The Self-Employed Health Insurance Deduction: A Complete Guide for Practice Owners

By Brian Giesecke, CPA/EA | Giesecke Advisory

Are you paying $20,000... $25,000... maybe $30,000 a year for health insurance?

If you're a practice owner, there's a good chance the answer is yes. Family coverage for a small practice isn't cheap.

But here's the thing... there's a specific tax deduction designed for exactly this situation. And most practice owners either don't know about it, don't claim it correctly, or leave money on the table because of how their entity is set up.

The self-employed health insurance deduction is one of the most valuable — and most misunderstood — deductions available to independent practice owners. Let's walk through how it works.

What the Deduction Actually Is

The self-employed health insurance deduction allows eligible business owners to deduct premiums for medical, dental, vision, and even long-term care insurance. Not as an itemized deduction buried in Schedule A. As an above-the-line deduction on Form 1040.

That distinction matters a lot.

An above-the-line deduction reduces your adjusted gross income (AGI) directly. You don't need to itemize. You don't need to hit any threshold. It just comes right off the top.

For a practice owner paying $24,000 a year in family health insurance premiums... in a 32% tax bracket... that's roughly $7,700 in tax savings. Every single year.

And it covers more than just your own premiums. You can deduct premiums for your spouse, your dependents, and children under 27 — even if they're not dependents.

Who Qualifies for the Self-Employed Health Insurance Deduction

You need to meet a few tests.

You're self-employed. This includes sole proprietors, partners in a partnership, LLC members, and S-corp shareholders who own more than 2% of the company. If you own your practice through any of these structures, you likely qualify.

You have net profit. The deduction can't exceed your net self-employment income from the business that provides the health plan. No profit? No deduction. But for most established practices, this isn't an issue.

You're not eligible for employer-subsidized coverage. This is the one that catches people. If you — or your spouse — are eligible for health insurance through another employer's plan, you can't take this deduction for those months. Even if you don't enroll. Eligibility alone disqualifies you.

So if your spouse works at a hospital that offers family coverage... and you're eligible for that plan but choose to buy your own instead... you can't deduct your premiums this way for those months.

It's a month-by-month test. If your spouse's employer coverage is only available for six months of the year, you can deduct the premiums for the other six months.

How to Claim It

For sole proprietors and single-member LLCs, this is straightforward.

You pay the premiums. You report the deduction on Schedule 1 of Form 1040, Line 17. It flows directly to your adjusted gross income calculation.

You don't deduct it on Schedule C. This is a personal deduction, not a business expense — even though it's based on your business income. That's the "above-the-line" part. It reduces your AGI before you even get to itemizing or taking the standard deduction.

Keep good records. Save your premium statements. Know exactly how much you paid each month. If your eligibility changes mid-year because of a spouse's coverage, track those months carefully.

The S-Corp Wrinkle: Getting This Right

Here's where it gets tricky — and where most mistakes happen.

If you own more than 2% of an S-corp (which is most practice owners), there's a specific process you need to follow. You can't just pay for health insurance personally and deduct it. The IRS has a specific set of rules for how this works.

Step 1: The S-corp pays the premiums — or reimburses you. The company needs to either pay the insurance premiums directly or reimburse you for the premiums you paid. This establishes it as a business expense.

Step 2: The premiums get included on your W-2. This is the part that confuses people. The health insurance premiums must be reported in Box 1 of your W-2 as wages. They're also typically shown in Box 14 for informational purposes.

Step 3: The premiums are NOT subject to FICA. Even though they're in Box 1, the premiums shouldn't be included in Boxes 3 and 5 (Social Security and Medicare wages). This is important — your payroll provider needs to handle this correctly.

Step 4: You deduct it on your personal return. Now that the premiums are on your W-2, you take the self-employed health insurance deduction on Schedule 1, Line 17 of your Form 1040. The amount on your W-2 goes up, but the deduction brings it back down.

It sounds circular... and it kind of is. The premiums go on your W-2, which increases your reported wages. Then you deduct those same premiums on your 1040, which reduces your AGI by the same amount.

But if you skip any of these steps — if the premiums aren't on the W-2, or if the S-corp doesn't pay or reimburse — the IRS can disallow the deduction entirely.

A common mistake: The shareholder pays premiums personally, never tells the S-corp, and takes the deduction anyway. If the IRS looks at this, they won't see the premiums on the W-2, and the deduction gets denied.

Make sure your payroll provider knows you're a more-than-2% S-corp shareholder with health insurance. This needs to be set up correctly from the start.

Medicare Premiums: The Deduction Most People Miss

If you're over 65 — or getting close — this one's important.

Medicare premiums qualify for the self-employed health insurance deduction. That includes:

• Medicare Part B (medical insurance)
• Medicare Part D (prescription drug coverage)
• Medigap policies (Medicare Supplement Insurance)

These are often overlooked because they feel like personal expenses. They're automatically deducted from Social Security. You might not even think of them as "premiums."

But they are. And if you're still self-employed or still an active S-corp shareholder... they're deductible.

For a practice owner paying $175/month for Part B, $50/month for Part D, and $200/month for a Medigap plan... that's $5,100 a year in deductible premiums that many people simply forget about.

The same rules apply: you need self-employment income, and you can't be eligible for employer-subsidized coverage for those months.

What You Can't Deduct This Way

Not everything qualifies. Here's what the self-employed health insurance deduction doesn't cover:

Months you're eligible for employer coverage. Already covered this — but it's the most common disqualifier. If you or your spouse can get coverage through an employer plan, those months don't count. Even if you don't enroll.

Premiums paid with pre-tax dollars. If premiums are already being deducted pre-tax through a different arrangement — like a spouse's employer cafeteria plan — you can't deduct them again. No double-dipping.

Premiums exceeding your business income. The deduction is limited to your net self-employment income. If your practice had a loss year, you can't use health insurance premiums to create or increase a loss.

Health insurance for employees who aren't you. The self-employed health insurance deduction is specifically for the owner (and their family). Regular employee health insurance is a separate business deduction on the company's books.

Long-term care premiums above the age-based limit. Long-term care insurance qualifies, but the IRS sets annual limits based on your age. In 2024, the limit ranges from $470 for those 40 and under to $5,880 for those over 70.

Optimization Tips: Getting the Most From This Deduction

A few strategies worth considering...

Review your entity structure. If you're an S-corp, make sure the W-2 reporting is set up correctly. If you're a sole proprietor considering S-corp election, factor health insurance premiums into your reasonable compensation analysis. The premiums on the W-2 increase your reported wages — which affects payroll taxes and retirement contribution calculations.

Coordinate with your spouse's coverage. If your spouse has access to employer coverage, do the math on both options. Sometimes it's cheaper to go through the employer plan. Sometimes your own plan plus the deduction is the better deal. Run the numbers both ways.

Don't forget dental and vision. They qualify. If you're paying for separate dental and vision plans, include those in your deduction. An extra $2,000-$3,000 a year adds up.

Track months carefully. If your eligibility changes during the year — a spouse starts or leaves a job, you turn 65, coverage options change — you need to calculate the deduction month by month. Partial-year deductions are common and completely valid.

Stack with other health-related deductions. The self-employed health insurance deduction and HSA contributions are separate strategies. If you have a qualifying high-deductible health plan, you can take the self-employed health insurance deduction AND contribute to an HSA. That's a powerful combination.

Review annually. Premium amounts change. Your income changes. Your spouse's situation changes. This isn't a set-it-and-forget-it deduction. Build it into your year-end tax planning review.

The Bottom Line

The self-employed health insurance deduction is one of the most significant tax benefits available to practice owners. For a family paying $24,000-$30,000 a year in premiums, the tax savings can easily reach $8,000-$10,000 annually.

But it only works if the setup is right. Especially for S-corp owners... the W-2 reporting, the reimbursement process, the FICA exclusion — all of it needs to be handled correctly.

If you're not sure whether you're claiming this correctly... or if you're an S-corp owner and your premiums aren't showing up on your W-2... it's worth a conversation.

And if you want a broader view of the deductions and strategies worth reviewing every year, I put together a [Tax Planning Checklist](#) that covers this and more.