What Is the Self-Employed Health Insurance Deduction?

As a self-employed person, you work for yourself. There’s no employer to cover the cost of your health coverage—which means that you’re on the hook for paying for your own health insurance out of pocket. 

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And while the Affordable Care Act (ACA) certainly aimed to lower the cost of health insurance for buyers shopping for a health insurance plan on the individual market, there’s no denying that health insurance coverage for many self-employed individuals is prohibitively expensive—and covering the cost of monthly health care insurance premiums can still put a major financial strain on many independently employed people.

Luckily, there are ways to mitigate those costs—including the self-employed health insurance deduction. 

What is the self-employed health insurance deduction?

First things first. What, exactly, is this health insurance deduction for the self-employed—and what does the deduction cover?

The self-employed health insurance deduction allows self-employed people (including, for example, small business owners, freelancers, or independent contractors) to deduct 100 percent of their health care insurance premiums. If you’re able to claim the health insurance deduction for the self-employed, you can lower your Adjusted Gross Income (AGI). And the lower your taxable income, the less you’ll owe on taxes in any given tax year.

There are a few different types of health insurance plans that qualify for the tax deduction, including:

• Medical insurance (including Medicare)
• Dental insurance

Certain qualified long-term care insurance plans are also eligible for the deduction—but unlike medical and dental insurance premiums, which are 100 percent deductible, there are caps on the amount you can deduct for long-term care based on age. The limits for 2021 are as follows:

• Age 40 or less, $450 maximum deduction (up from $430 in 2020)
• Ages 41 to 50, $850 maximum deduction (up from $810 in 2020)
• Ages 51 to 60, $1690 maximum deduction (up from $1630 in 2020)
• Ages 61 to 70, $4520 maximum deduction (up from $4350 in 2020)
• Age 70 or above, $5640 maximum deduction (up from $5430 in 2020)

If you qualify, you can claim the health insurance premium deduction on the Schedule 1 tax form, Line 16.

Who qualifies for the self-employed health insurance deduction?

Now that you know what this health insurance deduction for the self-employed actually is, let’s talk about who qualifies for the deduction.

As the name implies, the self-employed health insurance deduction is a deduction for self-employed people. This includes:

• Small business owners
• Freelancers
• Independent contractors
• Sole proprietors
• Members of a partnership
• Members of a multi-member LLC taxed as a partnership
• S Corporation owners that own more than 2 percent of the company and receive wages from the corporation

Taxpayers that qualify for the deduction may deduct the cost of their own premiums—as well as the premiums for their spouse, dependents, and children (under the age of 27).

While most self-employed people qualify for the deduction, not all do. If you’re eligible for a group health plan (for example, through your spouse’s employer or a former employer) and opt out of the coverage, then you’re not eligible to claim the self-employment health insurance deduction on your taxes. Basically, the self-employment health insurance deduction is only available for self-employed individuals whose only option is to purchase a health care policy on their own—so if you have the option to get coverage through a group plan, you won’t qualify for the deduction.

How does the self-employed health insurance deduction impact my taxes?

The biggest question most people have about the self-employed health insurance deduction is how it’s going to impact their taxes—and how much the deduction can reduce their tax liability.

Let’s take a look at a few important tax implications to consider when claiming the health insurance deduction for independent contractors, sole proprietors, and other self-employed people:

Self-Employment Tax

If your business structure requires you to pay self-employment tax, that tax is based on your business income, minus eligible business expenses, reported on Schedule C, Profit or Loss From Business—but those expenses do not include health insurance premiums. So, when you’re prepping your taxes, you’ll use your Schedule C to determine your business income that’s subject to self-employment tax—and then will claim your self-employed health insurance deduction separately, on your Schedule 1.

Itemized Deductions

Insurance premiums only cover a portion of total health care costs for any given year—and for some self-employed people (for example, people who have a catastrophic accident or who struggle with a chronic illness), medical costs throughout the year can eat up a significant portion of their income.

If you have significant health care costs through the year, one of the tax benefits that can help you lower your tax burden is itemizing your deductions. Under current tax laws, you can deduct any eligible medical and dental expenses that exceed 7.5 percent of your adjusted gross income on form Schedule A. But it’s important to note that you can’t claim the health insurance deduction for the self-employed on your Schedule 1 and include your premium costs on your itemized deductions on your Schedule A; you can only claim the deduction once. 

Income Limits

There is no dollar cap on how much of your health insurance premiums you can claim as a deduction. There are, however, limits based on your business income.

In order for 100 percent of your qualifying health care premiums to be considered tax-deductible, the total cost cannot exceed your net profit. So, if your self-employment income was zero last year, you wouldn’t be able to claim the self-employment health insurance deduction. If your business’ net profit was $1000, you would only be able to claim a $1000 deduction—even if your premium costs exceeded $1000 for the year.

Other things to keep in mind when determining whether you’re eligible for the health insurance deduction for the self-employed...

There are a few additional things you’ll want to keep in mind when determining eligibility for the insurance deduction for the self-employed, including:

• Tax credits. Under the ACA, households below a certain income threshold may qualify for the Premium Tax Credit, which can make health insurance more affordable—including for self-employed people. But keep in mind that if you use the tax credit to subsidize a portion of your premium costs, you’ll only be able to claim your out-of-pocket costs on your tax return—not the portion of your premium costs that were covered by the tax credit.
• Policyholder requirements. In order to qualify for the tax deduction, the insurance policy must be under either the self-employed taxpayer’s name or the business’ name; if it’s under someone else’s name (for example, a spouse), the premiums won’t qualify for the deduction.
• 2 percent shareholder requirements. If you’re a 2 percent shareholder in an S corp, in order to qualify for the self-employed health insurance deduction, you’ll need to either pay your premiums through your business or have your business reimburse you for the premium costs; if you just pay for your policy out of your personal account, it won’t be eligible for the deduction. You’ll also need to include your premium costs as shareholder wages on your W2.
  

Use The Self-Employed Health Insurance Deduction To Lower Your Tax Burden

If you qualify, the self-employed health insurance deduction can lower your tax liability—sometimes significantly. But as you can see, there are a lot of nuances to this deduction, so before you file your taxes, it’s important to speak to a tax professional to determine how much of your health insurance premiums are deductible—and how you need to calculate and report those premiums in order to effectively claim the deduction.