The Self-Employed Health Insurance Deduction: A Complete Guide

Being self-employed comes with several unique challenges—one of the biggest being paying for your health insurance. Unlike traditional employees who often get health benefits from their employers, you have to cover your own costs. 

The good news? The self-employed health insurance deduction can help reduce the financial burden of paying your health insurance premiums.

Key takeaways:

• The self-employed health insurance deduction lets you deduct 100% of your health insurance and lower your adjusted gross income.
• To qualify, you must be self-employed, have a profitable business, and not have access to employer-sponsored health coverage.
• Premiums you pay for yourself, your spouse, dependents, and children under age 27 qualify for the deduction.

What is the self-employed health deduction?

The self-employed health insurance deduction is a tax benefit that helps people who own a business pay for health insurance. It lets you deduct the cost of medical, dental, and vision insurance, qualifying long-term care coverage, and Medicare premiums for you, your spouse, dependents, and any non-dependent children under age 27 at the end of the tax year.

This deduction is particularly beneficial because it's an "above-the-line" deduction. This means you don’t have to itemize deductions to claim it. It reduces your adjusted gross income (AGI), which can help you qualify for other tax breaks.

Next, we’ll cover who can claim this potentially valuable tax benefit.

What qualifies for the self-employed health deduction?

Not everyone who is self-employed automatically qualifies for this deduction. To be eligible, you must meet specific criteria:

Self-employment status

You must be either:

• a sole proprietor,
• a partner in a partnership,
• a member of a limited liability company (LLC),
• or a shareholder in an S corporation (owning more than 2%).

You can’t claim the deduction if you’re an employee rather than a business owner, even if you pay out-of-pocket for health insurance. C corporation shareholders and less than 2% owners of S corporations don’t qualify, as they’re technically employees of the corporation.

Income requirement

You must have profit from your business to claim the self-employed health deduction, because the amount you deduct can’t exceed your net profit.

This means if your business operates at a loss, you can’t claim the deduction that year.

No access to employer-provided coverage

If you or your spouse have access to an employer-subsidized health insurance plan through a job—even if you choose not to enroll—you're not eligible for this deduction. This rule applies even if the coverage offered by the employer is expensive or doesn't meet your needs.

For example, say you’re self-employed, but your spouse has a full-time job and could add you to their employer-sponsored health insurance. If you opt to buy your own coverage because it’s less expensive than getting coverage through your spouse’s employer, you can’t deduct the premiums.

The silver lining to this limitation is the IRS applies it on a month-to-month basis. So if you spent half the year covered by a former employer’s group plan before quitting to pursue your business full-time, you’re only prevented from claiming the deduction for part of the year.

Now that you’ve determined you’re eligible, let’s cover how to claim the deduction.

How to calculate the self-employed health deduction

Claiming the self-employed health insurance deduction involves several steps, but it's pretty straightforward once you understand the process.

Step 1: Determine your total premiums paid

First, add up the total premiums you paid for health insurance for yourself and your family during the tax year. This includes any payments made for medical, dental, and vision coverage.

But there’s a limit on what you can deduct for long-term care insurance, and it depends on your age. Here are those limits for the 2024 tax year:

The IRS adjusts those limits annually for inflation. You can find each year’s cap in IRS Publication 502.

Step 2: Calculate your deduction limit

If your net income from self-employment is less than the total premiums you paid, you can only deduct up to your business income. 

For example, if you paid $10,000 in premiums but your net income from self-employment was $8,000, the IRS caps your deduction at $8,000.

Step 3: Fill out your tax forms

Use Form 7206 to calculate your deduction. It’s a relatively simple form, as far as tax forms go. You just have to enter your total premiums and net profit from the business. Then follow the instructions to calculate your deduction. Finally, you enter the result on Schedule 1 and file it with your individual income tax return, Form 1040. 

Step 4: Coordinate with other deductions

You can't double dip if you qualify for other health-care-related tax benefits.

For example, suppose you’re eligible for a premium tax credit under the Affordable Care Act (ACA). In that case, you can't claim the full health insurance deduction and the tax credit on the same premiums. You can’t claim the same health insurance premiums on Schedule A as an itemized deduction, either. 

You need to reduce your deduction amount by the amount you claim as a credit or deduction elsewhere.

You can’t claim your own health insurance premiums on Schedule C as a business expense, but you can deduct any health insurance premiums paid on behalf of employees. You should deduct these on the line for employee benefit programs.

Next, we’ll cover a few practical tips for claiming this potentially valuable tax break.

Tips for business owners to write off medical insurance premiums

Here are a few tips for leveraging the self-employed health insurance deduction:

1. Keep detailed records. Make sure you have accurate records of your health insurance payments. Save copies of invoices and proof of payment. Detailed records make it easier to calculate the deduction and provide documentation if the IRS ever audits your tax return.
2. Optimize your business structure. If you have an S corporation, your health insurance premiums must be reported as wages on your W-2 to claim the deduction. Work with a tax professional to structure your business in the most tax-efficient way possible.
3. Review your health insurance options annually. Health insurance premiums tend to fluctuate each year, and new options may become available. Review your plan annually to ensure you're getting the best coverage for your money.
4. Take advantage of other health-related deductions. If you have a high-deductible health plan (HDHP), you may be eligible to contribute to a Health Savings Account (HSA). Contributions to an HSA are tax-deductible, so they further reduce your tax burden.

How Bench can help you navigate self-employed health insurance deductions

One of the biggest concerns for many small business owners is overlooking tax deductions that could lower their tax bill. With Bench, you can rest easy knowing your financial records are in expert hands.

Our dedicated team of bookkeepers helps you track every expense and categorize it correctly. This makes it easy to see exactly where your money is going and what you can deduct at tax time.

We can take the headache out of tax season by offering unlimited tax consultations year round, and filing your tax returns from start to finish.

Want to learn more about how Bench can get you organized and filed on time? Get started or book a demo today.