Is Self-Employed Health Insurance Deductible: Limits and Penalty

Yes, self-employed health insurance is deductible. If you have net earnings from self-employment, you can deduct what you pay for medical, dental, vision, and qualified long-term care coverage for yourself, your spouse, your dependents, and any child who was under 27 at year end. The deduction sits above the line on Schedule 1, so it lowers your adjusted gross income whether you itemize or take the standard deduction. It is capped at the net income of the business that sponsors the plan, and it is blocked in any month you were eligible for a subsidized employer plan.¹

Who Can Take the Deduction

Three groups qualify. Sole proprietors reporting income on Schedule C are the largest. Partners with self-employment earnings reported on a Schedule K-1 also qualify. And shareholders who own more than 2% of an S-corporation are eligible, but only if the corporation pays or reimburses the premiums and reports those amounts as wages on the shareholder’s W-2.¹

For that S-corp shareholder, the W-2 reporting has to happen in the same year the premiums were paid or reimbursed. The premium amount is treated as wages for income tax purposes but is not subject to Social Security or Medicare withholding. It makes no difference whether the corporation pays the insurer directly or reimburses the shareholder; the W-2 has to show it either way.²

The plan also has to be established under your business or in your own name as a sole proprietor.³

The Employer-Plan Bar

You cannot take the deduction for any month you were eligible to participate in a subsidized health plan through your own employer, if you have a day job, or through your spouse’s employer. Note the word eligible: you don’t have to enroll in the other plan for the rule to disqualify you. Being able to enroll is enough.³

What Premiums Count

Medical, dental, and vision insurance premiums all qualify, as do premiums for qualified long-term care insurance. Coverage can be for you, your spouse, your dependents, or any of your children who were under 27 at the end of the tax year — even a child who does not qualify as your dependent for other tax purposes.⁴

Medicare Premiums

If you are self-employed and enrolled in Medicare, your Medicare premiums count. The IRS confirmed in Chief Counsel Advice 201228037 that Parts A, B, C, and D all qualify as medical care insurance for purposes of the Section 162(l) deduction. A self-employed person over 65 with continuing business income deducts Medicare premiums the same way a younger self-employed person deducts a private policy, subject to the same net-earnings cap and employer-plan rule.

Long-Term Care Premium Caps for 2026

Long-term care premiums qualify, but only up to a per-person annual limit that rises with age. For 2026:⁵

Age 40 or under: $500
Age 41 to 50: $930
Age 51 to 60: $1,860
Age 61 to 70: $4,960
Over age 70: $6,200

The cap applies per person. If both spouses carry long-term care coverage, each has a separate cap based on their own age at year end.

The Net-Earnings Ceiling

Your deduction cannot exceed the net earned income of the specific business that sponsors the plan. Premiums of $12,000 with $9,000 of net profit means a $9,000 deduction. A business loss means no deduction that year. The rule also prevents the deduction from creating or enlarging a net operating loss.¹

Net earned income for this purpose is gross business profit minus the deductible portion of your self-employment tax and any contributions to a self-employed retirement plan such as a SEP-IRA or SIMPLE IRA.³

One catch surprises people every year. This deduction lowers your income tax, but it does not reduce your self-employment tax. Social Security and Medicare tax on your net earnings is calculated before the health insurance deduction, so your SE tax bill stays the same.³

If You Bought Coverage Through the Marketplace

Marketplace coverage complicates the math. You cannot deduct premiums that were already offset by an advance premium tax credit, and you cannot claim both the full deduction and the full credit on the same dollars.³

The IRS gives you two ways to work through it: a Simplified Calculation Method and an Iterative Calculation Method. The simplified version is shorter but often produces a smaller combined benefit. The iterative version cycles through the deduction and the credit until both settle at optimal amounts and usually yields more. Both are laid out in Publication 974.⁶

How to Claim It

The deduction is calculated on Form 7206, which replaced the worksheet formerly published in IRS Publication 535.³ The form walks you through your total premiums, applies the long-term care age caps, compares the total against your net business earnings, and produces the deductible amount.

You need three things to complete it:

Your total premiums paid during the year for medical, dental, vision, and qualifying long-term care insurance
Your net profit from Schedule C, Schedule F, or Schedule K-1
Any Marketplace figures if you received or plan to claim the premium tax credit, so you can run the Publication 974 calculation

The final number from Form 7206 goes on Schedule 1 (Form 1040), Line 17. Because it is above the line, it reduces your AGI directly, which can also improve your eligibility for other income-dependent tax benefits.⁷

Premiums Left Over After the Cap

If the net-income cap keeps you from deducting all your premiums on Form 7206, the leftover amount may still be deductible on Schedule A, but only if you itemize. On Schedule A, medical expenses count only to the extent they exceed 7.5% of your AGI, and you cannot double-count anything already deducted above the line. Only the excess your business income could not absorb belongs there.⁸

Watch for the 20% Accuracy Penalty

Getting this deduction wrong can trigger an accuracy-related penalty of 20% of the resulting underpayment if the error is due to negligence or a substantial understatement of income.⁹ The common trip-ups are deducting premiums for months you were eligible for an employer plan, running past the net-earnings cap, and not reconciling with the premium tax credit. Keep your premium statements, proof of business income, and any Form 1095-A from the Marketplace with the return, so you can back up the number if the IRS asks.

1
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
2
Internal Revenue Service. Notice 2008-1 – Special Rules for Health Insurance Costs of 2-Percent Shareholder-Employees
3
Internal Revenue Service. Instructions for Form 7206
4
Internal Revenue Service. Topic No. 502 – Medical and Dental Expenses
5
Internal Revenue Service. Revenue Procedure 2025-32
6
Internal Revenue Service. Publication 974 – Premium Tax Credit
7
Internal Revenue Service. Form 7206 – Self-Employed Health Insurance Deduction
8
Internal Revenue Service. Publication 502 – Medical and Dental Expenses
9
eCFR. 26 CFR 1.6662-2 – Accuracy-Related Penalty