Is Health Insurance Tax Deductible for Small Businesses?

I work with a restaurant owner down in Bellaire who pays $14,400 a year for family health coverage. That’s $1,200 a month before the kitchen even opens. Last tax season, she walked in thinking those premiums were just gone.

I told her to sit down. We deducted almost all of it. Her federal tax bill dropped by $3,500. That’s real money.

Health insurance kills small business budgets. Nobody disputes that. What kills your tax return is getting the deduction wrong. The rules flip based on how you set up your business, whether you have staff, and what kind of plan you’re running. I’ve seen the same $12,000 in premiums treated three completely different ways.

Note: Tax rules change. Always consult with a qualified tax professional for advice specific to your situation.

The Self-Employed Health Insurance Deduction

You’re a sole proprietor, single-member LLC, or partner in a partnership. That self-employed health insurance deduction is your best friend on the tax return. You write off 100% of what you pay for yourself, your spouse, and your dependents.

You deduct:

• Medical insurance premiums
• Dental and vision coverage
• Qualifying long-term care insurance (subject to age-based limits)
• All Medicare premiums (Parts A, B, C, and D)

Kids under 27 count too, even if they’re not claimed as dependents on your return.

Where It Appears on Your Return

This is an above-the-line deduction. It hits your adjusted gross income directly on Schedule 1 (Form 1040), Line 17, using Form 7206. No 7.5% AGI threshold. No minimum. The first dollar counts.

I have a designer in the Energy Corridor paying $6,000 a year. She deducts all $6,000. No percentage gate to jump through. That’s the power of this deduction.

Eligibility Rules

Two hard stops you need to know:

1. No employer coverage available. If you or your spouse had access to an employer plan during the year, you lose the deduction for those months. I see this constantly. Your spouse lands a job in July with benefits. You lose the deduction for July through December, even if you paid your own policy the whole time.

2. Can’t exceed business profit. The deduction maxes at your net self-employment income. Your Schedule C shows $8,000 profit but you paid $12,000 in premiums. You deduct $8,000. That’s it.

S-Corp Owner Health Insurance: The 2% Shareholder Rules

You own more than 2% of an S-Corp. You work in the business. The health insurance rules are specific. IRS guidance spells out three steps:

1. The S-Corp pays or reimburses the premiums. The policy is in the corp’s name or your name. The business pays the insurer or reimburses you.

2. Premiums show on your W-2. Box 1 gets the premium amounts as taxable wages. Boxes 3 and 5 don’t. Income tax applies. FICA, FUTA don’t.

3. You deduct them on your personal return. Same above-the-line deduction as a sole proprietor.

Your S-Corp deducts the premiums. You deduct them again. Income tax washes out. You save employment taxes on the premium amount.

The mistake I see: Your S-Corp doesn’t actually reimburse the premiums or put them on your W-2. The IRS denies the deduction on audit. I’ve watched this happen. The corporation has to pay or reimburse. You can’t pay out of pocket and claim it later.

I have an HVAC contractor in Cypress running as an S-Corp. $9,600 a year in family premiums. Done right, that saves him $1,500 in employment taxes versus paying as wages. But only if the W-2 reporting is perfect.

C-Corp Owners: The Simplest Path

You’re a C-Corp owner and you work in the business. You have the cleanest setup. The corporation buys a group health plan, pays the premiums, and deducts them under IRC Section 106. Nothing hits your W-2.

No extra forms. No tricks. The corporation deducts it. You get it tax-free. Zero employment taxes on the premiums.

The trade-off is C-Corp double taxation when you pull money out. But for health insurance, C-Corps are the cleanest path.

Offering Coverage to Employees: Group Plans and HRAs

You hire employees. The picture changes. Employer-paid health insurance is deductible no matter what entity you are. Payroll taxes don’t apply.

Traditional Group Health Insurance

What you pay toward a group plan is fully deductible. In Houston, individual coverage runs $400 to $700 per employee per month. Family plans are $1,200 to $1,800. Most shops cover 50% to 75% of the employee premium.

I have a landscaping outfit in Spring. Five guys. They chip in an average $500 per month per person. That’s $30,000 a year in deductible expenses. The guys get tax-free coverage.

QSEHRA: The Small Employer Alternative

You have fewer than 50 full-time employees and no group plan. Set up a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). Reimburse employees tax-free for individual insurance and medical expenses.

2026 QSEHRA contribution limits:

Coverage Type	Annual Maximum	Monthly Maximum
Self-only	$6,450	$537.50
Family	$13,100	$1,091.66

QSEHRA rules:

• Employer contributions are tax-deductible
• Employee reimbursements are tax-free (if they have minimum essential coverage)
• Must be offered uniformly to all eligible full-time employees
• No minimum contribution requirement
• Cannot be offered with a group health plan

I have a marketing agency in Montrose. Eight staff. No group plan. They reimburse each person up to $537.50 a month for individual coverage. Fully deductible for the agency. Tax-free for the staff. No group plan headaches.

ICHRA: Flexible and Scalable

The Individual Coverage Health Reimbursement Arrangement (ICHRA) works for any size business. No cap on contributions. You set monthly allowances by employee class (full-time, part-time, salaried, hourly), and employees buy their own coverage.

You can offer ICHRA alongside a group plan if you’re not offering both to the same employees. Works well for mixed workforces.

Your contributions are deductible and tax-free for employees.

The Small Business Health Care Tax Credit

You have fewer than 25 full-time equivalent employees. You might qualify for a tax credit worth up to 50% of premiums. These are the requirements:

• Fewer than 25 FTEs
• Average annual wages below $68,200 (2026)
• You pay at least 50% of employee premium costs
• Coverage through the SHOP Marketplace

The full 50% credit hits at 10 or fewer employees with average wages under $34,100 (2026). It phases out as you hit 25 employees or the wage cap.

You can claim it for two years. Use Form 8941. It offsets regular tax and AMT.

What’s Not Deductible

Not all health expenses are business write-offs:

• Premiums for months when an employer plan was available (self-employed deduction killed)
• Premiums over net self-employment income (sole proprietors)
• Health insurance for non-employees (friends, non-dependent relatives)
• Cosmetic procedures unless medically necessary
• General wellness programs not tied to a qualifying plan
• Premiums paid with pre-tax dollars (no double-dipping)

Which Structure Gives You the Best Deduction?

Health insurance tax treatment depends on how your business is structured:

Structure	How Premiums Are Deducted	Employment Tax on Premiums?
Sole Proprietor / LLC	Above-the-line on personal return (Form 1040)	Not applicable (SE tax on net profit)
Partnership / Multi-member LLC	Partner’s above-the-line deduction	Not applicable
S-Corp (2%+ shareholder)	W-2 reporting + above-the-line deduction	No FICA/FUTA
C-Corp (employee-owner)	Corporate deduction, tax-free to employee	No FICA/FUTA

You’re picking entity structure for your Houston business. Health insurance treatment is one piece. It’s worth $3,000 to $5,000 a year in tax savings depending on the choice you make.

Getting the Deduction Right

Health insurance deductions hit business structure, employment rules, and tax planning all at once. The same $12,000 in premiums gets treated completely different depending on whether you’re a sole proprietor, S-Corp owner, or C-Corp employee.

I’ve worked in Houston for ten years. I’ve helped business owners in Energy Corridor, Bellaire, Spring, Pearland, Montrose, and every neighborhood between get this right. From picking the right entity to running payroll correctly to planning taxes year-round, we make sure your premiums are documented and deducted the right way.

Reach out if you want to review your health insurance tax strategy.

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This article provides general information and is not tax advice. Tax situations vary — consulting with a qualified tax professional about specific circumstances is always recommended.