Health insurance is expensive when you buy it yourself. The IRS knows this and created a deduction specifically for self-employed people: you can deduct 100% of health insurance premiums paid for yourself, your spouse, and your dependents.

This is one of the better deductions available to freelancers and it is underused, either because people do not know about it or because they are claiming it incorrectly and losing part of the benefit.

How it works

The self-employed health insurance deduction comes off your adjusted gross income (AGI), not as a business expense on Schedule C. This distinction matters. It reduces your income tax but not your self-employment tax.

Net business income$100,000
SE tax deduction (half)($7,065)
Health insurance premiums($8,400)
Adjusted gross income$84,535
Tax savings vs. not deducting (22% bracket)~$1,848

What qualifies

+Medical insurance premiums (individual, family plans)
+Dental insurance premiums
+Vision insurance premiums
+Long-term care insurance premiums (up to age-based limits)
+Premiums paid for a spouse and dependents
-Months when you were eligible for employer-subsidized coverage (cannot double dip)
-Premiums paid through an HSA

The eligibility limit

The deduction cannot exceed your net self-employment income. If you had $5,000 in net SE income and paid $8,400 in premiums, your deduction is limited to $5,000. The excess cannot be carried forward or deducted elsewhere on Schedule C.

In a business loss year, you get no deduction from this provision, though you may be able to claim some premiums as an itemized medical expense if you itemize.

The employer-coverage trap

If you were eligible for coverage through an employer's plan (yours or a spouse's) for any month, you cannot deduct premiums for that month under this provision. "Eligible" is the key word, not "actually enrolled." If your spouse had employer coverage you could have joined but chose not to, you do not get the deduction for those months.

This trips people up. Transitioning from employment to freelancing mid-year means you can only deduct premiums for the months when you were not eligible for employer coverage.

S-corp owners: different setup

If you are an S-corp shareholder-employee (2% or more ownership), the deduction works differently. The S-corp pays your health insurance premiums and includes them in your W2 wages in Box 1. You then deduct them on Form 1040 as a self-employed health insurance deduction. The premiums need to be reported this specific way or you lose the deduction. Your accountant should set this up correctly.

Where to claim it

Schedule 1 (Form 1040), Part II, Line 17. Your tax software should prompt you for this. If you use a CPA, make sure they know about your health insurance premiums. It is easy to miss if you are not specifically asked.