The title of this piece may be a tad dramatic. I’ve overstated it to make a point.
There’s a significant health insurance benefit for the self-employed that just doesn’t get much attention in the press. But it should.
It’s the Federal tax provision that allows self employed individuals to deduct 100% of their health insurance premiums for themselves and their families. IRS Publication 502 describes it in plain English (more or less):
"If you were self-employed and had a net profit for the year, you may be able to deduct, as an adjustment to income, amounts paid for medical and qualified long-term care insurance on behalf of yourself, your spouse, and your dependents.”
This deduction reduces, dollar for dollar, your taxable income for Federal income tax purposes, by the amount you paid in premiums. Your income is adjusted on page 1 of your 1040 tax return.
Yet, an article like this one in Reuters, examining how entrepreneurship is being stifled by lack of healthcare coverage, states that “Self-employed workers face a further disadvantage because they cannot deduct health-insurance payments from their income taxes, unlike companies that maintain a payroll.” So even when a benefit exists, it gets no respect.
There are some limitations to this tax deduction, to be sure. Your health insurance premiums are not, for instance, deducted for FICA taxes. That means you would still have to pay FICA taxes on the amount of the health insurance premiums. You also cannot, under this provision, deduct health insurance premiums your business pays on behalf of employees — this particular provision covers just the business owner and family. And you still have to come up with the money to pay for your insurance premiums, potentially before you file your return (unless you are able to reduce your estimated tax payments in anticipation of the tax savings).
But my point is that a benefit is available to entrepreneurs that blunts the wicked edge of high healthcare — if you know what it is.
For an added benefit, you can also layer on a health savings account coupled with a high deductible insurance plan. With a Health Savings Account (HSA) you can lower your health insurance premiums by getting a special high-deductible insurance plan. Then you fund a Health Savings Account to use it to pay for medical expenses not covered by insurance. Here again you get Federal Income tax benefits:
(1) tax deductions when you contribute to your HSA account;
(2) tax-free earnings through investment of the funds in your HSA account; and,
(3) tax-free withdrawals for qualified medical expenses.
Are these benefits perfect or right for every entrepreneur and his/her family? No. Will the self-employed entrepreneur or business owner still have to pay something toward health coverage no matter what? Yes.
For instance, this health deduction coupled with an HSA may not be sufficient for families on the economic edge already or who are big users of health services. Still, together they are a considerable benefit and should be better understood.
Our health coverage systems in the United States are broken. More can be done to make health coverage more affordable and more widely available to all. We also need tax deductions extended to premium costs for employees, not just for the business owner.
But until changes happen, please make sure you are aware of all the benefits available to you NOW. If you are thinking about entrepreneurship or going out as a freelancer, realize that you may have options that make healthcare more affordable.