How the self-employed health insurance deduction works

This article was fact-checked by our editors and a member of the Credit Karma product specialist team, led by Senior Manager of Operations Christina Taylor.

No matter how you buy it, health insurance isn’t cheap.

Generally, workers on employer-sponsored plans share health insurance premium costs with their employers. But if you’re self-employed and not eligible to get insurance through a spouse’s employer, you’ll typically be responsible for covering the entire cost of health insurance.

Still, there’s some good news. Employees generally can’t deduct their share of monthly premiums from employer-sponsored plans if they pay their share with pre-tax dollars (and most do). But if you work for yourself — as a freelancer or independent contractor, for example — you may be able to take the self-employed health insurance deduction.

If you meet the criteria for taking it, the deduction could allow you to trim 100% of your health insurance premiums off your federally taxable income. And reducing your taxable income can ultimately help lower your tax obligation.

Let’s look at the self-employed health insurance deduction and how it works.

• What is the self-employed health insurance deduction?
• How much is the self-employed health insurance deduction worth?
• Who can take the self-employed health insurance deduction?
• How do I claim the self-employed health insurance deduction?

What is the self-employed health insurance deduction?

The self-employed health insurance deduction is an adjustment to income, also known as an “above the line” deduction, because you don’t need to itemize to benefit from it. If you qualify for the deduction, claiming it will reduce your adjusted gross income, or AGI.

The deduction allows self-employed taxpayers to deduct the amounts paid for …

• Medical insurance
• Dental insurance
• Qualified long-term care insurance

The deduction isn’t limited to the business owner’s health insurance costs. You can also deduct the premiums paid for your spouse, dependents and children who are younger than 27 at the end of the tax year, even if the children aren’t your dependents.

How much is the self-employed health insurance deduction worth?

There is no dollar limit for the self-employed health insurance deduction, but it is limited to your net profit from self-employment. In other words, if your business earns no money, you can’t take the deduction, and the deduction can’t create a net loss for the year.

Here are some scenarios to illustrate how the deduction can and can’t work.

Any paid premiums that you don’t deduct as self-employed health insurance can be claimed as an itemized deduction on Schedule A.

Also, while you can deduct 100% of health and dental insurance premiums, the amount of long-term care insurance premiums you can deduct varies based on certain criteria. Generally, for each person covered, you can deduct the smaller of …

1. The actual premiums paid for that person, or
2. $420 for covered individuals 40 or younger, $780 for those 41–50, $1,560 for people 51–60, $4,160 for those 61–70, and $5,200 for those 71 or older

And for long-term care premiums to be deductible, the policy also must meet certain criteria.

Who can take the self-employed health insurance deduction?

Generally, in addition to the requirement that your business have a net profit, two other basic requirements apply if you think you want to take the self-employed health insurance deduction.

You must be self-employed

The IRS generally considers you self-employed if you work as a sole proprietor or independent contractor, you’re a partner in a business or you work for yourself in any other way, including part time.

The self-employed health insurance deduction isn’t just for sole proprietors or self-employed taxpayers who file Schedule C (where you report profit or loss from your business). It can also be claimed by …

• Partners of a partnership or members of an LLC that file Form 1065
• More than 2% owners of an S corporation who received wages from the corporation

You can’t be eligible for an employer-sponsored plan

The second requirement is that you can’t be eligible to participate in an employer-sponsored health insurance plan. If you’re eligible to participate in a program sponsored by your spouse’s employer — even if you choose not to participate in that plan — you can’t claim the self-employed health insurance deduction.

That requirement is determined on a month-by-month basis, so if you were eligible to participate in an employer-sponsored plan for five months out of the year and not eligible for the remaining seven months, you could deduct seven months of premiums.

How do I claim the self-employed health insurance deduction?

Unlike other tax deductions for self-employed people, the self-employed health insurance deduction isn’t taken on Schedule C or on a business return. Because it’s an adjustment to income, you claim it on Schedule 1 attached to your Form 1040 federal income tax return.

The Instructions for Form 1040 include a worksheet to help you calculate your deduction.

Bottom line

If you’re self-employed as a freelancer, independent contractor or small-business owner, the self-employed health insurance deduction could help offset the costs of buying health insurance. But you’ll need to meet the criteria for claiming the tax break — and you’ll have to complete and file all of the required forms — to take advantage of the deduction.

Relevant sources: IRS Publication 535, Business Expenses (2019) | IRS 1040 and 1040-SR Instructions (2019) | Kaiser Family Foundation: Average Annual Family Premium per Enrolled Employee for Employer-Based Health Insurance | HealthCare.gov: Health coverage for self-employed | IRS Topic No. 502: Medical and Dental Expenses | Congressional Research Office: Tax Deductions for Individuals, A Summary | IRS: Self-Employed Individuals Tax Center | IRS Schedule 1

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.