The Self-Employed Health Insurance Deduction: Who Qualifies, the Monthly Test and the Profit Limit

When you leave a job to work for yourself, health insurance goes from a payroll deduction to one of your largest monthly bills. The tax law recognizes that. IRC Section 162(l) lets self-employed people deduct health insurance premiums for themselves and their families, above the line, without itemizing.

It is a valuable deduction. It also has three rules that trip people up: the profit limit, the employer plan test, and the self-employment tax rule.

Who can take it

Section 162(l)(1) allows the deduction to a taxpayer who is an employee within the meaning of Section 401(c)(1), which is the Code's way of describing a self-employed individual with earned income. The 2025 Instructions for Form 7206 describe who may qualify:

• You were self-employed and had a net profit for the year reported on Schedule C or Schedule F.
• You were a partner with net earnings from self-employment reported on Schedule K-1.
• You received wages from an S corporation in which you were a more-than-2% shareholder.

For gig workers and freelancers, the first one is the usual path.

Whose insurance counts

Under Section 162(l)(1), the deduction covers amounts paid during the year for insurance that constitutes medical care for:

• You.
• Your spouse.
• Your dependents.
• Any child of yours who has not reached age 27 by the end of the year, even if the child is not your dependent.

The Form 7206 instructions also say that Medicare premiums you voluntarily pay to obtain insurance in your name can be used to figure the deduction. For qualified long-term care insurance, Section 162(l)(2)(C) limits the deduction to eligible long-term care premiums under Section 213(d)(10), which are capped by age and adjusted each year.

Limit 1: your profit

Section 162(l)(2)(A) says the deduction cannot exceed your earned income from the trade or business with respect to which the plan providing the coverage is established. In practice, if your Schedule C shows a loss, you get no deduction from that business. If it shows a small profit, the deduction is capped at the earned income from it.

If you have more than one business, the Form 7206 instructions say you use a separate Form 7206 to figure each plan's net earnings limit. A loss in one business does not help, and profit in a business that did not establish the plan does not count toward that plan's limit.

Limit 2: the month-by-month employer plan test

This is the rule that catches couples. Section 162(l)(2)(B) says the deduction does not apply for any calendar month in which you are eligible to participate in any subsidized health plan maintained by an employer of yours, your spouse, your dependents, or your under-27 child.

Three points to notice:

• Eligible, not enrolled. If your spouse's employer offers subsidized family coverage and you decline it to buy your own policy, you may still be shut out for those months.
• Month by month. The test runs each calendar month. If you left a job in March and lost access to its plan, April through December can qualify.
• Separate test for long-term care. The statute applies the rule separately to plans that include long-term care coverage and plans that do not.

The question is not whether you used your spouse's employer plan. It is whether you could have. Month by month.

Limit 3: it does not reduce self-employment tax

The deduction lowers income tax, not self-employment tax. Section 162(l)(4) says the deduction is not taken into account in determining net earnings from self-employment for tax years outside a one-year window that ended in 2010. The 2025 Form 7206 instructions confirm you cannot subtract it when figuring net earnings for self-employment tax from the business under which the plan is established. See how self-employment tax is calculated.

It also is not counted twice. Section 162(l)(3) says premiums deducted under this rule cannot also be counted as medical expenses for the itemized deduction under Section 213(a).

Where it goes and which form

The deduction is claimed on Schedule 1 (Form 1040), line 17, according to the Form 7206 page. The 2025 Form 7206 instructions say the worksheet in the Form 1040 instructions is generally enough, but you must use Form 7206 if, among other situations, you had more than one source of self-employment income, you file Form 2555, or you are using qualified long-term care premiums.

Marketplace coverage and the premium tax credit

If you buy coverage through the Health Insurance Marketplace and receive the premium tax credit, the self-employed health insurance deduction and the credit can affect each other. The Form 7206 instructions direct you to IRS Publication 974 if the plan was obtained through the Marketplace and considered established under your business. Follow that publication's method rather than guessing.

The QBI side effect

For the qualified business income deduction, Treas. Reg. 1.199A-3(b)(1)(vi) treats the self-employed health insurance deduction as attributable to the business, proportionately. That reduces qualified business income. It is a small effect, but tax software should be applying it, and you should know why your QBI number is lower than your profit. See the QBI deduction for gig workers.

A quick example

A self-employed delivery driver pays $600 a month for an individual policy. In January through April, her spouse's employer offered a subsidized family plan she could have joined. In May, the spouse changed jobs to one with no health coverage. Under the month-by-month test in Section 162(l)(2)(B), January through April do not qualify, and May through December can, so up to $4,800 of premiums is in play, subject to the profit limit from her delivery business.

If her Schedule C profit for the year was only $3,000, the deduction would stop at the earned income from that business under Section 162(l)(2)(A). Whether the excess can be used anywhere else on her return is a question to work through with her preparer.

Records to keep

• Premium statements or Form 1095 documents showing what was paid and for whom.
• Proof of payment.
• For each month, a note of whether you or your spouse had access to any employer plan, and documentation if access ended mid-year.
• Your Schedule C showing the profit that supports the limit.

For the full recordkeeping picture, see recordkeeping rules for the self-employed. And if the profit side is the question, read what the IRS examines in a Schedule C audit.