Tax expert says some taxpayers could save 12%-13% on premiums

The Small Business Jobs and Credit Act of 2010 signed into law last September provides a tax break for the self-employed on health care costs.

Self-employed workers who pay their own health insurance premiums can now deduct those costs before computing their self-employment taxes, which cover Social Security and Medicare.

“America’s small businesses applaud the U.S. Senate for extending these critical tax cuts,” said Kristie Arslan, executive director of the National Association for the Self-Employed. “Tax relief not only contributes to the success of small businesses but also promotes the long-term stability and growth of our economy. The small business community contributes nearly $1 trillion dollars each year to the economy, keeps Americans at work and off the unemployment rolls and continues to be the engine of economic growth. America’s small businesses and middle-class are counting on this economic relief.”

While the deduction for premiums paid for an owner subject to self-employment tax is not in itself new, using it to reduce the amount of income upon which self-employment tax is based is new. Also new and impacting the net benefit of the deduction is the reduction of part of the self-employment tax rate.

“There are a large number of moving parts to consider when determining the effective tax savings a self-employed taxpayer can expect to receive from this new tax law,” said Adam Holtzman, senior tax professional with Ghirardo CPA in Novato.

The magnitude of the savings is affected by several things: first, the amount of the self-employment income.

This decreases dramatically if self-employment income after including this deduction exceeds the threshold for the 12.4 percent Social Security tax of $106,800. Also, the taxpayer’s marginal income tax rate, both federal and state, comes into play and whether the taxpayer is subject to the Alternative Minimum Tax.

All of these variables make it very difficult to come up with a standard percentage that a self-employed taxpayer can expect to save as a result of this new law, said Mr. Holtzman.

“That being said, I estimate that the average self-employed taxpayer with earned income under $106,800 will likely save about 12 to 13 percent of the amount of the health insurance premiums, or such taxpayers will essentially receive a 12 to 13 percent reduction in the cost of their health insurance,” he said. “For self-employed taxpayers earning more than $106,800, the estimated savings will probably only be about 2 to 3 percent of the premiums.”

This is only in effect through the end of the year.

To qualify, you must be a self-employed business owner who meets the following requirements:

You must file an IRS Form 1040 Schedule C tax form or Schedule E with earned income. This includes sole proprietors, single member LLCs and sole owner S Corporations.

You must pay self-employment taxes via IRS Form 1040 Schedule SE.

You must pay for individual or family health coverage in 2010.

Ben Stone of the Sonoma County Economic Development Board said this is an important piece of legislation that will impact a number of business owners.

“It is important for people to know, considering the number of self-employed there are out there,” he said.