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2010 Tax Countdown – 2010 ONLY Additional Health Insurance Deduction for the Self Employed


With all the talk about health insurance reform, here is one that may level the playing field for self employed people who calculate Social Security and Medicare tax on Schedule SE in the personal Form 1040 – that is those who file Schedule C, Schedule F or Schedule E for earned income (not generally S corp shareholders). It comes to us courtesy of the Small Business Jobs Act of 2010 signed into law in September 2010. The excellent news is that self employed people will for the FIRST TIME be able to deduct health insurance costs in calculating net earnings from self-employment for the purposes of determining self-employment taxes.

Why is this a big deal? Social Security and Medicare tax is expensive — up to 15% since sole proprietors pay both the employer and the employee portions .  Corporations have been able to exclude Social Security and Medicare tax as well as take a deduction for income taxes for the cost of  health insurance premiums for-ever. But sole proprietors and single members of LLCs have been stuck taking only an income tax deduction for the cost of insurance.   Health insurance premiums have always been fully taxed for Social Security and Medicare for self employed taxpayers.  This law takes a stab at leveling the playing field…well, maybe.

Remember – for a self employed person, the tax return determines two taxes (three if you are subject to AMT)—income tax AND self employment tax (SS and Medicare).

Please note, too –this self employment tax deduction is ONLY FOR 2010. Isn’t that weird? We don’t know for sure, but apparently we are going back to the front page deduction only for income tax in 2011. So, if you were thinking of paying one big annual premium, December would be a good time to do that. It will be too late in January for this tax break.

One other draconian rule to take into account. Let’s say you are self employed and you get a health insurance plan for only yourself since your spouse is covered by a plan at his/her place of work. If the spouse’s plan is subsidized by the company (and they all are), and you are eligible to join your spouse’s plan, you may be stunned to learn that your personally owned health insurance premiums may not be deductible anywhere good on your return. OK…you can deduct them as itemized deduction on Schedule A. That is usually a pretty limited deduction. But you are probably not eligible for the good front page deduction. Does this seem fair? Unfortunately, “fair” is not a tax code concept.

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