Health-Care Tax Relief for the Self-Employed

If you are self-employed and your business is a sole proprietorship, single-member LLC, or sole-owner S-corp, you can indeed deduct your health insurance expenses for 2010. This one-year provision is not a part of the health-care reform bill that passed in March, however. It was included in the Small Business Jobs and Credit Act that President Barack Obama signed into law just last month.

“In this economic climate, any kind of bottom line tax savings is helpful,” says Kristie Arslan, executive director of the National Association for the Self-Employed, a Washington-based lobbying group. “This is one of the few small business provisions that’s been passed where business owners will actually see lower taxes on Apr. 15, 2011.”

Her organization has championed the deduction for more than eight years and unsuccessfully tried to get it included in the health-care reform law.

he new provision corrects what Arslan calls a fundamental unfairness: Self-employed individuals cannot deduct the full cost of health insurance premiums as a business expense on their payroll taxes, as other business entities can do.

Although the new law authorizes the deduction only for 2010, Arslan says it’s “a foot in the door” for self-employed individuals, who pay both the employer and employee portions of the payroll tax—a self-employment tax totaling 15.3 percent. Employees typically pay half that amount (7.65 percent) and their employers cover the other half as part of their payroll taxes. The new deduction exempts solo business owners from paying self-employment tax on the portion of their income that they spend on health premiums. “This is a step in the right direction. We’re hoping to extend it and make it permanent,” Arslan says.

Source: Bloomberg Businessweek