As the debate over health care and health care costs continued to draw attention, it appeared as if the smallest of businesses, those who are self-employed, were being ignored. Most of the health care related tax breaks and credits have been focused on businesses with employees but those who are self-employed or primarily family owned have been left out.
Until now.
Self-employed persons are finally getting a break. Under section 2042 of the Small Business Jobs Act of 2010 (downloads here as a pdf) recently passed by Congress, those who are self-employed and pay their own health insurance premiums are a little better off than before. Currently, if you are self-employed, you can only deduct health insurance premiums from income before computing “regular” federal income tax; however, SE tax (self-employment tax), or Social Security and Medicare tax, is computed on the entire amount. So-called W-2 employees were treated differently.
Assuming (and it’s a good assumption) that President Obama signs the act into law next week, that will change. Persons who are self-employed will be able to deduct the cost of health insurance premiums from income before calculating SE tax. That results in a savings of nearly 15% over the cost of those premiums: Social Security tax is payable at a rate of 12.4% and Medicare tax is payable at a rate of 2.9% – a combined rate of 15.3%. However, keep in mind that the income cap for Social Security tax for 2010 is $106,800 (there is no cap for Medicare tax), so the total amount of your savings will vary based on your income. But it’s still savings.
Of course, there’s a catch. There’s always a catch. It’s only for 2010. But hey, in this economy, beggars cannot, apparently, be choosers. It’s a break and we’ll take it.
This is incredible news for self employed people and I think it’s safe to assume that the President will sign it into law.
Thanks for digging out this great news Kelly! –Mike Peters
Good news > Bad news.
When the self-employed person pays less self-employment tax, his future benefits from the Social Security system have also been reduced. The less income you report, the lower your benefits. While you may have little faith in the future of your retirement benefits, the Social Security system will also support your dependents in the event of your early demise or disability.
Also, deducting the SECA does not yield parity between the S-E person and the Employee. Why? because the Employee receives gross salary + employer FICA, while the S-E person earning the same gross income subtracts his SECA.
Like the TaxGirl keeps telling us: Congress hates small business. Congress doesn’t know who works in small business. Congress has no understanding of life on Main Street
Anything being done on getting rid of the 2% shareholder rule for S corps?
IRS Notice 2008-1 gave partial relief on the 2% shareholder rule, but it didn’t help me, because I have coverage under my wife’s employment. My medical expense reimbursement plan only serves to save FICA/Medicare taxes on the reimbursements, and is barely worth the trouble. They should just get rid of the 2% shareholder rule entirely.