How Group Health Insurance Is Taxed for Sole Proprietors
A sole proprietor is not an employee of the business, so the owner’s own premiums are not a Schedule C expense. Instead the owner takes the self-employed health insurance deduction on the personal return. It reduces income tax, and it is limited to what the business earned.
How the Premiums Are Treated
Employees’ premiums and the owner’s premiums follow different rules.
Employees’ Premiums Are a Business Expense
Premiums a sole proprietor pays for common-law employees are deductible on Schedule C like any other business cost, and the employees are generally not taxed on them. See how the business deduction works and why the employee exclusion applies.
The Owner’s Premiums Are a Personal Deduction
The owner’s own premiums are deducted on the personal return as an adjustment to income, using Form 7206. The deduction can cover the owner, spouse, dependents and a child who is under age 27 at the end of the year.
It Reduces Income Tax, Not Self-Employment Tax
Because the deduction is taken on the personal return and not as a business expense, it generally does not reduce the net earnings used to figure self-employment tax.
Conditions for the Deduction
These come from the IRS instructions for Form 7206.
Net Profit From the Business
The sole proprietor must have a net profit reported on Schedule C or Schedule F, and the deduction cannot exceed the earnings of the business under which the plan is established.
The Plan Is Established Under the Business
The policy can be in the business’s name or in the owner’s own name, as long as it is considered established under the business.
No Other Subsidized Plan
The deduction is lost for any month the owner was eligible to join an employer-subsidized plan, including one offered by a spouse’s employer, even without enrolling.
No Section 125 for the Owner
Pre-tax payroll deduction through a cafeteria plan is for employees. A sole proprietor is not one, so the owner’s own premiums come through the personal deduction instead.
Common Problems for Sole Proprietors
Taking the Owner’s Premiums on Schedule C
The owner’s own premiums are claimed on the personal return, not as a Schedule C business expense. Employees’ premiums are the ones that belong on Schedule C.
Ignoring a Spouse’s Employer Plan
If the owner’s spouse could have joined a subsidized plan through the spouse’s job, the deduction is lost for those months, even if the owner never enrolled.
Assuming a Group Plan Is Available
A business with no employees other than the owner generally cannot buy group coverage, though carrier rules vary. The owner can usually buy individual coverage, and the same deduction can apply.
Sole Proprietor Questions
Can a sole proprietor have a group plan?
Usually only with at least one employee who is not the owner or the owner’s spouse. Carrier rules vary, so ask early what applies to your size.
Where do I claim my premiums?
On the personal return using Form 7206, not on Schedule C. Premiums for your employees go on Schedule C.
Does the deduction lower my self-employment tax?
Generally no. It reduces income tax but not the earnings used to figure self-employment tax.
Does it matter whose name is on the policy?
For a sole proprietor, the policy can be in the business’s name or your own, as long as it is established under the business.
What if my spouse has coverage at work?
The deduction is lost for any month you were eligible for a subsidized plan through your spouse’s employer, even if you did not enroll.
Who should confirm my situation?
Your CPA. We can help you decide between group and individual coverage and keep the premium records your CPA needs.
CFH are licensed insurance brokers, not tax advisors, and this page is general information rather than tax advice. Ownership, family relationships and how the business is taxed all change the result, so confirm your own treatment with your CPA. Our clients also have access to CPAs and attorneys through the firm.
Where These Rules Come From
IRS: Instructions for Form 7206, Self-Employed Health Insurance Deduction · S Corporation Compensation and Medical Insurance Issues · Notice 2008-1 · Publication 15-B, Employer’s Tax Guide to Fringe Benefits
Related Guides
Related reading: Tax Benefits of Group Health Insurance for Owners · C Corporation Owners · S Corporation Owners With More Than 2 Percent · Partners and LLC Members · Small Business Health Care Tax Credit · Section 125 Tax Savings Calculator
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