traditional IRA contributions, HSA deposits, and student loan interest.⁴ If you take any of those, your MAGI will come in below your gross pay.

Bonuses, Commissions, and Seasonal Pay

Your application asks for your projected income for the full coverage year, not just a snapshot of this month. Include expected bonuses in the 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 have to watch for a specific trap: if the application multiplies a single month’s earnings across all twelve months, the projection may be far higher than what you’ll actually earn. Correct the annual figure so it reflects only the months you work.

If You’re Self-Employed: Start With Net Profit, Not Revenue

If you work for yourself as a freelancer, independent contractor, or small business owner, report your net self-employment income rather than your total revenue. Net income is what’s left after you subtract allowable business expenses from what you brought in. This matches what you report on Schedule C of your Form 1040.⁶

Business expenses — equipment, supplies, advertising, office space, professional services — all reduce the number you report. Entering total revenue instead of profit would overstate your income and could cost you financial help you actually qualify for.

Self-employed applicants also get several above-the-line deductions that further reduce AGI, including the deductible portion of self-employment tax and contributions to a SEP-IRA or solo 401(k).⁴ If you pay your own health insurance, you may also be able to deduct those premiums, though the self-employed health insurance deduction and the premium tax credit interact in a circular way: the deduction lowers your MAGI, which raises your credit, which changes the deduction. A tax professional can help you work through both at once.

Other Income You Have to Include

MAGI isn’t limited to wages or self-employment profit. Your Covered California application has to include several other income types:³

Social Security benefits, including both the taxable and non-taxable portions. Even the part that isn’t taxed on your federal return still counts toward MAGI for marketplace purposes.¹
Tax-exempt interest from municipal bonds and other tax-free accounts.
Foreign earned income, even if excluded from taxable income.
Unemployment benefits for the expected duration.
Investment income — interest, dividends, capital gains, rental income, and royalties.
Pension and retirement distributions, including withdrawals from 401(k)s, IRAs, and pension plans.
Alimony received, but only if the divorce or separation was finalized before January 1, 2019.

Leaving any of these off the application creates a gap between what you report to Covered California and what shows up on your federal return. When the IRS reconciles your subsidy, a mismatch can trigger repayment.

Money That Doesn’t Count

Some income is excluded from MAGI and should not go on your application:⁷

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

Including any of these would inflate your reported income and could shrink or eliminate the help you qualify for.

Why Getting the Number Right Matters

If you received advance premium tax credits during the year, you have to file a federal tax return and attach Form 8962 to reconcile them, even if your income would otherwise be too low to require filing.⁸ You’ll use Form 1095-A, which Covered California mails each January, to complete it.

If your actual income came in lower than you estimated, you may get an additional credit on your return. If it came in higher, the credits you already received may exceed what you were entitled to, and you’ll owe the difference back. For the 2026 tax year, there is no cap on how much excess credit you have to repay; the full overpayment is added to your tax liability.⁹ That’s a change from 2021 through 2025, when repayment was capped at amounts between $350 and $3,200 depending on income.

Skipping reconciliation entirely can delay your refund and disqualify you from receiving advance credits in later years.⁸ With no repayment cap in place for 2026, an accurate income estimate at enrollment matters more than it did in recent years.

Updating Your Estimate When Income Changes

Your subsidy is based on the income you project at enrollment, but earnings move. If your income rises or falls during the coverage year, update your Covered California account within 30 days.¹⁰ You can do it online, by calling (800) 300-1506, or through a local enrollment counselor.

Updating works in both directions. If your income drops, a prompt update can increase your monthly subsidy right away. If your income rises, updating now shrinks the repayment bill you’d otherwise face at tax time. A significant income change can also open a special enrollment period, letting you move to a plan that fits your new situation.¹¹

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