What is tax deduction for self-employed health insurance?
Self-employed individuals can deduct the cost of their health insurance premiums for themselves, their spouses, and dependents. This deduction reduces adjusted gross income (AGI) rather than being treated as a standard itemized deduction, making it a valuable way to lower overall taxable income.
What is the self-employed health insurance deduction?
The self-employed health insurance deduction allows qualifying business owners to write off health, dental, and long-term care insurance premiums paid out of pocket. It applies to sole proprietors, partners, and S-corporation shareholders who own more than 2% of the company and are not eligible for coverage under another employer plan.
How to qualify and categorize the deduction
- You must have net business income from self-employment for the year (the deduction cannot exceed this amount.)
- You or your spouse cannot be eligible for a subsidized employer health plan.
- Deduct premiums for yourself, your spouse, dependents, and children under age 27 (even if they’re not your tax dependents).
- Record health insurance premiums as an adjustment to income on Schedule 1 (Form 1040), not as a business expense on Schedule C.
- For accounting purposes, track these premiums in a “Health Insurance Premiums” or “Owner Benefits” account separate from general operating expenses.
Examples of eligible health insurance premiums
- Medical insurance for the self-employed individual and family.
- Dental insurance premiums.
- Vision insurance premiums.
- Qualified long-term care insurance (up to annual IRS limits based on age).
- COBRA premiums if paid after leaving a prior employer.
Tax implications for self-employed health insurance
- The deduction is taken “above the line”, reducing AGI and taxable income directly.
- Premiums deducted here cannot also be claimed as itemized medical deductions.
- The deduction is limited to the amount of your self-employment net income; excess premiums can’t create or increase a loss.
- If you have multiple businesses, the deduction can be applied only against the income from the business that provides the coverage.
- Keep copies of all premium invoices, policy documents, and proof of payment for your tax records.
