Income and Assets · Adjustments to Income

Self-employed health insurance

Two limitations do almost all the work here, and both are easy to state wrongly. The deduction is capped by earned income from the particular business with respect to which the plan is established — not by total self-employment income. And it is lost for any month in which the taxpayer is eligible to participate in a subsidised employer plan of their own or a family member’s employer, whether or not they actually enrol. A spouse’s declined employer coverage is the most common way the deduction quietly disappears.

The rule

The deduction, and who it covers. For a taxpayer who is an employee within the meaning of § 401(c)(1) — that is, a self-employed individual — a deduction is allowed for amounts paid during the year for insurance constituting medical care for the taxpayer, the taxpayer’s spouse, the taxpayer’s dependents, and any child within § 152(f)(1) who has not attained age 27 as of the end of the taxable year (IRC § 162(l)(1)(A)–(D)). The under-27 child need not be a dependent.

Capped by one business’s earned income. No deduction is allowed to the extent it exceeds the taxpayer’s earned income within § 401(c) derived from the trade or business with respect to which the plan providing the medical care coverage is established (IRC § 162(l)(2)(A)). A taxpayer with two businesses cannot use the profits of one to support a policy established under the other.

Destroyed month by month by other coverage. Paragraph (1) does not apply for any calendar month for which the taxpayer is eligible to participate in any subsidised health plan maintained by any employer of the taxpayer, of the spouse, of a dependent, or of a child under 27 (IRC § 162(l)(2)(B)). Two features are commonly missed: the test is eligibility, not enrolment, and it is applied separately for plans that include qualified long-term care coverage and plans that do not (§ 162(l)(2)(B)(i), (ii)).

Long-term care premiums are limited by an age scale. For a qualified long-term care insurance contract, only eligible long-term care premiums within § 213(d)(10) are taken into account (IRC § 162(l)(2)(C)), and those are capped on a scale by attained age before the close of the year.

No double counting. An amount paid for insurance to which paragraph (1) applies is not taken into account in computing the itemized medical deduction under § 213(a) (IRC § 162(l)(3)).

And it does not reduce self-employment tax. The deduction allowable by reason of the subsection is not taken into account in determining net earnings from self-employment within § 1402(a) (IRC § 162(l)(4)). The provision reads oddly — it excludes the deduction for years beginning before 2010 or after 2010, leaving a single year in which it was allowed — but the current effect is plain.

S corporation shareholders are brought in. The subsection applies to any individual treated as a partner under § 1372(a), except that their wages from the S corporation are treated as their earned income (IRC § 162(l)(5)(A)). The premiums must be included in those wages for the deduction to be available against them.

It reduces adjusted gross income. The deduction is attributable to a trade or business not consisting of the performance of services as an employee, so it is allowed in computing adjusted gross income (IRC § 62(a)(1)).

Current figures

How it works in practice

Ask the coverage question first, and ask it about the whole household. Eligibility to participate in a subsidised employer plan — the taxpayer’s own, a spouse’s, a dependent’s, or a child under 27’s — kills the deduction for that month even where the offer was refused. The practical work is establishing, month by month, whether such an offer existed, and the answer often lies with a spouse’s employer rather than with the client.

Then match the policy to the business. Section 162(l)(2)(A) measures the cap by earned income from the business establishing the plan. For a sole proprietor the plan can be in the individual’s own name and still be treated as established with respect to the business, but where a taxpayer runs two ventures the allocation matters and the profitable one has to be the one the plan belongs to.

Remember what the deduction does not do. It does not reduce self-employment tax (§ 162(l)(4)), so it is worth less than an ordinary business expense of the same size. And any premium it absorbs is unavailable for the itemized medical deduction (§ 162(l)(3)), so there is no second bite for a taxpayer whose remaining medical expenses clear the § 213 floor.

For an S corporation shareholder the mechanics are specific: the corporation pays or reimburses the premiums, includes them in the shareholder’s Form W-2 wages, and the shareholder then deducts under § 162(l) against those wages treated as earned income by § 162(l)(5)(A). Skipping the wage inclusion removes the basis for the deduction.

How this has changed

Section 162(l)(4) preserves a one-year experiment in its text. It denies the deduction against net earnings from self-employment “for taxable years beginning before January 1, 2010, or after December 31, 2010” — leaving 2010 as the single year in which the deduction did reduce self-employment tax, under a temporary provision that was never renewed. The current rule is clear, but the drafting is a fossil of that year and reading the subsection quickly can suggest the opposite of what it means.

Coverage for a child under 27 arrived with the Affordable Care Act and is broader than it looks: § 162(l)(1)(D) reaches any child within § 152(f)(1) who has not attained age 27 by the end of the year, without requiring that the child be a dependent. The same child’s eligibility for their own employer’s subsidised plan is then a disqualifying event under § 162(l)(2)(B), so the widening cuts both ways.

The long-term care limitation is indexed and moves every year. Section 213(d)(10) caps eligible premiums on a five-band age scale, adjusted annually — for 2026 by Rev. Proc. 2025-32 § 3.27. Only the capped amount enters § 162(l), so a taxpayer over 70 paying a large long-term care premium deducts only the banded figure here and may take the excess into § 213(a).

The S corporation route has been stable but depends entirely on payroll mechanics. Section 162(l)(5)(A) has treated a shareholder’s wages as earned income since 1998, and the deduction stands or falls on whether the premiums were included in those wages. It is an administrative failure, not a statutory one, that most often destroys the deduction.

Exam focus

Expect a spouse’s employer plan in the facts, with the offer declined. The deduction is denied for those months.

Expect two businesses, testing whether the cap is measured on the right one.

Expect the interaction with § 213, where the correct answer is that the two do not overlap but premiums disallowed under § 162(l) remain available under § 213(a).

Expect self-employment tax offered as also reduced. It is not.

Check yourself

1. A sole proprietor pays 10,000 dollars of premiums and has 6,500 dollars of earned income from the business the plan is established under. How much is deductible under this provision?

Answer: 6,500 dollars. IRC § 162(l)(2)(A) caps the deduction at earned income derived from the trade or business with respect to which the plan is established; the remaining 3,500 dollars may be taken into account under § 213(a).

2. The taxpayer’s spouse is offered subsidised coverage by their employer and declines it. What is the effect?

Answer: No deduction for any calendar month in which the spouse was eligible to participate. IRC § 162(l)(2)(B) applies to eligibility, not to enrolment.

3. Does this deduction reduce self-employment tax?

Answer: No. IRC § 162(l)(4) provides that the deduction is not taken into account in determining net earnings from self-employment within § 1402(a).

4. May premiums for a child aged 25 who is not a dependent be included?

Answer: Yes. IRC § 162(l)(1)(D) covers any child within § 152(f)(1) who has not attained age 27 by the end of the taxable year, with no dependency requirement.

5. How does a more-than-2-percent S corporation shareholder qualify?

Answer: Through IRC § 162(l)(5)(A), which applies the subsection to an individual treated as a partner under § 1372(a) and treats their wages from the corporation as earned income — so the premiums must be included in those wages.