Can You Write Off Health Insurance as a Business Expense?

You can write off health insurance as a business expense, but how you do it depends entirely on how your business is set up. A sole proprietor takes an above-the-line deduction on the personal return, limited to business net profit. A C corporation deducts employee premiums as an ordinary business expense on Form 1120. An S corporation shareholder who owns more than two percent sits in the middle: the corporation pays the premium, reports it as wages on the shareholder’s W-2, and the shareholder then deducts it on the personal return. Get the mechanics right and the deduction is generous; get them wrong and you either overpay or invite an audit.

If You’re Self-Employed

Sole proprietors, partners, and single-member LLC owners can deduct premiums paid for medical, dental, vision, and qualified long-term care insurance covering themselves, a spouse, dependents, and any children under age 27, whether or not the children are claimed as dependents.1Internal Revenue Service. Instructions for Form 7206 (2025) It’s an above-the-line deduction, so it reduces adjusted gross income whether you itemize or take the standard deduction. You calculate it on Form 7206 and carry it to Schedule 1 (Form 1040), line 17.2Internal Revenue Service. 2025 Schedule 1 (Form 1040)

The deduction can’t exceed the net profit of the business that established the plan. A Schedule C showing $30,000 of profit and $18,000 of premiums yields an $18,000 deduction. Break even or post a loss and the deduction drops to zero for the year.3Internal Revenue Service. Form 7206 Self-Employed Health Insurance Deduction One quirk catches people out: the deduction lowers income tax but not self-employment tax. The statute specifically excludes it from the net earnings figure used for Social Security and Medicare.4Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses

The Subsidized-Plan Trap

You lose the deduction for any month you were eligible to participate in a subsidized health plan through any employer, including a spouse’s employer or an employer of a dependent.3Internal Revenue Service. Form 7206 Self-Employed Health Insurance Deduction “Eligible” is the operative word. Whether you actually enrolled in the spouse’s plan is beside the point. If it was available, you’re disqualified for those months. The test runs month by month, so you might qualify January through June and lose the deduction from July when a spouse starts a job that offers family coverage.

When Premiums Exceed Profit

If profit is too low to absorb the full premium, the leftover isn’t gone. The excess can be claimed as an itemized medical expense on Schedule A, subject to the 7.5 percent of AGI floor. You can’t claim the same dollars in both places.4Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses

If You Own More Than 2% of an S Corporation

Shareholders who own more than two percent of an S corporation follow a specific routing. The policy has to be established in the corporation’s name, and the corporation must either pay the premiums directly or reimburse the shareholder within the same tax year. The corporation then adds the premium amount to the shareholder’s W-2, Box 1.5Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues

Those wages are subject to federal income tax withholding but generally exempt from Social Security, Medicare, and federal unemployment tax, provided the plan covers all employees or a class of employees. On the W-2, the premiums appear in Box 1 but not in Boxes 3 or 5.5Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues The shareholder then takes the self-employed health insurance deduction on the personal return, with W-2 wages from the S corporation serving as the earned-income cap.

This is where most errors happen. If the S corporation pays the premiums but never adds them to the W-2, the shareholder can’t claim the above-the-line deduction at all. The IRS treats the W-2 reporting as a prerequisite, not a formality. Medicare Part B and Part D premiums also qualify if the S corporation pays or reimburses them and reports the amounts as compensation.5Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues The subsidized-plan rule applies here too: access to an employer plan through the shareholder or a spouse shuts off the deduction for those months.

If You Run a C Corporation

For C corporations, the treatment is clean. Health insurance premiums paid for employees are a deductible business expense, reported on line 24 of Form 1120 as part of employee benefit programs.6Internal Revenue Service. Instructions for Form 1120 (2025) – Deductions The premiums are also excluded from employees’ gross income, so employees owe no tax on the coverage.7Office of the Law Revision Counsel. 26 U.S. Code 106 – Contributions by Employer to Accident and Health Plans

Only the employer’s share is deductible. Employee contributions made through payroll don’t count as a business deduction. The company needs a written plan document, and the plan has to meet nondiscrimination requirements: a fully insured group health plan can’t give richer benefits or lower costs to highly paid executives alone.8Internal Revenue Service. Notice 2011-1 Affordable Care Act Nondiscrimination Provisions Applicable to Insured Group Health Plans The IRS has not issued final enforcement regulations for insured plans, but the statutory rule stands and compliance is the safer route.

If You Cover Employees

Deducting premiums is only part of the picture once you have staff. Two other rules affect the total tax outcome.

Small Business Health Care Tax Credit

Smaller employers can claim a credit worth up to 50 percent of premiums paid for employees, or 35 percent for tax-exempt employers. To qualify, all of the following must be true:

  • Fewer than 25 full-time equivalent employees, with the largest credit reserved for businesses with fewer than 10.
  • Average annual wages below roughly $65,000 (inflation-adjusted), with the biggest credit at $27,000 or less.
  • The employer pays at least 50 percent of employee-only premium costs.
  • Coverage is offered through the SHOP Marketplace.

The credit phases out as the workforce grows or average wages rise.9Internal Revenue Service. Small Business Health Care Tax Credit and the SHOP Marketplace You claim it by filing Form 8941, which then flows into Form 3800 (General Business Credit) for most employers. Tax-exempt organizations claim it on Form 990-T as a refundable credit.10Internal Revenue Service. 2025 Instructions for Form 8941 – Credit for Small Employer Health Insurance Premiums

ACA Employer Mandate

Businesses with 50 or more full-time equivalent employees are Applicable Large Employers and face penalties for failing to offer affordable coverage.11Internal Revenue Service. Determining if an Employer is an Applicable Large Employer For 2026, coverage is treated as affordable if the employee’s required contribution for self-only coverage doesn’t exceed 9.96 percent of household income.12Internal Revenue Service. Rev. Proc. 2025-25 Because employers don’t usually know household income, the IRS offers safe harbors based on W-2 wages, the federal poverty line, or rate of pay.13Internal Revenue Service. Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act Employers under 50 FTEs have no mandate to offer coverage at all.

Reimbursing Instead of Buying a Group Plan

If you’d rather not run a traditional group health plan, an HRA lets you reimburse employees for their own coverage and still generate a deductible business expense.

A Qualified Small Employer HRA (QSEHRA) is available to employers with fewer than 50 full-time employees that don’t offer a group plan. The business reimburses employees for individual insurance premiums and qualified medical expenses up to annual caps: for 2026, $6,450 for self-only coverage and $13,100 for family coverage. Reimbursements are deductible by the employer and tax-free to employees who maintain minimum essential coverage. Greater-than-two-percent S corporation shareholders can’t participate.5Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues

An Individual Coverage HRA (ICHRA) has no employer size limit. It reimburses employees for individual health insurance premiums and can satisfy the ACA employer mandate if affordability is met, measured against the lowest-cost silver plan in the employee’s area minus the employer’s contribution.14Internal Revenue Service. Health Reimbursement Arrangements (HRAs) There’s no dollar cap on employer contributions, and an ICHRA can integrate with Medicare.

Where the Deduction Goes on Your Return

Reporting depends on entity type:

Mismatches between forms are the fastest way to draw scrutiny. An S corporation shareholder’s premium amount on the W-2 needs to match the Form 7206 figure. Premiums the entity deducts on its own return shouldn’t reappear as a personal above-the-line deduction.

What to Keep on File

For the self-employed deduction, keep proof that the plan was established under the business: the policy application, premium invoices addressed to the business, and payment records such as bank statements or canceled checks. A year-end profit and loss statement establishes the earned-income cap. Insurers usually issue an annual premium summary that works as a single-document backup.

S corporation shareholders should keep the W-2 and confirm it matches the premiums the corporation paid. Any gap between insurer billing, S corporation payment, and W-2 reporting causes problems during examination. Employers deducting premiums for staff should keep the written plan document, enrollment records, and evidence of nondiscrimination compliance. The IRS generally has three years from the filing date to audit, extending to six if income is substantially understated, so holding records for at least six years is reasonable practice.