Understanding how the self-employed health insurance deduction works can make a meaningful difference at tax time. If you pay for your own coverage, whether you’re a freelancer, sole proprietor, or S Corporation owner, you may be able to deduct premiums for yourself and your family.
What you’ll learn
What you’ll learn
Key takeaways
- Small business owners can often deduct health insurance premiums “above the line,” meaning they reduce adjusted gross income without needing to itemize
- To qualify, you must have net profit from your business and cannot have been eligible for an employer-sponsored plan during the months you claim
- S Corporation owners who own more than two percent of the business must follow specific payroll and reporting rules to claim the deduction correctly
In this guide, we break down who qualifies, how much you can deduct, and how to claim it correctly so you don’t leave money on the table.
What is the self-employed health insurance deduction?
Health insurance premiums are an “above-the-line” deduction, which means that they reduce adjusted gross income (AGI). This can be useful in a number of ways when compared to “below-the-line” deductions. This deduction does not require you to itemize tax deductions on Schedule A of your Form 1040; instead, it comes off the top before considering standard or itemized deductions, so it’s not included as an itemized medical expense deduction.
If you’ve ever worked for an employer that offered a pre-tax health insurance benefit, you may wonder how it works for those who are in business for themselves. The self-employed health insurance deduction levels the playing field for sole proprietors and freelancers by allowing them to deduct the cost of health insurance on their tax returns.
Now that we better understand the purpose of this deduction, let’s see who is able to take advantage of it.
Who qualifies for the self-employed health insurance deduction?
One thing to keep in mind is that because this deduction is intended for taxpayers who are self-employed, it requires you to have net profit from a business, reported on Schedule C of Form 1040 or through a Schedule K-1. If your business is running a loss because expenses are greater than income, you unfortunately won’t be able to benefit from this deduction because the rule is that you can’t deduct more for health insurance than the amount of earned income from the business.
There’s another rule to be aware of: You can’t claim the deduction for any month you were eligible for an employer-sponsored plan. That includes eligibility for health insurance coverage through your spouse’s employer.
Qualifying at a glance
| Business type | Filing requirement | Deduction eligibility |
| Sole proprietor/freelancer | Schedule C (Form 1040) | Deductible up to the amount of net profit reported on Schedule C |
| Partner in a partnership | Schedule K-1 (Form 1065) | Deductible based on net earnings from self-employment |
| S Corporation shareholder | Form W-2 and Schedule K-1 | Deductible for >2% owners if premiums are paid/reimbursed by the S Corporation and reported as wages |
What if you had access to an employer plan for part of the year?
You may be in a situation where you were eligible for employer-sponsored health insurance for part of the tax year but not for the entire year. Maybe your spouse started a new job midway through the year. Or you might have held a W-2 job for the first few months of the year that included health insurance, and then decided to leave your job and become self-employed.
Your eligibility to claim the deduction is determined on a month-by-month basis. When calculating the amount of the self-employed health insurance deduction, you can include the insurance premiums you paid during the months you were not eligible for an employer-sponsored plan, but not for the months when you were eligible. So if you were eligible for an employer plan in January — June but were not from July — December, include the amounts you paid for health insurance only for the months of July — December when you report the total paid for insurance during the tax year to the IRS.
Now that you know who qualifies for the deduction, let’s talk about which expenses are included when it’s time to calculate it.
What health insurance coverage can be included?
As far as the type of plan, basically anything that isn’t sponsored by an employer counts. That includes:
- Affordable Care Act (ACA) plans purchased on the ACA Marketplace
- Private health insurance purchased off the Marketplace
When you think about health insurance, you might only be thinking about standard medical insurance that covers typical medical expenses, such as doctor visits. That certainly qualifies, but there are additional types of insurance that can qualify, too, including premiums you pay for dental and vision insurance. The insurance coverage can be:
- For yourself
- Spouse who’s not on an employer-sponsored plan
- Your dependents
- Your children who are less than 27 years old as of the last day of the tax year.
- If you pay Medicare premiums while you’re self-employed, you can include those too
Another type of insurance you might not think about is long-term care insurance. Those premiums can be included, too, although there are limits on the amount you can claim depending on your age — the older you are, the higher the limit, so the more you can claim.
How much can you deduct?
We’ve talked about who qualifies as well as which expenses are deductible, so let’s move on to the question you’re probably most curious about: How much can you deduct?
That depends on two things: first, the amount of net business income you have; and second, the amount you pay for health insurance. As we mentioned earlier, the deduction is limited by the amount of your net business income, so that’s the most you would be able to deduct. Let’s walk through two examples.
- If you have net business income of $60,000 and spend $8,000 on health insurance, you can deduct the full $8,000.
- But if you have net business income of $5,000 and spend the same $8,000 on health insurance, you can only deduct $5,000 of your health insurance expenses.
Next, let’s go over the logistics of how to claim the self-employed health insurance deduction when the time comes.
How to claim the self-employed health insurance deduction
Required tax forms
The IRS introduced Form 7206 for the 2023 tax year, so it’s relatively new, and this is where you’ll calculate your allowed deduction. The form walks you through the key points, including your net business income and qualified health insurance expenses. The end result is your total deduction, which you’ll have once you complete Line 14.
The next step is straightforward: once you have that number, it goes directly onto Schedule 1, Part II (on Line 17 for 2025’s version of Form 1040). This schedule is where adjustments to income, also known as above-the-line deductions, are calculated. It ensures that the self-employed health insurance deduction reduces your adjusted gross income.
Note: We’ve provided these screenshots as a helpful visual guide, but tax forms can easily get complicated. If you aren’t sure how Form 7206 and Schedule 1 interact for your specific business, we highly recommend reaching out to your CPA or bookkeeper for guidance.
Impact on tax liability and QBI
While the reduction in adjusted gross income will, in turn, reduce your overall tax liability, this deduction does not affect your self-employment taxes. Those are assessed on your net business income, and since the self-employed health insurance deduction does not reduce business income, it will not reduce the amount of self-employment taxes you have to pay.
One other thing to be aware of: this deduction reduces your qualified business income (QBI), which in turn reduces the QBI tax deduction you qualify for. While you do lose some tax savings as a result, you’re receiving a greater benefit from the tax deduction allowed for the health insurance deduction than you’ll lose from a slightly smaller QBI deduction.
Recordkeeping best practices
As you’re preparing your tax return, you’ll want to save records so you can document your deduction if the IRS follows up later. Copies of any receipts showing the dates and amounts of health insurance payments will be the best source of information, and they can be stored electronically to help you limit the volume of paper documents you have to file.
Special rules for S Corporation owners
The self-employed health insurance deduction is available to S Corporation shareholder employees, but it’s important to understand the specific rules that apply in this situation:
- The deduction is available to those who are two percent shareholders of the S Corporation, which means they own at least two percent of the company’s shares.
- Premiums must be paid or reimbursed by the S Corporation as the employer.
- The amount paid or reimbursed for premiums must be included on the employee’s Form W-2 Box 1 wages to ensure they are deductible as a business expense for the S Corp.
If this is handled correctly, the employee can then claim the self-employed health insurance deduction when they file their individual tax returns. It’s crucial for the S Corporation and the shareholder employee to understand the rules, and for the S Corp in particular to have processes in place to ensure compliance so the business can claim the deductible business expense and the employee can claim the deduction on their own tax returns.
Use due diligence with the self-employed health insurance deduction
The self-employed health insurance deduction can be a great way for small business owners to save money on their taxes while paying for the coverage they need. It’s important to understand the rules about who qualifies for the deduction and how to claim it, so you know how to receive the tax benefit that’s allowed when you’re paying out of your own pocket for health insurance.
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Peggy James is a certified public accountant (CPA) currently based in Durham, NC. Peggy loves numbers and has her own firm providing accounting and tax services to small businesses and individuals. She contributes to publications including RetireGuide, Investopedia, and The Balance.