Is Health Insurance Tax Deductible for Small Businesses?

Yes, health insurance is tax deductible for small businesses in most situations, but how you claim it depends on how the business is organized. Sole proprietors, partners, S-corporation shareholders, and C-corporations each take a different route. On top of the deduction, some small employers qualify for a separate tax credit worth up to 50% of what they contribute toward employee premiums.

What You Can Deduct Based on Business Structure

The federal tax code treats premiums differently depending on the entity paying them. Get the structure right and the deduction follows; get it wrong and the write-off can disappear.

Sole Proprietors and Single-Member LLCs

If you file a Schedule C, you can deduct premiums for medical, dental, and long-term care insurance covering yourself, your spouse, your dependents, and your children under age 27. This is the self-employed health insurance deduction under Internal Revenue Code Section 162(l).¹ It comes off as an adjustment to income on Schedule 1 of Form 1040, not as a business expense on Schedule C itself.²

Two things to know. The deduction cannot exceed your net profit from the business. And it reduces income tax only; it does not reduce self-employment tax.²

Premiums you pay for your employees are separate. Those are ordinary business expenses on Schedule C.

Partnerships and Multi-Member LLCs

When a partnership pays premiums for a partner, the payments are treated as guaranteed payments. The partnership deducts them as a business expense, and the partner picks them up as income on Schedule K-1.³ The partner then claims the self-employed health insurance deduction on Schedule 1, which offsets that income.

If a partner pays the premiums personally, the partnership has to reimburse the partner and report that reimbursement as a guaranteed payment on the K-1.² Skip that step and the partner loses the above-the-line deduction. Multi-member LLCs taxed as partnerships follow the same path.

S-Corporations

If you own more than 2% of an S-corporation, premiums the company pays for you must be included as wages in Box 1 of your W-2. They are not subject to Social Security or Medicare tax, so they do not appear in Boxes 3 or 5.⁴ The corporation deducts the premiums, and you claim the self-employed health insurance deduction on your personal return to offset the added wages.

The mechanics matter. The S-corporation must either pay the premiums directly or reimburse you, and the amount must land on your W-2. If it doesn’t, you lose the deduction.⁴

C-Corporations

C-corporations have the cleanest treatment. Premiums paid for employees, owner-employees included, are deductible as ordinary and necessary business expenses under Section 162(a).¹ Owner-employees do not include the premiums in personal income. The corporation deducts on Form 1120, and the coverage is a tax-free fringe benefit.

Rules That Can Reduce or Kill the Deduction

A few conditions apply across every structure other than the C-corp.

The plan has to be established under the business. For sole proprietors and partners, the policy can be in either the business name or the individual’s name.² For S-corporation shareholders, the corporation must pay or reimburse. A policy with no link to the business is a personal expense, not an above-the-line deduction.

You can’t be eligible for subsidized coverage elsewhere. You lose the self-employed health insurance deduction for any month you were eligible to participate in a subsidized plan through your own other employer, your spouse’s employer, or the employer of a dependent or child under age 27.¹ The disqualifier is eligibility, not enrollment. The IRS applies it month by month, so if a spouse’s coverage kicked in mid-year, you only lose the deduction for the months after.²

Your deduction is capped at business income. Self-employed individuals, partners, and S-corporation shareholders cannot deduct more than the net earned income from the business that set up the plan.¹ If the business earned $30,000 and you paid $35,000 in premiums, you deduct $30,000. The extra $5,000 may still show up as an itemized medical expense on Schedule A, but only to the extent your total medical costs top 7.5% of adjusted gross income.

Long-term care premiums are capped by age. Long-term care premiums qualify, but only up to age-based limits. For 2026, those limits run from $500 at age 40 or younger to $6,200 above age 70. Anything paid above the applicable cap can’t be included.

The Small Business Health Care Tax Credit

Section 45R offers a separate credit for certain small employers that help pay for employee coverage. A credit is worth more than a deduction of the same size because it reduces tax dollar-for-dollar.

To qualify, all of the following have to be true:⁵

No more than 25 full-time equivalent employees.
Average annual wages per FTE below roughly $68,200 for the 2026 tax year, with the credit starting to phase out above $34,100.⁶
Employer pays at least 50% of each enrolled employee’s premium.
Coverage bought through the Small Business Health Options Program (SHOP) Marketplace.

The credit is worth up to 50% of premium contributions, or 35% for tax-exempt employers. It also phases out as FTEs exceed 10.⁵ FTE is not a headcount; part-time hours combine into full-time equivalents, so 20 half-time workers count as roughly 10 FTEs.⁷ You claim the credit on Form 8941, attached to your income tax return.⁸

Reimbursement Arrangements as an Alternative

If a full group plan is too much, two kinds of health reimbursement arrangements let a small business put tax-favored dollars toward employees’ individual coverage.

A Qualified Small Employer HRA (QSEHRA) is open to employers with fewer than 50 FTEs that do not offer a group plan.⁹ The employer funds it; employees cannot contribute through salary reduction. Once an employee shows proof of individual coverage, the employer reimburses qualifying medical expenses tax-free. For 2026, the maximum reimbursement is $6,450 for self-only coverage and $13,100 for family coverage, and the terms must be the same for every eligible employee.⁶

An Individual Coverage HRA (ICHRA) is open to employers of any size and has no annual contribution cap.¹⁰ It can even run alongside a traditional group plan if different employee classes get different options. Reimbursements are free of income tax and payroll tax. One catch: employees offered an ICHRA that counts as affordable cannot also claim premium tax credits on a Marketplace plan.

Where to Report It

The right form depends on the entity:

Sole proprietors, partners, and LLC members calculate the self-employed health insurance deduction on Form 7206 and report it on Schedule 1 (Form 1040), line 17. Form 7206 is required rather than the Form 1040 worksheet if you have more than one source of self-employment income, file Form 2555, or are deducting long-term care premiums. Premiums for employees remain a Schedule C expense.²
S-corporation shareholders owning more than 2% check that the premiums are in Box 1 of the W-2, then take the deduction on Schedule 1 using Form 7206.⁴
C-corporations deduct employee premiums on Form 1120. No personal deduction is needed for owner-employees because the premiums are already excluded from their income.
The small business health care tax credit goes on Form 8941, attached to the business return.⁸

A Compliance Trap to Know About

Small employers with fewer than 50 FTEs generally are not exposed to the Affordable Care Act’s employer mandate penalties for not offering coverage.¹¹ What can catch a small business off guard is offering something informal. If you reimburse employees for individual premiums outside a formal HRA, that arrangement can violate federal market reform rules and trigger an excise tax of $100 per day per affected employee.¹² Employers who find and fix the problem promptly may qualify for reduced penalties, particularly where the failure was due to reasonable cause rather than willful neglect.

1
Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses
2
Internal Revenue Service. Instructions for Form 7206 (2025)
3
Internal Revenue Service. Publication 541, Partnerships
4
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
5
Office of the Law Revision Counsel. 26 USC 45R – Employee Health Insurance Expenses of Small Employers
6
Internal Revenue Service. Revenue Procedure 2025-32
7
Internal Revenue Service. Small Business Health Care Tax Credit Questions and Answers: Determining FTEs and Average Annual Wages
8
Internal Revenue Service. Instructions for Form 8941 (2025)
9
Office of the Law Revision Counsel. 26 U.S. Code 9831 – General Exceptions
10
HealthCare.gov. Individual Coverage Health Reimbursement Arrangements
11
Internal Revenue Service. Affordable Care Act Tax Provisions for Small Employers
12
Office of the Law Revision Counsel. 26 U.S. Code 4980D – Failure to Meet Certain Group Health Plan Requirements