What qualifies
Premiums paid for insurance ordinary and necessary to your trade or business are deductible. Common policies: general liability, professional liability (E&O), property and casualty, business interruption, cyber liability, employment practices liability, fidelity bonds, malpractice, workers' compensation, and commercial auto.
Where it goes
Schedule C line 15 ("Insurance, other than health"). Health insurance for the owner is handled separately on Schedule 1 line 17 (the self-employed health insurance deduction). Employee health insurance, on the other hand, is deductible on Schedule C as a business expense.
Prepaid premiums
Cash-method taxpayers may generally deduct prepaid insurance premiums in the year of payment if the coverage period does not extend more than 12 months beyond the payment date. The 12-month rule is a useful timing tool — pay a January premium in December and deduct it in the earlier year.
Self-insurance not deductible
Setting aside a reserve for "self-insurance" without paying an actual third-party premium is not a deductible expense — the dollars remain yours. Only out-of-pocket loss payments are deductible (and even then, only as ordinary business expenses, not insurance).
Workers' compensation
Workers' compensation insurance premiums on covered employees are deductible. Owner coverage is more nuanced — many states allow owners to opt out, and the premium for an opt-in owner is generally still deductible if the owner is providing services to the business.
Worked example with numbers
Consider a sole prop with $100,000 in gross receipts and $30,000 in legitimate Schedule C deductions, including this category. Each additional $1,000 of qualifying expense reduces Schedule C net profit by $1,000, which reduces self-employment tax by approximately $1,000 × 92.35% × 15.3% ≈ $141, and reduces income tax by $1,000 × marginal rate. At a 22% federal marginal rate, the combined federal tax savings on each additional $1,000 of legitimate deduction is roughly $361, and state savings sit on top of that. The math is why disciplined categorization throughout the year pays for itself.
Common mistakes that disallow the deduction
The recurring ways this deduction gets disallowed in examination cluster in four categories: (1) personal-use expenses bundled with business (the deduction is disallowed entirely or apportioned downward); (2) inadequate substantiation (no receipt, no invoice, no business-purpose note); (3) the wrong line on Schedule C (not fatal, but it weakens audit defense); and (4) double-counting with another line (for example, deducting an expense on Schedule C and also on Form 8829, or as a personal itemized deduction on Schedule A). The fix in every case is contemporaneous bookkeeping and a clean chart of accounts.