Can the Self-Employed Deduct HSAs & Health Insurance Costs?
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If you are self-employed and juggling your income and health coverage, the good news is that you can take advantage of both Health Savings Accounts (HSAs) and health insurance premium deductions. But while both offer tax perks, they work a bit differently and come with specific eligibility rules.
If you are self-employed and have a qualifying high-deductible health plan (HDHP), you are eligible to open and contribute to an HSA. This tax-advantaged account allows you to set aside money for medical expenses tax-free. You may also be able to deduct the premiums you pay for health insurance, including dental and long-term care coverage, provided that you meet certain criteria.
Using an HSA When You Are Your Boss
HSAs are available to anyone with an eligible HDHP, including freelancers, gig workers and small business owners. The key requirement is that your health insurance must meet the IRS’s standards for a high deductible: in 2025, that means at least $1,650 in deductibles for individuals or $3,300 for family coverage, with out-of-pocket maximums of $8,300 and $16,600, respectively.
Assuming you qualify, you can contribute up to $4,300 if you have individual coverage or $8,550 for family coverage in 2025. If you are 55 or older, you can contribute an additional $1,000. Unlike a Flexible Spending Account, there is no “use it or lose it” rule — your money rolls over each year and can even be invested, growing tax-free for future medical needs or retirement healthcare costs.
One important catch is that your contributions must be made in cash and are generally made with after-tax dollars. However, you can deduct these contributions from your personal tax return using Schedule 1 of Form 1040, reducing your overall taxable income.
When Insurance Premiums Become Tax-Deductible
If you are self-employed and pay for your health insurance, you may be able to deduct those premiums without itemizing your deductions. This is especially valuable if you do not have access to an employer-sponsored plan and are paying out of pocket for the coverage for yourself, your spouse and dependents.
The deduction is taken as an “adjustment to income,” meaning it lowers your adjusted gross income, which can help you qualify for other tax breaks. However, this is not a blanket deduction. You can only claim it for months when neither you nor your spouse was eligible to participate in a subsidized employer health plan.
You will need to report the deduction using Form 7206, and your business must show a net profit for the year. If you had a loss, you cannot claim the deduction, even if you paid for health insurance all year long.
Income Limitation Rule
Both HSA contributions and health insurance premium deductions are tied to your self-employment income. Specifically, you cannot deduct more than the income your business earns. Therefore, if your business generated $5,000 in profit for the year, that is your cap for total deductions between your HSA and insurance premiums.
Know the HSA Boundaries
It is also important to understand what your HSA funds can and cannot be used for. You can use the money for qualified medical expenses such as doctor’s visits, prescriptions, dental and vision care, and psychiatric treatment. But monthly health insurance premiums are generally not considered qualified expenses, unless they fall into certain categories. The IRS allows HSA funds to be used for:
• Medicare premiums (if you are 65 or older)
• COBRA continuation coverage
• Health insurance while receiving unemployment compensation
• Qualified long-term care insurance (subject to limits)
Any other use of HSA funds for non-qualified expenses before age 65 triggers both income tax and a 20% penalty.
Final Thoughts
For self-employed individuals, using an HSA and deducting health insurance premiums can offer meaningful tax benefits and financial relief.
When in doubt, consult a tax professional, especially if your business structure includes employees or involves an S-corp or LLC. A little planning can go a long way in maximizing your deductions and keeping more of your hard-earned money.