If you’re fully self-employed and pay your own health insurance premiums, you’ll get a tax break for the 2010 tax year. Last month, President Obama signed a law that lets self-employed workers take a deduction for health insurance premiums paid for yourself and dependents.
Changes to Health Insurance Premium Deduction
We owe two types of taxes to the Federal government – Federal income tax and self-employment tax. You can reduce the amount of tax you owe by taking certain tax deductions – one of them being the cost of health insurance.
We’ve always been able to deduct the cost of health insurance from our Federal taxes, but still paid self-employment taxes on that money. So, if you made $20,000 last year and paid $5,000 in health insurance premiums, you’d pay Federal taxes on $15,000, but self-employment tax on $20,000. The new law evens it out – this year, you’d only owe self-employment tax on $15,000.
In case you didn’t know, the self-employment tax includes Social Security and Medicare tax (remember FICA from your days of getting payroll checks). All workers pay the tax, but regular employees only pay half the tax (7.65%) and their employer pays the other half. We pay the full 15.3% ourselves.
Reducing the self-employment tax will result in a slightly smaller Federal tax deduction. You’re allowed to take half the self-employment tax as a deduction on Federal taxes. But, since self-employment taxes will be lower this year, so will your Federal tax deduction for that tax.
How Much Will You Save?
The National Association for the Self-Employed says this change will save us an average of $468 to $968 in self-employment taxes. To figure out how much you’ll save, multiply your health insurance premiums by .153. This only works if your income is below $106,800 because you don’t pay Social Security tax (12.4% of self-employment tax) on income above that amount. You pay Medicare tax on all your income regardless of the amount.
“Yay!” for tax savings. “Boo!” for it being this year only. Send a letter to Congress if you want this deduction to be made permanent (seriously).
Disclaimer: I’m not a tax professional. I just read the news and study IRS.gov.