Self‑Employed Health Insurance Deduction
Estimate how much of your health insurance premiums you can deduct as a self‑employed taxpayer, and the approximate federal tax savings.
The “Above‑the‑Line” Deduction Many Freelancers Miss
If you are self‑employed, paying for health insurance can feel like a double hit: premiums are expensive, and they are paid with after‑tax dollars. To soften that burden, U.S. tax law allows many self‑employed people to deduct health insurance premiums “above the line,” meaning the deduction reduces adjusted gross income (AGI) rather than requiring itemization. In practice, this deduction is one of the most valuable and most commonly misunderstood benefits of being a sole proprietor, partner, or S‑corp owner.
The rule sounds simple: you can deduct premiums you pay for yourself, your spouse, and your dependents if you have net self‑employment income and you are not eligible for an employer‑subsidized plan. But there are important caps. The deduction cannot exceed your net profit from the business (after certain adjustments), and it interacts with self‑employment tax and retirement contributions. Getting the logic right matters because the deduction lowers your income tax, and sometimes your Medicare surtax exposure too.
This calculator estimates the allowable deduction using the most common Schedule C scenario. It also provides a rough income‑tax savings estimate so you can see the impact quickly. For complex cases, the IRS worksheets or a tax professional will be more precise.
Who Can Claim It?
You can usually claim the self‑employed health insurance deduction if:
- You have net earnings from self‑employment (Schedule C, partnership income, or S‑corp wages).
- The policy is established under your business or you pay the premiums yourself.
- You are not eligible for an employer‑subsidized health plan for any month of the year (including through a spouse).
If you are eligible for an employer plan but choose not to enroll, you generally cannot claim the deduction for those months.
The Underlying Math
Let N be your annual net profit from self‑employment before the health insurance deduction. Let H be your annual health insurance premiums. The deduction is capped at your adjusted net earnings. For a Schedule C taxpayer, adjusted net earnings are net profit minus the deductible half of self‑employment tax.
Self‑employment tax is computed on 92.35% of net profit. The combined SE tax rate is 15.3% up to the Social Security wage base, then 2.9% Medicare beyond. For a broad estimator we approximate the deductible half of SE tax as:
Adjusted net earnings are then:
The allowable health insurance deduction is:
Once you know your deduction, your federal income‑tax savings is approximately your marginal tax rate times that deduction.
Worked Example
Jordan is a freelance designer filing as single. Net profit on Schedule C is $84,000. She paid $7,800 in health premiums for herself during the year. Her marginal federal tax rate is 22%.
Compute half of SE tax deduction: 0.0765 × 0.9235 × $84,000 ≈ $5,933.
Adjusted earnings: $84,000 − $5,933 = $78,067.
Deduction cap is $78,067, so the full $7,800 premiums are deductible.
Estimated income‑tax savings: 22% × $7,800 ≈ $1,716.
Jordan effectively reduces the after‑tax cost of her insurance by more than a thousand dollars. The deduction also lowers her AGI, which can improve eligibility for other credits.
Comparison Table: Deduction vs Itemizing
Health expenses can also be deducted as itemized medical expenses above 7.5% of AGI. For many self‑employed people, the above‑the‑line deduction is far better.
| Approach | Where It Applies | Typical Outcome |
|---|---|---|
| Self‑employed deduction | Schedule 1 (reduces AGI) | Often full premium deductible up to net earnings |
| Itemized medical expenses | Schedule A | Only amounts above 7.5% of AGI count, and only if itemizing |
| No deduction | Common mistake | Pay premiums fully after tax |
S‑Corporations and Partners: A Quick Note
If you are a more advanced self‑employed taxpayer, the mechanics can change slightly. S‑corporation owners who own more than 2% of the company must generally have premiums paid or reimbursed by the S‑corp and included in W‑2 wages. The deduction then appears on the shareholder’s personal return, but the S‑corp treatment is required for eligibility. Partners in a partnership typically have premiums treated as guaranteed payments or paid by the partnership on their behalf. The cap logic is similar—deduction cannot exceed the relevant earned income—but paperwork differs. This calculator still provides a good baseline for the magnitude of the deduction.
Interaction With Marketplace Subsidies
Many freelancers buy coverage on the ACA Marketplace. Premium tax credits lower what you actually pay, and only the net premiums you pay out of pocket are deductible. Because the self‑employed deduction reduces AGI, it can sometimes increase your premium tax credit. In other cases, if you estimate a high deduction and later your income rises, you may have to repay part of the credit. The relationship can be circular, which is why Marketplace filers often use the IRS worksheets to iterate. If you receive a subsidy, enter your net premiums after the credit, not the sticker price.
Planning Uses
Beyond tax filing, the deduction helps with planning:
- Quarterly estimates. If you are paying quarterly taxes, include expected health premium deductions to avoid overpaying.
- Choosing coverage. The deduction effectively discounts premiums by your marginal rate. A $10,000 premium at a 24% marginal rate has an after‑tax cost closer to $7,600.
- Retirement contribution sequencing. Large SEP‑IRA or solo‑401(k) contributions can reduce adjusted earnings and therefore reduce the health deduction cap. When income is tight, run scenarios to see which deduction provides more benefit.
Limitations and Assumptions
This estimator simplifies the IRS worksheet. It assumes:
- You are a Schedule C‑style self‑employed taxpayer. S‑corp rules can differ (premiums must be included in W‑2 wages).
- Your marginal tax rate is a good proxy for savings. Phaseouts and credits can change effective savings.
- We do not model the Social Security wage base or Additional Medicare Tax thresholds; SE tax adjustment is approximate.
- You are not eligible for an employer plan during the year.
Use the calculator to plan, then confirm using IRS Publication 535 and the self‑employed health insurance deduction worksheet when filing.