Health insurance is one of the biggest costs of leaving a W-2 job. Without an employer subsidizing premiums, freelancers often pay for the whole plan themselves.
The self-employed health insurance deduction softens that hit. It lets many self-employed people deduct premiums for themselves and their family directly from income, without needing to itemize.
What you can deduct
Eligible premiums generally include medical, dental, and vision insurance for you, your spouse, your dependents, and children under 27. Certain qualified long-term care premiums can count too, up to age-based limits. Marketplace plans qualify, but only the amount you actually paid after any premium tax credit counts.
It is an above-the-line deduction
The deduction is taken as an adjustment to income, not as an itemized deduction. That means you can claim it and still take the standard deduction. It also lowers your adjusted gross income, which can help with other income-based thresholds and credits.
The rules that disqualify people
Two limits catch people most often:
- You cannot take the deduction for any month you were eligible to join a subsidized health plan through an employer, including your spouse's employer, even if you chose not to enroll
- The deduction cannot exceed the net profit of the business under which the plan is established, so it does not help in a year your business ran at a loss
What it does not reduce
The deduction lowers your income tax, but it does not reduce self-employment tax. Your Social Security and Medicare tax is still calculated on your full net business profit. Keep that in mind when estimating your total bill, because the savings are smaller than the premiums multiplied by your marginal rate plus 15.3%.
Special rules for S-corp owners
If you own more than 2% of an S-corp, the premiums usually need to be paid or reimbursed by the S-corp and included in your W-2 wages before you can claim the deduction on your personal return. Setting this up incorrectly is a common mistake, so check with your payroll provider or accountant if you have made the election.
This article is for general education only and is not tax or legal advice. Tax rules vary by jurisdiction, change over time, and depend on your specific situation. Talk to a qualified tax professional before making filing or payment decisions.