8728 / Is a taxpayer who is classified as an independent contractor, and thus self-employed, entitled to deduct the cost of health insurance coverage?

A self-employed individual is generally entitled to deduct the cost of health insurance coverage. The IRS has ruled that a self-employed individual may deduct the medical care insurance costs for himself and his spouse and dependents under a health insurance plan established for his trade or business up to the net earnings of the specific trade or business with respect to which the plan is established.

In determining this deduction limit under IRC Section 162(l)(2)(A), a self-employed individual may not combine the net profits from all his trades and businesses. However, if a self-employed individual has more than one trade or business, the individual may deduct the medical care insurance costs of the self-employed individual and his spouse and dependents under each specific health insurance plan established under each specific business up to the net earnings of that specific trade or business.¹

According to the IRS, a self-employed individual may not deduct the costs of health insurance on Schedule C. The deduction under IRC Section 162(l) must be claimed as an adjustment to gross income on the front of Form 1040.²

Partners and sole proprietors are self-employed individuals, not employees. However, the deduction is not available to a partner or sole proprietor for any calendar month in which the individual is eligible to participate in any subsidized health plan maintained by any employer of the self-employed individual or spouse.³

Beginning in 2003, a self-employed individual can deduct 100 percent of amounts paid during a taxable year for long-term care insurance up to the annual limits (see below) for an individual, spouse or dependents.⁴ Sole proprietors, partners, and S corporation shareholders owning more than 2 percent of an S corporation’s shares generally may take advantage of this deduction.

The deduction for eligible long-term care premiums that are paid during any taxable year for a qualified long-term care insurance contract⁵ is subject to an annual dollar amount limit that increases with the age of the insured individual. In 2025, for taxpayers age 40 or less, the limit is $480. For ages 41 through 50, the limit is $900. For ages 51 through 60, the limit is $1,800. For ages 61 through 70, the limit is $4,810. For those over age 70, the limit is $6,020.⁶ The age is the individual’s attained age before the close of the taxable year. The limits are indexed annually for increases in the medical care cost component of the CPI (this is the so-called Medical Care Cost Adjustment).⁷

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Planning Point: Many self-employed individuals may now be eligible to participate in ERISA-covered association health plans under the new DOL regulations that were finalized in 2018. The new regulations on association health plans generally expand access to these types of plans by broadening the types of businesses that qualify (i.e., the regulations relaxed the requirement that all participating employers be in the same trade or business). However, the new rules also expanded the availability of association health plans to “working owners” of small businesses. In order to qualify, the individual must (1) have an ownership interest in a trade or business (including self-employment), (2) receive wages or self-employment income from the business and (3) work at least 20 hours per week (or 80 hours per month) in the business, or alternatively earn enough from the business to pay for coverage of the owner and any beneficiaries. The proposed requirement that no other employer-sponsored health coverage be available to the owner-employee was eliminated from the final regulations.⁸

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Although a district court struck down the DOL regulations, the DOL has indicated that it intends to appeal the decision. In the meantime, the DOL has clarified that employers participating in association health plans can maintain the plan coverage until the end of the plan year or the contract term if that date is later. The DOL will not pursue any enforcement actions against employers who participate in association health plans if the employer relied upon the final DOL regulations governing these plans.