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Determine retirement, HSA, self-employed-health, and half-SE-tax adjustments
Most returns subtract the standard deduction or itemized deductions after adjusted gross income is set. Four adjustments act earlier: they lower gross income itself to produce adjusted gross income. This lesson covers the four that self-employed filers and savers meet constantly: one-half of self-employment tax, deductible retirement contributions, health savings account contributions, and self-employed health insurance. Each is claimed above the line, so each works whether the taxpayer itemizes or takes the standard deduction.
Employees split Social Security and Medicare taxes with their employer: each side pays half. A self-employed worker pays both halves as self-employment tax, so the law gives back the employer half through an adjustment to income. The deduction equals one-half of the SE tax for the year and is claimed above the line, which means it lowers adjusted gross income whether the taxpayer itemizes or takes the standard deduction.
Two rules apply. First, the deduction is an income tax deduction only: it never reduces the net earnings figure on which SE tax itself is figured, so there is no circular recomputation. Second, only the regular SE tax is halved: the deduction does not include tax imposed by section 1401(b)(2), the 0.9% Additional Medicare Tax on self-employment income above the filing-status threshold, so none of that tax is deductible.
Dana has $80,000 of net earnings from self-employment and figures SE tax of $11,304. Her adjustment is \(11{,}304 \div 2 = 5{,}652\), claimed on Schedule 1. Her net earnings subject to SE tax stay $80,000: the $5,652 plays no part in that figure.
Publication 517 Page 11
You can deduct one-half of your SE tax in figuring AGI. This is an income tax deduction only, which is claimed on Schedule 1 (Form 1040), line 15.View on the source
Publication 517 Page 11
Don't claim this deduction in figuring net earnings from self-employment subject to SE tax.View on the source
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This deduction doesn’t include taxes imposed by section 1401(b)(2), pursuant to section 164(f)(2) of the Internal Revenue Code.View on the source
A sole proprietor figures $11,160 of self-employment tax on Schedule SE. What is the deductible one-half of SE tax and how does it affect net earnings subject to SE tax?
A deductible traditional IRA contribution must meet three tests in order. First, the saver needs compensation: contributions are allowed only to the extent of taxable compensation for the year. For a self-employed saver, IRA compensation is net earnings from the business reduced by the deductible half of self-employment tax and any deduction for contributions to the saver’s own retirement plan. Second, the annual limit caps the contribution at $7,000 for 2025, or $8,000 for a saver age 50 or older. Third, coverage and income decide how much of the contribution is deductible. A saver covered by no employer plan — neither the saver nor, on a joint return, the spouse — deducts the full contribution; an uncovered spouse of a covered worker instead phases the deduction down across $236,000 to $246,000 of modified AGI. A covered saver phases the deduction down across a modified-AGI range that depends on filing status:
| Filing status | Full deduction | Phaseout range | No deduction |
|---|---|---|---|
| Single or head of household (covered saver) | Modified AGI $79,000 or less | $79,000 to $89,000 | $89,000 or more |
| Married filing jointly (covered saver) | Modified AGI $126,000 or less | $126,000 to $146,000 | $146,000 or more |
| Joint return, saver uncovered and spouse covered | Modified AGI $236,000 or less | $236,000 to $246,000 | $246,000 or more |
| Married filing separately | No full deduction | Less than $10,000 (partial) | $10,000 or more |
A saver who files separately but did not live with the spouse at any time during the year is treated as single for this purpose. Timing matters too: contributions for 2025 must be made by April 15, 2026; a contribution made between January 1 and April 15 must designate its year with the sponsor; and the return may be filed claiming the contribution before it is actually made. Inside a phaseout range the saver uses the worksheet to figure a reduced deduction; the contribution itself may still be made as a nondeductible contribution. The deductible part is entered on Schedule 1, line 20.
A self-employed owner who contributes to their own SEP, SIMPLE, or qualified plan claims that contribution on a different line, Schedule 1, line 16, and the same circular compensation problem appears. The owner's compensation for the plan is net earnings from self-employment after both the deductible half of SE tax and the deduction for the contribution itself, so the contribution and the compensation depend on each other. The IRS resolves this by reducing the plan's contribution rate: divide the plan rate by one plus that rate. A 25% plan rate becomes \(0.25 \div 1.25 = 0.20\), and a 10% rate becomes 0.090909. The Rate Table for Self-Employed lists whole-percentage rates, the Rate Worksheet handles the rest, and the Deduction Worksheet for Self-Employed then applies the reduced rate to net profit minus the half-SE-tax deduction. Choosing, covering, and funding SEP and SIMPLE plans for a whole payroll is taught in Part 2, Plans for the Self-Employed; this step covers only the owner's own deduction.
Priya is 38, single, and covered by her employer's plan, with modified AGI of $70,000. She contributes $7,000. The contribution is within her $7,000 limit, and her income sits below the $79,000 start of her phaseout range, so the full $7,000 is deductible on Schedule 1, line 20. Had her modified AGI been $84,000 instead, she would fall inside the $79,000 to $89,000 range and figure a reduced deduction on the worksheet, deducting only part of the $7,000.
Marco, a sole proprietor with no employees, has a SEP with a 25% contribution rate, $100,000 of net profit, and a $7,065 deduction for half of his SE tax. His reduced rate is \(0.25 \div 1.25 = 0.20\). His maximum deduction for his own contribution is \(0.20 \times (100{,}000 - 7{,}065) = 0.20 \times 92{,}935 = 18{,}587\), entered on Schedule 1, line 16. Applying the full 25% to $92,935 ($23,234) would overstate it, because that figure ignores the contribution's own reduction of compensation; $18,587 is exactly 25% of the $74,348 left after subtracting it.
Publication 590-A Page 5
Yes. For 2025, you can contribute to a traditional IRA up to: • $7,000, or • $8,000 if you were age 50 or older by the end of 2025.View on the source
Publication 590-A Page 2
For 2025, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: • More than $126,000 but less than $146,000 for a married couple filing a joint return or a qualifying surviving spouse, • More than $79,000 but less than $89,000 for a single individual or head of household, or • Less than $10,000 for a married individual filing a separate return.View on the source
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$236,000 or less a full deduction. more than $236,000 but less than $246,000 a partial deduction. $246,000 or more no deduction.View on the source
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less than $10,000 a partial deduction. $10,000 or more no deduction.View on the source
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If you didn’t live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” filing status).View on the source
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Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2025 must be made by April 15, 2026.View on the source
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If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. If you don’t tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). Filing before a contribution is made. You can file your return claiming a traditional IRA contribution before the contribution is actually made.View on the source
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If you file Schedule 1 (Form 1040), enter your IRA deduction on line 20 of that form.View on the source
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Enter your compensation minus any deductions on Schedule 1 (Form 1040), line 15 (deductible part of self-employment tax), and Schedule 1 (Form 1040), line 16 (self-employed SEP, SIMPLE, and qualified plans).View on the source
Publication 560 Page 11
If you contribute to your own SEP IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. • The deduction for the deductible part of your self-employment tax. • The deduction for contributions to your own SEP IRA. The deduction for contributions to your own SEP IRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEP IRA indirectly by reducing the contribution rate called for in your plan.View on the source
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Example. You are a sole proprietor with no employees. If your plan's contribution rate is 10% of a participant's compensation, your rate is 0.090909.View on the source
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Sole proprietors and partners deduct contributions for themselves on line 16 of Schedule 1 (Form 1040).View on the source
Danny, an unmarried part-time student age 22, earns $3,500 in wages in 2025 and is not covered by an employer plan. What is the most he can contribute to his traditional IRA for 2025?
A health savings account pairs with a high deductible health plan: the saver contributes now, deducts the contribution, and later spends the account on qualified medical expenses. Anyone may fund the account, including an employer or a family member, but the tax treatment follows the source. Contributions the individual (or anyone other than the employer) makes are deducted above the line, with no need to itemize. Employer contributions take the other route: they are excluded from gross income rather than deducted.
Eligibility is tested person by person. On the first day of each month the individual must hold HDHP coverage, carry no disqualifying other coverage, stay out of Medicare, and be unclaimable as a dependent. A general-purpose health FSA that pays medical expenses before the HDHP deductible is disqualifying coverage; dental-only and vision-only coverage are permitted. Failing any test for a month blocks contributions attributable to that period, so mid-year Medicare enrollment or new disqualifying coverage stops the deduction from that point on — except under the last-month rule, which treats an individual eligible on the first day of the last month of the tax year as eligible for the entire year. Anyone who relies on the last-month rule must then remain eligible through the testing period (for 2025, through December 31, 2026); failing to do so puts the extra contributions back into income with a 10% additional tax.
Limits cap the deduction. For 2025 the limit is $4,300 with self-only HDHP coverage or $8,550 with family coverage, plus $1,000 for an eligible individual age 55 or older at year-end. One who was not eligible for the entire year or who changed coverage during the year is limited to the greater of the Form 8889 worksheet amount or the full annual amount for the coverage held on the first day of the last month, and Archer MSA contributions for the year reduce the HSA limit. Contributions above the limits are excess: not deductible and subject to a 6% excise tax for each year they remain, unless withdrawn with any earnings by the return due date.
Lena holds self-only HDHP coverage for all of 2025, has no other coverage, is not enrolled in Medicare, and cannot be claimed as a dependent. She contributes $3,000 of her own money to her HSA. She deducts the full $3,000 above the line even though she claims the standard deduction. Had her employer contributed $1,000 of that $3,000 instead, the $1,000 would have been excluded from her income and only the remaining $2,000 would have been deducted.
Publication 969 Page 3
• You can claim a tax deduction for contributions you or someone other than your employer make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).View on the source
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To be an eligible individual and qualify for an HSA contribution, you must meet the following requirements. • You are covered under a high deductible health plan (HDHP), described later, on the first day of the month. • You have no other health coverage except what is permitted under Other health coverage, later. • You aren’t enrolled in Medicare. • You can’t be claimed as a dependent on someone else’s 2025 tax return.View on the source
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Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Contributions made by your employer aren’t included in your income.View on the source
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For 2025, if you have self-only HDHP coverage, you can contribute up to $4,300. If you have family HDHP coverage, you can contribute up to $8,550.View on the source
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Additional contribution. If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000.View on the source
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However, if you weren’t an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of: 1. The limitation shown on the Line 3 Limitation Chart and Worksheet in the Instructions for Form 8889, Health Savings Accounts (HSAs); or 2. The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year.View on the source
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Last-month rule. Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month if you didn’t otherwise have coverage.View on the source
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Because you didn’t remain an eligible individual during the testing period (December 1, 2025, through December 31, 2026), you must include in your 2026 income the contributions made for 2025 that wouldn’t have been made except for the last-month rule.View on the source
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If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax.View on the source
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Excess contributions. You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions aren’t deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution isn’t included in Form W-2, box 1 you must report the excess as “Other income” on your tax return. Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.View on the source
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You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions. • You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made. • You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.View on the source
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Reduction of contribution limit. You must reduce the amount that can be contributed (including any additional contribution) to your HSA by the amount of any contribution made to your Archer MSA (including employer contributions) for the year.View on the source
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Other employee health plans. An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses can’t generally make contributions to an HSA. FSAs and HRAs are discussed later.View on the source
An individual has family HDHP coverage all year but enrolls in Medicare effective July 1, 2025. What happens to the 2025 HSA deduction?
Self-employed workers have no employer to pay part of their premiums, so the self-employed health insurance deduction moves qualifying premiums above the line onto Schedule 1, line 17. The plan must be established under the business, and three limits shape the amount. Premiums claimed here can never reappear as Schedule A medical expenses. Any month in which the worker could join a subsidized employer plan, their own or a spouse's, drops out of the deduction. And the deduction for the year cannot exceed net earnings from the business that established the plan, so a loss business supports no deduction. For this cap, net earnings means the net profit from that business minus the deductible half of SE tax (Schedule 1, line 15) and minus any deduction for the owner's own SEP, SIMPLE, or qualified plan contributions (Schedule 1, line 16).
What remains after these limits is deducted in full: unlike the medical-expense deduction, there is no percentage-of-AGI floor on this adjustment. Premiums not claimed here may be included with other medical expenses on Schedule A, subject to the 7.5% limit, when the taxpayer itemizes.
Rosa reports $60,000 of net profit from her business, which stays far above $9,000 after her half-SE-tax deduction, and pays $9,000 in premiums under a plan established under that business. She is never eligible for a subsidized employer plan. All three limits are satisfied, so she deducts the full $9,000 on Schedule 1, line 17, and excludes the $9,000 from her Schedule A medical expenses. Had she been eligible for her spouse's subsidized plan for 3 of the 12 months, only 9 months of premiums, \(9 \times 750 = 6{,}750\), could have been deducted.
Publication 517 Page 11
If you qualify, you can take this deduction as an adjustment to income on Schedule 1 (Form 1040), line 17.View on the source
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The following special rules apply to the self-employed health insurance deduction. • You can't take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. • You can't take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. • The deduction can't exceed your net earnings from the business under which the insurance plan is established.View on the source
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If you itemize your deductions and don’t claim 100% of your self-employed health insurance costs on Form 1040 or 1040-SR, include any remaining premiums with all other medical expenses on Schedule A (Form 1040) subject to the 7.5% limit.View on the source
Form 1040 Instructions Page 94
2. Enter your net profit* and any other earned income** from the business under which the insurance plan is established, minus any deductions on Schedule 1, lines 15 and 16.View on the source
A self-employed taxpayer pays $4,800 in health insurance premiums for the year ($400 per month), was eligible for a spouse's subsidized employer plan for 7 months, and has $2,500 of net earnings from the business establishing the plan. What is the allowable self-employed health insurance adjustment?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.