Health Insurance Deduction When You Work for Yourself
Who qualifies, the earned-income cap, the month-by-month employer-plan test, and the extra step S corporation owners must take.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The self-employed health insurance deduction lets sole proprietors, partners, and S corporation owners with more than 2 percent ownership deduct medical, dental, and qualifying long-term care premiums for themselves, a spouse, and dependents. It reduces adjusted gross income without itemizing, but it is capped at business earnings and lost for any month you could join a subsidized employer plan.
On this page
Who qualifies?
- Sole proprietors and single-member LLC owners reporting a net profit on Schedule C or Schedule F
- Partners and LLC members with net earnings from self-employment, if the partnership pays or reimburses the premiums and reports them as guaranteed payments
- Shareholders owning more than 2 percent of an S corporation, if the premiums are handled correctly through the corporation (below)
The policy can be in your name or the business's name — though partners and S corporation owners need the business to pay or reimburse the premiums — and it can cover your children who are under age 27 at year end, even if they are not your dependents.
What premiums count?
| Coverage | Deductible? |
|---|---|
| Medical, dental, and vision insurance for you, spouse, dependents | Yes |
| Qualified long-term care insurance | Yes, up to age-based annual limits |
| Medicare Parts B and D premiums, and Medicare Advantage | Yes |
| Marketplace premiums | Only the net amount you paid after the premium tax credit, figured under Pub. 974 |
| Premiums paid with pre-tax money elsewhere | No |
What limits apply?
Earnings cap. The deduction cannot exceed net earnings from the business under which the plan is established, after subtracting the deductible half of self-employment tax and retirement plan contributions for that business. For an S corporation owner, the cap is the wages received from that corporation. A business with a loss produces no deduction for that year.
Month-by-month employer-plan test. For any month you — or your spouse, a dependent, or a child under age 27 — were eligible to participate in a subsidized health plan through an employer, you cannot deduct premiums for that month. Eligibility is what counts, not whether you enrolled, and the test is applied separately to long-term care coverage and other health coverage.
How do S corporation owners claim it?
The corporation must either pay the premiums or reimburse you for them. It then includes the premiums in your wages in box 1 of Form W-2 — but not in boxes 3 and 5, so no Social Security or Medicare tax applies. You then deduct the same amount on your personal return. If you pay premiums personally and the corporation never reimburses or reports them, the deduction is generally lost. A more-than-2-percent shareholder is anyone who owns — directly or through family attribution — more than 2 percent of the stock or voting power on any day of the year, so a shareholder's spouse or child on the payroll is treated the same way.
Where is it claimed?
On Schedule 1 of Form 1040. Many filers can use the worksheet in the Form 1040 instructions, but Form 7206 is required if you had more than one source of self-employment income, file Form 2555, or include long-term care premiums. If the coverage came through the Marketplace with a premium tax credit, the deduction and credit are figured together using Pub. 974.
Frequently asked questions
Can I deduct premiums for a month when my spouse's employer offered coverage I declined?
No. Eligibility for a subsidized employer plan through either spouse disqualifies that month, even if you declined the coverage.
What if the remaining premiums do not fit under the cap?
Premiums you cannot deduct this way can be included with other medical expenses if you itemize, subject to the floor based on adjusted gross income.
Does the deduction reduce self-employment tax?
No. It reduces income tax only. Self-employment tax is calculated before this deduction.
Can a health savings account be combined with this?
Yes. If you have a high-deductible plan, the premiums can still be deducted here and separate contributions can be made to a health savings account.
Official sources
The IRS explains: “Use this form and its instructions to determine any amount of the self-employed health insurance deduction you may be able to claim and report on Schedule 1 (Form 1040), line 17.” — Internal Revenue Service, About Form 7206, Self-Employed Health Insurance Deduction, https://www.irs.gov/forms-pubs/about-form-7206
The IRS explains: “Therefore, the additional compensation is included in the shareholder-employee's Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2.” — Internal Revenue Service, S corporation compensation and medical insurance issues, https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk runs S corporation owner premiums through payroll so the deduction is not lost. See pricing or book a free fit call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
Book a free fit call