Self- Employed to Receive Health Insurance Tax Break for 2010

Small Business Jobs Act

The Small Business Jobs Act was signed by President Obama on September 27, 2010. The bill was implemented to stimulate the creation of jobs in the small business sector. The legislation provided for tax breaks which included a new deduction for the 2010 tax year specifically for the self-employed. This tax change applies to the health insurance costs for individuals and family members in calculating their 2010 self-employment tax.  The change could save a family as much as $3500 depending upon their yearly insurance premiums and their net earnings.

Self Employed Health Insurance Deduction

Self-employed individuals pay 15.3% of their net earnings which is known as the self-employment tax. The self-employment tax rate is the sum of 12.4% for Social Security (old age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). The Social Security tax applies to the first $106,800 of net earnings in 2010; there is no ceiling on the Medicare tax.

In 2003 there was a change in the tax law which allowed self-employed individuals to deduct the cost of health insurance for income tax purposes. While this change enabled small-business owners to deduct the cost of health care from their income, that income already had been exposed to self-employment tax. Thus, the self-employed effectively paid self-employment tax on income used to purchase health care.

If an average family (self-employed income) paid $14,000 for health insurance coverage then the 15.3% self-employment tax on earnings used to pay that premium would be $2142. The new legislation (Section 2042) allows the self-employed to deduct this premium on their self-employment tax as well as their income tax. The theory is that this tax savings can be re-invested in their businesses.

This is a substantial tax break in which the government in effect is paying 15.3% of the health insurance premiums for self employed individuals (such as real estate agents) and families in 2010. Review the IRS Self Employed Health Insurance Deduction worksheets and consult with your accountant to determine your tax savings.