2025 Rules: Deduct Half Self-Employment Tax on Schedule 1

The Internal Revenue Service confirmed that for the 2025 tax year, people who are self‑employed can still deduct 50% of Self‑Employment Tax and can claim the Self‑Employed Health Insurance deduction when they meet the rules. These two adjustments reduce taxable income on the individual return, and neither requires itemizing.

The rules apply nationwide and cover sole proprietors, independent contractors, partners, and certain S corporation shareholders, continuing the approach used in recent years without major changes. Taxpayers must use Schedule SE (Form 1040) to figure self‑employment tax and Form 7206 to compute the health insurance deduction, then report both adjustments on Schedule 1 (Form 1040). According to analysis by VisaVerge.com, the stability in these rules helps small firms and independent workers plan ahead, especially those newly running a business in the United States 🇺🇸.

Who is treated as self‑employed?

The IRS treats a person as self‑employed if they:

• Carry on a trade or business as a sole proprietor or an independent contractor.
• Receive a partner’s distributive share of ordinary income or loss — that share is self‑employment income for relevant partners.

These categories matter because self‑employed people pay Social Security and Medicare taxes through Self‑Employment Tax, rather than through payroll withholding.

To calculate that tax, a filer includes Schedule SE (Form 1040) with the return, then claims the deductible part of that tax as an adjustment to income on Schedule 1 (Form 1040). This process remains in place for 2025.

The IRS also allows a separate adjustment for health coverage premiums paid by a self‑employed person for themselves, a spouse, dependents, and a child under age 27 (even if that child is not a dependent), using Form 7206 to compute the amount.

Deductible half of Self‑Employment Tax

The deductible part of Self‑Employment Tax works the same way it has for years:

• After computing self‑employment tax on Schedule SE (Form 1040), the taxpayer can deduct 50% of that tax on Schedule 1 (Form 1040).
• This deduction lowers Adjusted Gross Income (AGI), but it does not change the self‑employment tax bill itself.
• It also does not reduce the net earnings figure used to compute Self‑Employment Tax.
• The IRS treats the deduction as an above‑the‑line adjustment, so it can be claimed whether or not the filer itemizes on Schedule A (Form 1040).

The placement on Schedule 1 reflects that half of self‑employment tax is viewed as the “employer share,” which Congress allows to be treated as an income‑tax deduction rather than a business expense.

Self‑Employed Health Insurance deduction (Form 7206)

The Self‑Employed Health Insurance deduction is separate and uses Form 7206, Self‑Employed Health Insurance Deduction:

• Premiums can include medical and dental insurance and qualified long‑term care insurance (subject to limits).
• Coverage can be for the self‑employed person, their spouse, dependents, and a child under 27 at year‑end, even if that child is not a dependent.
• The deduction can be large for families buying their own coverage, but important guardrails apply:
  • It cannot exceed the income from the business under which the plan is established.
  • It is not allowed for any month the taxpayer (or their spouse, or the employer of a dependent/qualifying child under 27) was eligible to take part in an employer‑subsidized plan.

Eligibility — one of these must be true for the year

• The person is self‑employed and had a net profit reported on Schedule C (Form 1040) or Schedule F (Form 1040).
• The person is a partner with net earnings from self‑employment reported on Schedule K-1 (Form 1065), box 14, code A.
• The person used one of the optional methods to figure net earnings on Schedule SE (Form 1040).
• The person received wages from an S corporation and is a more‑than‑2% shareholder; health insurance premiums paid or reimbursed by the S corporation are included as wages on Form W‑2.

What it means for plan establishment and reporting

For the policy to count, the insurance plan must be considered established under the business:

• Sole proprietors (Schedule C) and farmers (Schedule F): policy can be in the business name or the individual’s name.
• Partners: a policy can be in the partnership’s name or the partner’s name, but if the partner pays premiums personally, the partnership must:
  1. Reimburse the partner, and
  2. Report the premiums as guaranteed payments on Schedule K‑1 (Form 1065) so the amounts are included in the partner’s gross income.
     Without that reimbursement and reporting, the plan is not treated as established under the business.
• More‑than‑2% S corporation shareholders: a policy can be in the S corporation’s name or the shareholder’s name. Either the S corporation pays the premiums or it reimburses the shareholder; the S corporation then reports the premium amounts as wages in box 1 of Form W‑2, and the shareholder includes them in gross income. Skipping these steps prevents the deduction.

Employer‑eligibility months and double counting

• No deduction is allowed for any month the taxpayer or spouse was eligible for an employer‑subsidized plan. This also applies if an employer of a dependent or a qualifying child under 27 offered subsidized coverage.
• The rule is based on eligibility, not actual enrollment — a frequent tripwire for midyear job changes.
• If a taxpayer itemizes medical expenses on Schedule A (Form 1040), they must subtract the self‑employed health insurance amount from medical expenses before applying the 7.5% AGI threshold. The same premium dollars cannot be counted twice.
• The health insurance adjustment does not reduce net income from self‑employment for purposes of Self‑Employment Tax.

Policy changes and current rules (2025)

Officials and tax practitioners point to continuity for the 2025 tax year:

• The IRS still requires Schedule SE (Form 1040) to compute self‑employment tax and Schedule 1 (Form 1040) to report both the deductible half of that tax and the Self‑Employed Health Insurance deduction.
• Rules on plan establishment, S corporation wage reporting, and partnership guaranteed payments remain in place.
• The health insurance deduction cannot exceed income from the trade or business that paid the premiums — tying the benefit to active self‑employment earnings.

Recent legislation (the “One Big Beautiful Bill,” passed across 2024–2025) did not change the 50% deduction for Self‑Employment Tax or the rules for Self‑Employed Health Insurance. It left in place familiar small‑business items such as the simplified home office method at $5 per square foot up to 300 square feet ($1,500 max).

VisaVerge.com reports that the absence of cuts to these self‑employed adjustments gives owners continued breathing room on cash flow.

Deduction mechanics — step‑by‑step

To claim the deductible half of Self‑Employment Tax:

1. Complete Schedule SE (Form 1040) to calculate tax on net earnings from self‑employment.
2. Carry the resulting tax through the return; claim 50% of that tax as an adjustment to income on Schedule 1 (Form 1040).
3. That deduction lowers AGI but does not change the Self‑Employment Tax amount itself.

To claim Self‑Employed Health Insurance:

1. Use Form 7206 to compute the allowed amount based on:
   • The year’s premiums,
   • Limits for qualified long‑term care, and
   • The ceiling equal to the self‑employment income of the business that paid the premiums.
2. Ensure the policy is established under the business with the correct reporting (guaranteed payments on Schedule K‑1 or wages on Form W‑2 for S‑corp shareholders).
3. Transfer the result to Schedule 1 (Form 1040) as an above‑the‑line deduction.

Practical examples and common scenarios

• A household that buys marketplace coverage for part of the year and then becomes eligible for a spouse’s employer plan in October:
  • Premiums for January–September may be deductible (if other rules are met).
  • Premiums for October–December would not be deductible due to the employer‑eligibility rule.
• A partner who pays for a policy in their name but never receives a reimbursement reported as a guaranteed payment:
  • The IRS will not view the policy as a business plan; the deduction is lost.
• A more‑than‑2% S corporation shareholder must ensure premiums are included in wages on Form W‑2; otherwise the deduction fails.

Practical impact on households and small firms

• For a one‑person business, these adjustments can ease tax pressure:
  • The 50% Self‑Employment Tax deduction is automatic once Schedule SE is complete.
  • The health insurance deduction can be substantial, especially for families buying their own coverage all year.
• A child under 27 can be covered and counted even if not a dependent — helpful for college students and young adults.
• Partnerships and S corporations require extra bookkeeping:
  • Partners need partnership reimbursement and Schedule K‑1 guaranteed‑payment reporting.
  • S corporations must include premium amounts in Form W‑2 box 1 for more‑than‑2% shareholders.
• Tax software and payroll platforms commonly guide users through these entries, and many small firms rely on them to keep records clean.

Practical checklist (recommended)

1. Add up net profit by business and keep it separate — the Self‑Employed Health Insurance deduction cannot exceed income from the business that paid the premiums.
2. Confirm the policy is established under the business. Sole proprietors can keep it in their own name; partners and S‑corp shareholders need reimbursement‑and‑reporting steps.
3. Mark any months when employer‑subsidized coverage was available to the taxpayer, spouse, dependent, or a child under 27 — those months do not qualify.
4. Use Form 7206 to calculate the health insurance deduction and carry the result to Schedule 1 (Form 1040).
5. Complete Schedule SE (Form 1040) to compute self‑employment tax, then deduct 50% of that amount on Schedule 1 (Form 1040).
6. If itemizing on Schedule A (Form 1040), subtract the self‑employed health insurance amount from total medical expenses before applying the AGI threshold.

Also keep in mind the simplified home office deduction remains $5 per square foot up to 300 square feet ($1,500 max) — often claimed alongside these other small‑business items.

Common errors to avoid

• Claiming premiums on Schedule A without first checking Form 7206.
• Forgetting to remove above‑the‑line premiums from itemized medical expenses.
• Missing employer‑eligibility months and losing months of deduction.
• For partnerships and S corporations, failing to reimburse and report premiums (guaranteed payments or W‑2 wages), which can make the premiums non‑deductible.

Documentation and resources

Keep these documents and records:

• Premium invoices and proof of payment.
• Proof that the business paid or reimbursed premiums.
• Form W‑2 showing premiums included in wages for more‑than‑2% S‑corp shareholders.
• Schedule K‑1 (Form 1065) pages that display guaranteed payments for partners.

The IRS has an online hub for independent workers: the Self-Employed Individuals Tax Center, which points to forms, instructions, and publications. It’s the best place to confirm that the current year’s Schedule SE (Form 1040), Schedule 1 (Form 1040), and Form 7206 are up to date before filing. The IRS pages include line‑by‑line instructions that match the forms taxpayers need.

Key forms and links:
– Schedule SE (Form 1040): About Schedule SE (Form 1040)
– Schedule 1 (Form 1040): About Schedule 1 (Form 1040)
– Form 7206: About Form 7206
– Schedule C (Form 1040): About Schedule C (Form 1040)
– Schedule F (Form 1040): About Schedule F (Form 1040)
– Schedule K‑1 (Form 1065): About Schedule K‑1 (Form 1065)
– Form W‑2: About Form W‑2
– Schedule A (Form 1040): About Schedule A (Form 1040)
– Form 8829 (home office reference): About Form 8829

These links point to official IRS pages that include current‑year versions and instructions. Before filing, taxpayers should confirm they are using the latest year’s forms and line numbers, as the IRS may update layouts while keeping the core rules intact.

Important takeaways:
– Claim 50% of Self‑Employment Tax on Schedule 1 (Form 1040) after completing Schedule SE (Form 1040).
– Use Form 7206 to compute the Self‑Employed Health Insurance deduction and transfer it to Schedule 1 (Form 1040).
– Keep careful records and ensure partnership and S‑corp reporting steps are completed so the plan is treated as established under the business.
– Months of employer‑eligibility disallow the health insurance deduction even if the family chooses to remain on marketplace coverage.

For many independent workers — rideshare drivers, home‑based sellers, farm operators, and freelancers — these adjustments are now routine components of tax filings. The rules for 2025 remain familiar: same schedules, same forms, and the same need for accurate records to preserve the deductions.