The Health Insurance Deduction Most LLC Owners Are Taking Wrong — or Missing Entirely

If you run a business as a sole proprietor or LLC owner, you can deduct 100% of what you pay for health insurance. Not as an itemized deduction buried on Schedule A. As an above-the-line deduction that reduces your adjusted gross income before you even get to the standard deduction question.

Most people know this exists. Far fewer are taking it correctly.

Here’s what the deduction actually does, what kills it, and where business owners consistently get it wrong.

What the Deduction Covers

The self-employed health insurance deduction covers premiums you pay for:

• Medical insurance
• Dental insurance
• Vision insurance
• Qualified long-term care insurance (subject to age-based dollar caps)

It covers you, your spouse, and your dependents. If you’re supporting a kid under 27 on your plan, those premiums count too — even if the child is no longer a dependent for other tax purposes.

For 2026, the long-term care caps run from $480 for people under 40 up to $6,020 for people over 70. Standard medical, dental, and vision have no per-premium dollar cap — you deduct what you actually paid.

The deduction goes on Schedule 1, Line 17. It reduces your AGI directly. That matters because a lower AGI opens up other deductions, reduces exposure to the net investment income surtax, and helps you qualify for credits that phase out by income.

The One Limit Everyone Forgets

The deduction cannot exceed your net profit from the business.

If your LLC had a net profit of $30,000 for the year and you paid $40,000 in health insurance premiums, your deduction is capped at $30,000. The remaining $10,000 disappears. You can’t carry it forward. It’s gone.

This hits hardest in a startup year — when revenue is low but you’re still paying full freight on a family health plan. The premiums are real. The deduction isn’t always.

One thing the deduction does NOT do: it doesn’t reduce your self-employment income for SE tax purposes. You still pay Social Security and Medicare taxes on your full net profit. The deduction only cuts your income tax — not your SE tax. That’s a meaningful distinction when SE tax runs 14.13% on the first $184,500 of income.

The Spouse Coverage Trap

This is the one that gets people.

If you are eligible for coverage under an employer-sponsored health plan — your own employer or your spouse’s employer — you cannot take the self-employed health insurance deduction for any month you’re eligible for that coverage. Even if you chose not to enroll. Eligibility is what matters, not enrollment.

So if your spouse has a job with health benefits that covers the family, and you’re choosing to buy a separate plan for your business anyway, you generally can’t deduct those premiums. The IRS treats you as having subsidized coverage available.

This comes up constantly with working couples. One person runs a business, pays $12,000 a year in health insurance, claims the deduction, and the IRS sends a notice: your spouse’s employer offered family coverage. Deduction disallowed.

If your spouse’s plan is genuinely not a good fit — wrong doctors, high deductibles, limited network — that’s worth documenting. But “we didn’t want to use it” is not enough. The question is whether coverage was available, not whether you liked it.

The LLC Setup Distinction

For a single-member LLC (taxed as a sole proprietorship), the rules are the same as for any sole proprietor. You take the deduction on Schedule 1 based on your Schedule C net income.

For a multi-member LLC taxed as a partnership, each member who is active in the business can take a self-employed health insurance deduction based on their share of the business income — but the premiums need to be established under the partnership plan and properly reported on the partner’s K-1. The mechanics matter.

If you have an S-corp, the rules are completely different. The health insurance premium has to go through your W-2 wage before you can deduct it. That’s a separate post — see /blog/s-corp-owner-health-insurance-deduction for the full breakdown.

Where This Often Goes Wrong

Problem 1: Taking it as a Schedule A itemized deduction. A lot of people — and some tax software — put health insurance on Schedule A as a medical expense. That deduction only kicks in above 7.5% of AGI. At 7.5%, you’d need $7,500 in premiums before you start getting any benefit on a $100,000 income. The above-the-line deduction doesn’t have that threshold. It’s dollar-for-dollar against income.

Problem 2: Missing the deduction entirely. If you didn’t know this existed and you’ve been paying health insurance out of pocket without deducting it on Schedule 1, that’s potentially years of missed deductions. An amended return may be worth filing.

Problem 3: Claiming it in a loss year. If your business had a net loss — or even zero profit — you can’t take any of the deduction. Some software will still enter the number but zero it out. Make sure your return reflects this correctly.

Problem 4: Including Medicare premiums when you’re covered elsewhere. If you’re over 65, on Medicare, and running a business, you can deduct your Medicare Part B and Part D premiums as self-employed health insurance — but only if you’re not also eligible for employer coverage elsewhere. The same eligibility rule applies.

What This Deduction Is Actually Worth

At a 22% federal tax bracket plus a 6.85% New York State rate, a $15,000 health insurance deduction is worth about $4,327 in tax savings. That’s real money — and it’s gone if the deduction isn’t claimed correctly.

If you’re paying $800–$2,000 a month for a family health plan and running a business, this is not a small line item. It deserves to go in the right place on your return, confirmed to not be blocked by the spouse-coverage rule, and capped correctly against your net income.

If you’re also contributing to an HSA alongside your health plan, that’s another above-the-line deduction that works well alongside this one. See /blog/hsa-self-employed-triple-tax-break for how the two interact.

This post is for general information only and does not constitute tax advice. The self-employed health insurance deduction has specific rules that depend on your business structure, coverage eligibility, and net income. Consult a qualified tax professional before making filing decisions. Geiger Tax & Accounting serves clients in Amityville, Long Island, and nationwide. Call (631) 532-5622 or visit geigertax.com/contact to schedule.