How to Deduct Health Insurance Premiums if You're Self-Employed

If you run your own business, you already know that health insurance is one of the highest recurring costs you face. Without an employer covering a portion of premiums, self-employed workers often pay the full amount out of pocket. The Internal Revenue Service (IRS) offers a valuable tax break to help: the self-employed health insurance deduction. This deduction can significantly reduce your taxable income, lighten your financial load, and make your annual health coverage more affordable.

This guide walks you through how the deduction works, who qualifies, what premiums are eligible, and how to claim it correctly. Whether you’re a freelancer, independent contractor, sole proprietor, or small business owner, understanding this deduction can make a meaningful difference in your tax planning.

Key Highlights

• Many self-employed individuals can deduct health, dental, vision, Medicare, and long-term care insurance premiums for themselves and their families.

• The deduction is taken “above the line” on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, which lowers your adjusted gross income (AGI).

• You must have a net profit from your business and be ineligible for employer-sponsored coverage to claim the deduction.

• Marketplace (ACA) health insurance can still qualify, even when premium tax credits are involved.

• Good documentation and proper IRS forms are essential, especially for S corporation shareholders.

• Professional guidance can help you maximize the deduction and avoid common mistakes.

Why Health Insurance Deductions Matter for the Self-Employed

Self-employed people often face higher health insurance costs because they lack access to employer-sponsored group plans. Historically, this has contributed to a higher uninsured rate among self-employed workers, with some studies showing that up to one in four previously went without coverage.

The financial impact is real. Premiums for health, dental, and vision insurance can take a sizable portion of monthly revenue, especially during slower business periods. Fortunately, the IRS allows eligible self-employed individuals to deduct these premiums directly from taxable income.

This deduction can help:

• Lower your AGI

• Reduce federal income tax

• Improve monthly cash flow

• Make private health insurance coverage more affordable

• Free up resources to invest back into your business

For entrepreneurs balancing rising healthcare costs with the needs of their business, this deduction acts as a practical financial tool.

What You Can Deduct: Eligibility and What Qualifies

Who qualifies as “self-employed”

You may qualify for the self-employed health insurance deduction if you operate as one of the following:

• A sole proprietor filing Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)

• A single-member LLC taxed as a disregarded entity

• A partner in a partnership

• An S corporation shareholder who owns more than 2% of the business

To qualify for the self-employed healthcare tax break, your business must show net profit for the year. If business expenses exceed revenue and you report a loss, the deduction is generally not allowed.

What kinds of premiums are deductible

The IRS allows 100% of the following premiums to be deductible when paid out of pocket:

• Health insurance premiums

• Dental and vision insurance

• Eligible long-term care insurance within IRS limits

• Medicare Part A, B, C, and D premiums

• Coverage for your spouse, dependents, and children under age 27 at year-end (even if they are not dependents on your tax return)

Where the deduction is claimed – above the line 

This is an above-the-line deduction, meaning you claim it on:

• Schedule 1 Form 1040 self-employed insurance deduction, line 17

You do not need to itemize deductions to claim it. This distinguishes it from other medical expense deductions, which fall under itemized deductions and only apply if expenses exceed a percentage of your AGI.

How to Actually Claim Your Health Insurance Deduction – Step-By-Step Guide

1. Keep good records

Maintaining organized documentation ensures you can substantiate the deduction:

• Monthly premium invoices

• Payment confirmations or bank statements

• Policy information listing who is covered

• Medicare statements, if applicable

Staying organized helps make tax prep easier, especially if you work with an accountant.

2. Fill out needed forms

You will need to:

1. Complete IRS Form 7206, Self-Employed Health Insurance Deduction, which calculates your allowable deduction.

2. Transfer the total to Schedule 1, line 17.

3. Attach Form 7206 to your IRS Form 1040, U.S. Individual Income Tax Return, when you file.

If you prefer expert support navigating the process, 1-800Accountant’s tax filing services for the self-employed can walk you through every step.

3. Watch for limitations or special situations

There are a few significant limitations to consider:

• Business must have net profit: A business loss disqualifies the deduction.

• Employer-coverage eligibility: If you or your spouse were eligible for an employer-sponsored plan at any time during the year, you may not qualify.

• S corp self-employed medical insurance premium deduction rules for >2% shareholders:

  • Premiums must be included as wages on your IRS Form W-2, Wage and Tax Statement.

  • Only after this step may you deduct them.

  • Incorrect handling may cause issues with payroll taxes or deductions.

These special situations are common among small businesses, which is why many entrepreneurs rely on professional support for ongoing compliance.

Common Questions and Mistakes to Avoid

Here are some of the most frequent issues self-employed individuals run into:

• Confusing premium deductions with itemized medical deductions. They fall under entirely different rules.

• Forgetting dental, vision, or long-term care premiums. These are often missed but typically deductible.

• Claiming the deduction when the business had a loss. A net profit is required.

• Not including children under age 27. They qualify even if they are not dependents.

• Misunderstanding S corp requirements. Improper reporting on W-2 forms can cause problems.

Avoiding these mistakes helps ensure you capture every eligible deduction, reducing your tax liability.

What If You Also Claim Other Medical Deductions or Have Marketplace / ACA Coverage?

Marketplace coverage

Marketplace plans remain a common choice for freelancers and small-business owners. In 2022, 3.3 million self-employed people and small business owners used Marketplace coverage, according to Treasury data.

If you purchased Marketplace coverage, your premiums may still be deductible. However, if you received a premium tax credit, the deductible amount may be reduced. You must also reconcile credits on IRS Form 8962, Premium Tax Credit.

Interaction with other medical deductions

Out-of-pocket medical expenses fall under itemized deductions, not the self-employed health insurance deduction, such as:

• prescriptions

• copays

• deductibles

• medical supplies

These two categories are separate and operate under different rules. You can use both if applicable, as long as you understand how each one applies.

Why It Matters for Small Business Owners and Freelancers

The self-employed health insurance deduction does more than save you money at tax time. It also helps with long-term financial strategy.

• Lower AGI opens doors to other tax benefits. A reduced AGI may help you qualify for additional deductions and credits.

• Insurance becomes more affordable. Treating premiums as deductible expenses makes private coverage more manageable.

• Better forecasting and budgeting. Knowing you can deduct premiums helps you estimate quarterly tax payments more accurately.

• Supports stable business growth. When owners stay insured, they protect both their health and their business continuity.

Are You Eligible to Deduct Your Health Insurance Premiums?

Use this list as a quick reference to determine your eligibility:

• You are self-employed with a net profit.

• You paid health, dental, vision, Medicare, or eligible long-term care premiums.

• Coverage applies to you or your family (including children under 27).

• You were not eligible for an employer-sponsored health plan.

• You kept thorough documentation.

• You completed Form 7206 and properly filed Schedule 1 and Form 1040.

• You follow special rules for S corp shareholders, if applicable.

When You Might Want Professional Help (and How 1-800Accountant Can Help) 

Professional help may be worthwhile when:

• You run multiple businesses with varying income and loss patterns.

• You are an S corp owner who needs to ensure payroll and W-2 rules are correct.

• You have Marketplace coverage and need to reconcile premium credits.

• You want to maximize deductions while avoiding errors.

• You prefer a knowledgeable advisor to guide year-round planning.

1-800Accountant, America's leading virtual accounting firm, supports freelancers, solopreneurs, and small business owners with expert tax services, proactive planning, and dedicated accountant support for an affordable, tax-deductible fee. Learn more about how our tax services for small businesses can help you save time and reduce your tax burden by scheduling a free 30-minute consultation.