The landscape · Self employed and owners
The self employed health insurance deduction
A self employed person can deduct health, dental, and long term care premiums for themselves, a spouse, and dependents directly from income, without itemizing.
Who this exists for. This exists for a self employed person, partner, or more than 2 percent S corporation owner who pays for their own health insurance and is not eligible for a plan through a spouse's employer. Ticks that show it: I earn money on my own (freelance, gig, side work); I own a business with revenue; I buy health insurance on the marketplace.
How it works
The premiums are deducted as an adjustment to income on the personal return, which lowers adjusted gross income. The deduction is limited to the net profit of the business, so a business that loses money gets no deduction that year, and it is not allowed for any month the person or spouse was eligible for a subsidized employer plan. Long term care premiums are included up to age based caps the IRS sets each year. Marketplace coverage counts, and when a premium tax credit was received the deduction and the credit are figured together by a method the IRS lays out, since each one changes the other. For an S corporation owner the premiums have to be paid or reimbursed by the corporation and included in W2 wages for the deduction to work.
What it gives
It is taken whether or not the person itemizes, which most self employed people do not.
Premiums for a spouse and dependents count, not only the owner's own.
Lowering adjusted gross income can help with other phase outs on the return.
What it costs, or where the catch is
A loss year or a tiny profit caps or wipes out the deduction.
Any month of eligibility for a spouse's employer plan disqualifies that month, even if the spouse's plan was not taken.
The interplay with the premium tax credit requires a circular calculation that software does not always handle cleanly.
A worked example
Nora is a freelance editor with $70,000 of net profit who pays $620 a month for a marketplace plan for herself and her son, which is $7,440 a year. She receives no premium credit. The full $7,440 comes off her income as an adjustment, and at a 22 percent rate the saving is $7,440 times 0.22, about $1,640. Her self employment tax is unchanged because this deduction does not touch it.
Where it goes wrong
The common miss is an S corporation owner who pays premiums personally without running them through payroll, which loses the deduction entirely.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
IRS: About Form 7206, Self Employed Health Insurance Deduction. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about The self employed health insurance deduction
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- The health savings account
This applies when a person is covered by a qualifying high deductible health plan and has no other disqualifying coverage, which opens the door to a health savings account.
- The traditional IRA and the deduction phase out
This exists for anyone with earned income who opens an IRA on their own, and especially for a worker who also has a plan at work, since that changes whether the contribution is deductible.
- The Roth IRA and its income phase out
This exists for anyone with earned income below the Roth income lines who wants an account where qualified withdrawals come out tax free.
- The backdoor Roth and the pro rata rule
This exists for a person whose income is above the Roth IRA phase out and who has no pretax money in any traditional IRA.
- The spousal IRA
This exists for a married couple filing jointly where one spouse has little or no earned income and the other spouse earns enough to cover both contributions.
- IRA catch up at 50
This applies when a person who contributes to a traditional or Roth IRA turns 50 during the year, which adds a catch up amount to the yearly cap.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.