If you are self employed then you are no stranger to claiming the expenses that you incur while operating you small business. You are also no stranger to shopping for the goods and services that you need to keep your business flowing. Although some are much different depending on your line of work, some goods and services such as health insurance are needed by barbers as well as contractors.
If you are self employed, and searching for a quote on health insurance, you need to factor into the cost of the premium any savings on income tax that paying the health insurance premium will bring you. Can the entire amount of premiums paid for the entire year be expensed on your schedule C?
What about self employment tax? Yeah…What about it! First let’s understand it, and how it is different than income tax. This will be a basic and simple explanation, leaving out the gory details for simplicity’s sake. Let’s compare income tax to self employment tax for a relative understanding.
Everyone who lives understands two basic sureties: You will pay taxes and you will die. Income tax is the percentage you pay on the money you earn if you work for a company owned by others or if you are self employed. Self employment tax is a different animal. This next paragraph will explain how self employment tax is the same thing, by a different name, that SSDI is to the person who is an employee of another’s company.
It’s called by a different name because there is a different set of mathematics involved in calculating it. Don’t let “calculations” and “mathematics” scare you away from this lesson. I will keep it simple, as promised. Think about it like this: When you are self employed, you are responsible for the same things your employer is responsible for as well as what you are responsible to pay as the employee. You wear both hats when you are self employed.
The Federal government wants 15% of every worker’s taxable income to keep the Social Security System healthy and thriving. Okay, everyone take a moment to roll their eyes and shake their heads. Good. Now, if you work for an employer, that employer is responsible for paying one half of this tax, about 7.5%, the employee pays the other half. Simply put: When you are self employed you must pay both halves on your taxable income. Got it? Good.
Now let’s factor in “taxable income.” If you pay part of the premium for the health coverage that your employer provides, then that amount is deducted from your gross income before you pay the 7.5%, So now the question, that also is the title of this article: If I am self employed, do I deduct my premiums that I pay for my own health insurance before paying the 15% self employment tax? Are these payments also permitted as expenses off the gross income?
You have got the simple explanation, now the simple answer: Yes.
There are a few caveats of course, like you can’t do it if you claim a loss, and there are some limits according to a formula, and if you are able to participate in another that self employed health insurance plan, and so on. Your accountant will help you with evaluating this when considering any quotes you get for health insurance. If you are self employed, you should have a good accountant…Or be one!
