Self-Employed Health Insurance Deduction: How Business Owners Deduct Premiums Above the Line

Self-employed health insurance deduction rules:

1. Who qualifies: Sole proprietors, partners (general and limited), LLC members, and S-Corp shareholders who own more than 2% of the corporation.

2. What is deductible: Health insurance, dental insurance, vision insurance, and long-term care insurance premiums for the taxpayer, spouse, and dependents under age 27 (regardless of whether the child is a tax dependent).

3. The deduction cannot exceed net self-employment income. If the business generates a loss or income below the premium amount, the deduction is limited. The unused portion is not carried forward (but may be deductible as an itemized medical expense on Schedule A, subject to the 7.5% AGI floor).

4. Cannot be claimed if eligible for employer-sponsored coverage. If the business owner (or their spouse) has access to a subsidized employer plan, the self-employed health insurance deduction is not available for the months the employer plan was available (even if not enrolled).

5. S-Corp special rule for >2% shareholders. The S-Corp must pay or reimburse the shareholder’s premium and include it in the shareholder’s W-2 as wages (Box 1 only, not subject to FICA). The shareholder then claims the deduction on their personal 1040. If the premium is not run through the S-Corp payroll, the deduction may be disallowed.

6. Does NOT reduce SE tax. Unlike most business deductions, the self-employed health insurance deduction reduces income tax only. It is not deductible in calculating net SE income for the SE tax computation.