What Is the Self-Employed Health Insurance Deduction? And Are You Eligible?

Many self-employed people leave valuable tax deductions on the table, because they don’t know how they work. One tax benefit that is often overlooked is the self-employed health insurance deduction. If you qualify, you may be able to deduct up to 100% of your health insurance premiums you paid during the tax year. 

Below, we break down how the self-employed health insurance deduction works and help you determine if you’re eligible to claim it.

How does the self-employed health insurance deduction work? 

Working for yourself gives you access to exclusive tax benefits, such as the self-employed health insurance deduction. This tax break allows qualified individuals to deduct their monthly health insurance premiums, such as for long-term care coverage or Medicare, from their taxable income. Health insurance costs for dependents, spouses, and certain children under the age of 26 are also deductible through this incentive.

You’ll need to meet certain criteria to qualify for the self-employed health insurance deduction. This deduction is different from the medical expense deduction, which can be claimed by anyone who chooses to itemize their deductions on Schedule A. But you can only claim the deductions that exceed 7.5% of adjusted gross income (AGI). 

That’s not the case with the self-employed health insurance deduction. The self-employed health insurance deduction can be claimed even without itemizing deductions for the year. So if you choose the standard deduction, you can still claim the self-employed health insurance deduction and deduct up to 100% of your qualifying premiums.  

Who is eligible for the self-employed health insurance deduction? 

To qualify for the self-employed health insurance deduction, you must meet the IRS’ definition of self-employed. And you must be enrolled in a qualifying insurance plan, such as a plan through the Affordable Care Act (ACA) marketplace.

In general, the criteria for the self-employed health insurance deduction is straightforward. You qualify for this tax deduction if any of the following applies to you:

• You are self-employed (as a freelancer, gig worker, independent contractor, or business owner) and earn a net profit for the year from your business or business partnership.

• You receive wages from an S corporation in which you are a more-than-2% shareholder. And any health insurance premiums paid or reimbursed by the S corporation go on a W-2 as wages.

If you have multiple businesses, you cannot combine the income from all your businesses to determine if you have a net profit for the year. You can only use earnings from one business and that business must be named as the sponsor for your health insurance plan. 

You can also qualify for the self-employed health insurance deduction if you are a sole proprietor and the health insurance is purchased in your name. If you have a business partnership, the insurance can either be in the name of the partnership or your name but certain rules apply depending on how the premiums are paid.  

Who is ineligible for the self-employed health insurance deduction? 

Not every self-employed individual will be able to take this deduction. The following criteria disqualify you from claiming the self-employed health insurance deduction:

• You are eligible for coverage through an employer or your spouse’s employer. 

• You didn’t earn a profit from your business or reported a net loss for the year. 

Essentially, if you are eligible for health insurance coverage elsewhere, you cannot take the deduction. And your business must make a profit for the year. 

So, for example, say you are a self-employed consultant who also works a full-time, W-2 job as a customer service representative. Your W-2 job offers you insurance from January to May. So you can’t deduct any premiums you paid during those months. And if your freelance consulting business takes a loss for the year, you can’t take the deduction at all.

How to calculate your self-employed health insurance deduction

The self-employed health insurance deduction is special, because it is an above-the-line tax deduction. This means you can take advantage of it whether you itemize or not. It also allows you to potentially deduct the full cost of your insurance premiums for health, dental, and qualified long-term care plans. 

So, if you paid $7,800 in health insurance premiums for the year, you may be able to reduce your taxable income by a full $7,800 with this deduction. 

However, if you purchased insurance through the ACA marketplace and received a premium tax credit to help you pay for insurance, you can only deduct the portion of your premiums that you pay for out of pocket. You will receive Form 1095-A from the health insurance marketplace by January 31 to help you sort out the details regarding the monthly premiums you paid and the premium tax credits you received.  

How do you claim the deduction on Schedule 1 of Form 1040? 

Schedule 1 of Form 1040 is for reporting adjustments to income. These adjustments may include Schedule C income or the self-employed health insurance deduction. 

Beginning in tax year 2023, you can use Form 7206 to determine how much of the self-employed health insurance deduction you are eligible to claim. This form has replaced the self-employed health insurance deduction worksheet. You will use this form if: 

• You have more than one source of income subject to self-employment tax. An example would be driving for Uber and also being a pastor. 

• You file Form 2555 to exclude foreign income from your tax return. 

• You use the amounts you paid for qualified long-term care to figure your deduction. 

Use the self-employed health insurance deduction worksheet from Publication 974 if: 

• You established your insurance plan under your business’ name through the health insurance marketplace. 

• You are eligible to claim the premium tax credit for your health coverage purchased through the marketplace.

How does the self-employed health insurance deduction affect your adjusted gross income (AGI)?  

The self-employed health insurance deduction lowers your AGI. Your AGI determines how much of your income the IRS will tax from your Form 1040. So deductions equal tax savings.  

Can you deduct self-employed health insurance on Schedule C? 

Self-employed individuals use Schedule C to report income and expenses. There are different categories of tax deductions on Schedule C, but the self-employed health insurance deduction isn’t one of them. 

Instead, as mentioned, you record the deduction as an adjustment on Schedule 1 of Form 1040.  

What medical expenses are eligible for deduction? 

This deduction is for premiums for qualified health insurance plans. This includes:

• Medical and dental insurance premiums 

• Qualifying long-term care coverage premiums

• Medicare premiums (Parts A, B, C, and D)

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Written by:

Timalyn Bowens, EA

Timalyn S. Bowens, EA, is an IRS-licensed enrolled agent who has been working in the tax industry for 11 years. She started Bowens Tax & Bookkeeping Solutions in 2016, helping small businesses keep their records straight and compliant with the IRS.

Edited by:

Charlene Rhinehart, CPA

Charlene Rhinehart, CPA, is a personal finance editor at GoodRx. She has been a certified public accountant for over a decade.

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