06/23/2025
If you're a small business owner or self-employed, you already wear many hats—from CEO to marketing manager to payroll processor. But when tax season rolls around, many entrepreneurs miss out on valuable deductions simply because they’re not aware they exist. One of the most impactful—and underutilized—of these is the Self-Employed Health Insurance Deduction.
This deduction can help offset one of your biggest monthly expenses: health insurance premiums. And while it’s not a business expense per se, it still lowers your adjusted gross income (AGI), providing real tax savings.
In this post, we’ll break down:
What the self-employed health insurance deduction is
Who qualifies
How it’s calculated
Common pitfalls to avoid
Smart strategies to make the most of this deduction
What Is the Self-Employed Health Insurance Deduction?
Self-employed individuals can deduct 100% of health insurance premiums they pay for themselves, their spouses, dependents, and children under age 27—even if those children are not dependents on their tax return.
This deduction applies to premiums paid for:
Medical insurance
Dental insurance
Long-term care insurance (subject to age-based limits)
And here’s the best part: you don’t have to itemize to claim it. It’s an “above-the-line” deduction—which means it reduces your AGI directly.
Who Qualifies?
To qualify, you must meet two key criteria:
You must have net profit from self-employment.
This includes sole proprietors (Schedule C), partners (Schedule K-1), and S corporation shareholders owning more than 2%.
You cannot be eligible for any other subsidized health insurance plan.
That means neither you nor your spouse can have access to an employer-sponsored plan—even if you choose not to participate in it.
How to Calculate the Deduction
Start with the total premiums paid during the tax year. Then:
Subtract any premium tax credits received through a Health Insurance Marketplace.
Deduct only up to the net profit from your business. If you have a loss, you can’t take the deduction.
For S Corporation owners, there's a unique advantage: when the corporation pays for or reimburses your health insurance premiums, that amount is added to your W-2 as wages, but not subject to FICA taxes (Social Security and Medicare).
This provides a dual benefit:
You still get to deduct the premiums on your personal return (above-the-line deduction).
You and your S Corp save on payroll taxes—no Social Security or Medicare withholding is required on that portion of income.
💡 Important: This only applies if the health insurance is properly structured and paid or reimbursed by the S corporation and included as wages on the W-2.
Common Mistakes to Avoid
Deducting when you or your spouse are eligible for employer insurance. If you have any access to employer coverage, you’re disqualified—even if it’s more expensive.
Not adjusting for Marketplace subsidies. The IRS will disallow deductions not properly reduced by subsidies.
Claiming the same expenses twice. If you take this above-the-line deduction, you cannot also deduct it as a Schedule C expense or as an itemized medical deduction.
Strategies to Maximize the Deduction
1. Coordinate with Other Deductions
Lowering your AGI can help you qualify for other tax breaks—like the child tax credit or retirement contribution deductions. Use this strategically!
2. Set Up Health Reimbursement Arrangements (HRAs)
If you have employees, look into Qualified Small Employer HRAs (QSEHRAs) to offer tax-free reimbursement for premiums while keeping compliance in check.
3. S Corporations: Get Your W-2 Right
Make sure your S Corp is either paying for the insurance directly or reimbursing you and including the amount as wages. If this isn’t done properly, the deduction can be lost entirely.
We can help you get the full benefit and save money
Health insurance is expensive, but the IRS gives self-employed taxpayers a break—if they know to take it. Don’t leave money on the table. This deduction is real, impactful, and completely legal.
If you're not sure if you qualify or how to document your deduction, reach out. As enrolled agents and tax pros, we specialize in helping small business owners like you reduce your tax burden and stay compliant. Sign up today for a free discovery call.