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July 20, 2009

Self-employed Health Insurance Deductibility - Will It Get Lost in the Shuffle?

Self-employed Health Insurance Deductibility - Will It Get Lost in the Shuffle?

Anita Campbell

CEO, Small Business Trends LLC

Summary

If you are a self-employed business owner, today you can  deduct 100% of what you pay for your health insurance premiums  off your

If you are a self-employed business owner, today you can deduct 100% of what you pay for your health insurance premiums off your adjusted gross income for Federal income tax purposes.  It’s a considerable benefit – one that I find is frequently overlooked in media reports about health insurance for the self-employed.  I’ve even run into some small business owners – and aspiring business owners – who seem unaware of the provision.  And that’s a shame, because it’s a valuable benefit.

However, as good as that benefit is, you still have to pay a 15.3% self-employment (FICA) tax on those premiums. 

That means, a business owner buying health insurance for himself or herself and dependents, who files a Schedule C, is at a disadvantage compared with larger businesses.  Larger businesses are able to deduct the cost of health insurance as ordinary business expenses.  They are not charged FICA taxes against those amounts.  Unfortunately, the ability to take a full deduction against FICA or self-employment taxes is not available to Schedule C filers -- sole proprietors, freelancers, independent contractors, and those who run LLCs. 

This inequity in the current tax law affects potentially millions of self-employed individuals in the United States. And it costs them real money. 

The self-employed on average pay $12,680 in annual health insurance premiums.  If you paid the average premium, then this tax inequity would cost you as much as $1940 in taxes per year.  

$12,680 x .153  = $1,940 in tax

The National Association for the Self Employed (NASE) has been a strong proponent of changing this issue.  It has spearheaded efforts to get legislators to bring parity to health insurance deductibility between sole proprietors and large corporations.

The Equity for Our Nation’s Self-Employed Act was introduced in the House in March 2009 by Reps. Wally Herger (R-CA), Ron Kind (D-WI), Suzanne M. Kosmas(D-Fla.) and David G. Reichert (R-WA), and in the Senate by Jeff Bingaman.  

In light of the current debates about health care reform for the entire country, I was wondering if these bills had just withered and died.  My fear is that Congress will be distracted, fighting over competing massive healthcare proposals that in the end get compromised and watered down so much they don’t help anyone.  Meanwhile, more modest proposals that actually help improve small business owners’ lot, like these bills, would get lost in the shuffle.

But according to Kristin Oberlander, Public Affairs Manager for NASE, the bills are far from dead.  As of July 6, 2009 NASE is working to encourage other lawmakers to step up to become co-sponsors for the bills in the House and Senate. They are also encouraging congressional members taking a lead on health reform to incorporate this provision into larger health reform legislation.

Time will tell what happens with the self-employed tax equity issue.  But in my opinion, it would be a valuable one for Congress to act on. 

For more background, see the NASE Advocacy statement.  NASE also heads up a coalition consisting of over 40 small business organizations, working for the self-employed tax equity issue – the coalition has a dedicated informational website at www.setaxequity.org.