Self-employment can be seen as an important part of financial freedom, as well as freedom from the standard 9 to 5 employment. However, the traditional benefits of an employer versus employee relationship are typically on all on your shoulders when you become self-employed. This includes your health insurance, retirement savings and other benefits. Working with your tax professional or accountant, such as Precision Financial Services in Yucaipa, CA, you can determine the best options to enjoy these benefits while reducing your tax liability. In this article, we will be focusing on health insurance and what points you need to remember to enjoy a deduction for this benefit.
Purchase through the Individual Health Insurance Market
When working for an employer, your health insurance premium is typically offset by the employer’s contribution. Once you become self-employed, however, the whole expense is entirely on your shoulders.
But the ACA has made it possible to access a premium tax credit to offset insurance premium payments, as long as you purchase your policy through a federal or state health insurance exchange. Some states do not have their own exchanges set up, so the best way to determine if your state has an exchange is to start at the federal level. However, there are other ways to save in this area.
Self-Employment Deduction Is Not New
While there has been a 25 percent deduction on self-employed health insurance premiums since 1987, there was even better news in 2003 when premiums were made 100 percent deductible. Found on line 29 of the Form 1040, self-employed individuals can reduce their adjusted gross income by the amount of health insurance premiums paid during a given year. In addition, you can still take your premium tax credit. The only time this will not be the case is if you were eligible for group insurance through a spouse’s employer and opted not to take advantage of it.
More-Than-2% S-Corp Shareholders
There has been some confusion regarding 2% S-Corp shareholders, who used to pay their insurance premiums and then have them reimbursed from the corporation. While there have been some different concerns regarding how to handle these situations, the current notices have seemed to indicate that for small mom and pop shops, where the two spouses are essentially two shareholders. However, if they are both covered under the same insurance policy, then they can continue to receive reimbursements from the corporation. Simply put, the couple would be considered one covered employee. Additionally, after being reimbursed, they can take the premiums deduction on their tax filing.
Flexible Options Available
For the self-employed, there are a variety of options available beyond what would typically be offered by an employer. Thus, there is the ability to choose a HAS-qualified high deductible health plan (HDHP). This type of coverage allows for the insured individual to open an HAS and make the necessary pre-tax contributions to fund it for medical expenses incurred at a later date.
The contributions can be deducted above the line, so they are available even if you choose to not itemize your deductions. Discuss this option with your tax professional or accountant to determine if a health savings account will work for you.
Another point about these savings accounts is that money can be withdrawn tax free for qualified medical reimbursements, but it can also be left in there and used as an additional retirement fund, with distributions being taxed at retirement.
Federal Tax Subsidies
If your insurance was purchased though one of the marketplaces or the federal exchange, then you would have access to the premium tax credit, which is a subsidy to assist you in affording health coverage. These subsidies can be paid directly to the insurance company, making your average monthly bill that much easier to handle.
Additionally, pre-existing conditions can no longer be used to deny someone insurance. Therefore, many self-employed individuals have been able to enjoy affordable coverage with more options than previously.
Final Thoughts
While you cannot double deduct, it is important to track your medical expenses throughout the year. After all, if your medical expenses exceed the 10 percent of your adjusted gross limit (AGI), then you can deduct them. Then it is important to decide if you will deduct your insurance premiums with your medical expenses or as part of the self-employed health insurance deductible.
