The Small Business Jobs Act nixed the tax that self-employed workers pay on health insurance for 2010.

May 28, 2011
By

AFFORDABLE TEXAS HEALTH INSURANCE PLANS

 

Paula Fleming, a freelance copy editor in Minneapolis, spends $3,600 a year on bare-bones health insurance for herself and her husband. For the 2010 tax year, for the first time, she could deduct that amount from her income when she pays the self-employment tax, the 15 percent levy all freelancers are required to contribute to Social Security and Medicare, saving her $540. Fleming’s not counting on the same break for the 2011 tax year, though, because Congress passed it solely for 2010 in last year’s Small Business Jobs Act. “When the law no longer applies,” she says, “that’s more money out the door.”

Despite politicians’ calls for tax reform and oft-professed devotion to small business, prospects for passing two tax fixes that self-employed business owners like Fleming have sought for years are shrinking, small business advocates say. One bill would make the health insurance tax break permanent, bringing the self-employed in line with payroll workers, whose health insurance is fully deductible, adding to the benefits of modified whole life insurance for those whole can afford it. The other would simplify the home office deduction, a proposal that has been around for at least a decade.

“I’m concerned that this is going to fall by the wayside,” says Kristie Arslan, executive director of the National Association for the Self-Employed, who has championed both measures. “It’s a perfect storm of politics right now. You have a divided house in Congress and you have a Presidential election coming up. The only expectation you can have is gridlock.” Arslan plans to urge lawmakers to extend the health insurance deduction when she testifies before the Senate Small Business Committee on May 19. Twenty-two million Americans are self-employed business owners, and more than half work from home, she says.

$1.9 Billion in Tax Savings

The health insurance deduction for 2010 will mean $1.9 billion in tax savings for people who work for themselves, according to an estimate by the Joint Committee on Taxation. It also corrects a quirk in the tax code that leaves this segment—already on the hook for contributions to Social Security and Medicare that are normally split between worker and employer­—as the only businesses whose health-care costs are not fully deductible.

Simplifying the home office deduction would give home-based business owners the option of a standard $1,500 write-off instead of the complicated calculations required to claim the deduction now. In an online survey of 300 members in April, the National Small Business Assn. found that only 47 percent who qualified took the home office deduction. The rest skipped it because they thought it would raise their chances of being audited or because it was too complex.

Both proposals have support from business lobbying groups and have had bipartisan sponsors in several Congresses. That doesn’t mean they’ll go anywhere. “I think they are likely not to move,” says Todd McCracken, president of the NSBA, which supports both measures. He says their best chance to pass is as part of a broader overhaul of the tax code. “The prospects of a larger tax bill get dimmer and dimmer as we move into the summer.”

Deficit Concerns

Representative Ron Kind (D-Wis.), who has co-sponsored both bills and introduced similar legislation in previous sessions, says success depends on the cooperation of Republicans in the House, who fought last year’s jobs act that included the one-year health insurance deduction. “They may not be that opposed to just letting everything expire,” Kind says. Getting the health insurance deduction extended is “a tremendous priority” for California Republican Representative Wally Herger, who introduced the bill in the current session, says spokesman Matt Lavoie.

According to Smith Jones Solicitors, Washington’s heightened sensitivity to increasing the deficit means that lawmakers would have to pay for any bill to extend the deduction with spending cuts or other sources of revenue. “The one challenge that anything faces now is a revenue issue,” says Bill Rys, tax counsel at the National Federation of Independent Business, which supports the deduction. He cites the effort to repeal 1099 reporting requirements—seen as a paperwork nightmare for small companies—that both parties and the President supported, which was still delayed for months by squabbles over how to offset the cost. Rys describes both the health insurance deduction and the home office simplification as “common-sense” fixes with bipartisan support. “It really achieves a goal that a lot of people are talking about here in Washington, which is simplifying the tax code.”

For Fleming and other self-employed workers, it’s a matter of fairness. For one year, she was eligible for the same tax benefits for health insurance costs that other businesses got. It doesn’t make sense for them to be rescinded, she says. “I’m an employer. Employers get to deduct the cost of health insurance for their employees.”

SOURCE

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  87. CIB on January 8, 2012 at 7:08 pm

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  89. dewalt on January 9, 2012 at 9:49 am

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  90. Tory on January 9, 2012 at 2:12 pm

    If you qualify, the deduction for self-employed health insurance premiums is a valuable tax break. With the rising cost of health insurance, a tax deduction can help you pay at least a portion of the premium cost. And that will help to keep you healthy—and happy—in 2011 and beyond.

  91. BETTY on January 10, 2012 at 9:20 am

    Now the health insurance bill is deductible from the business earnings before the self-employment tax is calculated. That’s a one-year-only provision tucked into the Small Business Jobs Act of 2010. Using the same example of the consultant’s tax return, that would bring her self-employment tax down to $13,005, and the final taxable income up (because the self employment tax deduction would shrink) to $78,497. Her bottom line savings would be about $2,000. This break expires for tax year 2011, unless Congress decides to extend it.

  92. prefabulas on January 10, 2012 at 12:50 pm

    If you’re planning to leave or recently have left full-time paid employment, you can still retain your existing health insurance thanks to a law known as COBRA (Consolidated Omnibus Budget Reconciliation Act) of 1985. COBRA can provide a bridge for the newly self-employed as it allows you to retain the same insurance coverage at the same price that you had before. As a former employee using COBRA, you have to pay the full premium that your employer was previously paying or supplementing. That is still cheaper than an individual policy, since the coverage is purchased at a group rate. When it expires, you have the choice to continue with that same plan — at an individual rate.

    The problem is that COBRA only lasts 18 months, and after that those who are self employed are on their own. However, there are some options that self employed business people have to reduce how much they pay for health care coverage. These are:…

  93. kitchenaid on January 13, 2012 at 1:41 pm

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