Can Self-Employed Individuals Get a Flexible Spending Account?
While an FSA is an employer-based benefit, self-employed individuals have other tax strategies available for managing out-of-pocket medical costs.
A Flexible Spending Account, or FSA, is a savings plan that allows employees to set aside a portion of their earnings for qualified medical and dental expenses. The funds contributed are not subject to payroll taxes, which lowers an individual’s taxable income. These accounts are established by an employer, and the employee elects how much to contribute during an open enrollment period. The designated amount is then deducted from their paychecks throughout the year.
FSA Eligibility for the Self-Employed
Self-employed individuals, such as sole proprietors and partners in a partnership, are not eligible to establish a Flexible Spending Account for themselves. The reason for this restriction is that FSAs are governed by Section 125 of the Internal Revenue Code. These plans require a formal employer-employee relationship, which a self-employed person does not have with their own business.
This ineligibility extends to owners of S-corporations. An individual who owns more than 2% of an S-corporation is treated similarly to a partner in a partnership for benefit purposes and cannot participate in a company-sponsored FSA. While the S-corporation can establish an FSA for its non-owner employees, the owners themselves are excluded.
Health Savings Accounts as an Alternative
For the self-employed, a Health Savings Account (HSA) is an alternative for managing healthcare costs. An individual can open and contribute to an HSA without an employer, but they must be covered by a High-Deductible Health Plan (HDHP). For 2025, an HDHP is a plan with a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage.
HSAs offer a triple tax advantage: contributions are tax-deductible, the funds in the account grow tax-free, and withdrawals for qualified medical expenses are also tax-free. For 2025, an individual with self-only HDHP coverage can contribute up to $4,300, while someone with family coverage can contribute up to $8,550. Individuals aged 55 and older can contribute an additional $1,000 as a catch-up contribution. The funds are owned by the individual and are not subject to a “use-it-or-lose-it” rule, as any remaining balance rolls over indefinitely.
The Self-Employed Health Insurance Deduction
Another tax strategy for the self-employed is the ability to deduct health insurance premium payments directly. This is not an itemized deduction but an “above-the-line” deduction taken on Schedule 1 of Form 1040. This placement reduces a taxpayer’s adjusted gross income (AGI), which can help them qualify for other tax benefits. This deduction is available whether you take the standard deduction or itemize.
The deduction allows for 100% of the premiums paid for medical, dental, and qualifying long-term care insurance to be written off. This applies to coverage for the self-employed individual, their spouse, and any dependents. This deduction is available for any month the individual was not eligible to participate in an employer-subsidized health plan, such as one offered by a spouse’s employer.
A limitation on this tax benefit is that the total deduction claimed cannot be more than the net profit earned from the business. If a business owner has a net loss for the year, they cannot take the self-employed health insurance deduction. The deduction is tied specifically to the earnings of the business that was established by the individual.