🌿 How Sole Proprietors & Single-Member LLCs Can Use Health Insurance to Reduce Taxes

For many sole proprietors and single-member LLC owners, health insurance feels like a fixed cost — something you pay because you have to, not because it meaningfully impacts your bottom line. But with the right structure, health insurance becomes a strategic tax lever that directly lowers your taxable income and supports larger retirement contributions.

If you operate as a Schedule C business, here’s what most people miss:

Your health insurance premiums can work for you, not against you.

Let’s walk through exactly how.

1. Your Health Insurance Premiums Are Deductible as “Self-Employed Health Insurance” (SEHI)

Sole proprietors have access to one of the most straightforward tax benefits available:

the Self-Employed Health Insurance (SEHI) deduction.

This allows you to deduct premiums for:

• Medical
• Dental
• Vision
• Long-term care (subject to annual limits)
• Coverage for spouse & dependents

This deduction is taken above the line on your Form 1040, which means:

✔ It reduces Adjusted Gross Income (AGI)

✔ It can improve your eligibility for credits and deductions

✔ It directly lowers taxable income — whether you itemize or not

This is a deduction W-2 employees do not get access to in the same way.

2. Lower AGI Means a Stronger 20% QBI Deduction

The Qualified Business Income deduction (QBI) is one of the largest tax advantages available to pass-through business owners. But it comes with income limits and phaseouts.

Reducing AGI through SEHI can:

• Help you stay below the QBI threshold
• Increase the size of your 20% deduction
• Prevent phaseouts for high-income professions (including locums)

For many sole proprietors making $100k–$350k in profit, this interaction alone can result in thousands of dollars of tax savings.

This is why health insurance is not just coverage — it's a strategic QBI optimizer.

3. Health Insurance Stacks Perfectly With Solo 401(k) and SEP IRA Contributions

One of the unique advantages of being self-employed is the ability to control two major levers simultaneously:

Income management + retirement contributions.

Because the SEHI deduction reduces your AGI (but not your Schedule C net profit), it doesn’t negatively impact your contribution limits.

You still get:

• Solo 401(k) employee deferral
• Employer contribution based on net earnings
• Optional Roth contributions
• Optional mega-backdoor Roth setups (for certain structures)

What this means in practice:

→ You reduce taxable income with health insurance

→ You maintain high contribution room

→ You layer both strategies for a significantly lower tax bill

Most sole proprietors overlook how cleanly these two strategies work together.

4. Adding an HSA Creates a “Triple Tax Advantage”

If your coverage is through a High-Deductible Health Plan (HDHP), don’t overlook the Health Savings Account (HSA).

This is one of the most tax-efficient tools available.

You get:

1. Pre-tax contributions
2. Tax-free growth
3. Tax-free withdrawals for medical expenses

And at age 65, the HSA becomes even more flexible — withdrawals for non-medical uses are penalty-free (taxed like a traditional IRA).

This effectively gives you:

• A secondary retirement account
• A medical emergency reserve
• A tax-advantaged investment vehicle

When combined with the SEHI deduction, HSAs can further reduce your taxable income while building long-term wealth.

5. Example: A Sole Proprietor Earning $185,000

Let’s illustrate the impact:

• $185,000 Schedule C profit
• $12,000 annual health insurance premiums
• $8,550 HSA family contribution (2025 estimate)
• $37,000 Solo 401(k) contributions

Combined effect:

✔ Taxable income drops dramatically

✔ QBI deduction improves

✔ Total deductions exceed $50,000–$60,000

✔ Long-term retirement savings grow simultaneously

This is the type of coordinated planning most people don’t realize is available without changing their entity.

6. When a Sole Proprietor Should Consider “Upleveling” Entity Structure

While the SEHI deduction works well, there are situations where staying a sole proprietor limits your planning:

You may want to consider forming an S-Corporation if:

• Your net profit consistently exceeds $150k+
• You want more control over payroll tax exposure
• You’re exploring Cash Balance Plans or advanced pension strategies
• You want more flexibility in calculating “reasonable compensation”

But until that point, Schedule C owners enjoy one of the cleanest and most efficient health insurance deduction rules in the tax code.

Final Word: Health Insurance Is a Tax Lever for Sole Proprietors

You’re not limited to “just paying the bill.”

As a sole proprietor, you have access to:

• The SEHI deduction
• The ability to reduce AGI strategically
• The opportunity to boost your QBI deduction
• Full stacking with Solo 401(k) contributions
• HSA triple-tax benefits

This combination puts you in an excellent position to reduce taxes while building long-term wealth.

If you’re not sure whether you’re using every benefit available to you, or you want to compare Schedule C benefits to an S-Corp structure,

MyPensionTree can help you map out your optimal strategy.

👉 Book a tax-savings consultation

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