March 8, 2011
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Would you spend 18 percent more for your morning coffee than someone working for a larger company? How about for your gym membership? No way, right? Well, that’s precisely what you’re doing for your health care.
Small businesses spend 18 percent more, on average, than large businesses for comparable policies, according to the Center for American Progress. This is largely due to high administrative costs – they can account for up to 30 percent of premiums, says the Center – also a lack of negotiating power, and a limited ability to spread risk.
If you’re self-employed, you, too, know this song and dance. Individual policies are often much pricier than the versions you’d be offered as an employee, and you don’t have an employer to help cover the costs. Policies are even more costly in states that require guaranteed-issue, meaning you can’t be turned away for coverage, no matter your health issues. New York, where I live, is one of these, as are Maine, Massachusetts, New Jersey and Vermont.
So come tax time, you really want to make the most of the dollars you’ve been doling out on premiums. Here’s are five ways to do it.
1. Deduct premiums from self-employment taxes. This year, the IRS is saying it’s a one-time deal, although it’s possible it will be extended. Either way, you want to take advantage. Here’s how: If you are self employed, you’re taxed 15.3 percent on your net earnings. This tax essentially serves to take the place of Social Security and Medicare that you and your company would pay if you were an employee. This is completely separate from your income taxes (it goes on line 29 of your 1040). You can now deduct the amount you spent on health insurance premiums from those taxes, says Keith Mendonsa, a health insurance specialist with eHealthinsurance.com. “It’s an above the line deduction, so basically what it allows you to do is subtract those premiums from your gross income to reduce your net earnings.” So let’s say you pulled in $80,000 in 2010 and you spent $10,000 on health insurance premiums for yourself or your family. You’ll be able to apply that 15.3 percent tax on $70,000, instead of the full $80,000 – a self-employment tax savings of over $1500.
2. Take a deduction as a business expense. Yep, you’re reading this correctly – this is essentially a double dip. Not only can you deduct your premiums from your self-employment taxes, you can also deduct them from your income taxes. This, again, is an above the line deduction, which means you don’t have to itemize. One caveat: You can’t deduct premiums paid for any month that you were also eligible for an employer-sponsored health insurance plan (this would primarily apply to those who are working a side job and have chosen to purchase an individual health plan because it’s less expensive – in other words, rare, but not an impossibility).
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3. Consider itemizing to deduct medial expenses. You’re likely itemizing anyway – there are so many expenses you can deduct as a business owner – so if you had extremely high health expenses in 2010 (a medical emergency, dental work that wasn’t covered) you should probably at least run the numbers to see if those costs will add up to a deduction. In most cases, they won’t, because you can only deduct the cost of medical expenses that exceed 7.5 percent of your adjusted gross income, but it’s worth a shot. So let’s say your AGI is $50,000, which makes your threshold for deductible medical expenses $3,750. You can deduct the total of any costs after you hit that mark, so if you shelled out $5,000, $1,250 of it will be deductible. Keep in mind that your co-payments and deductibles all count toward that amount, says Mendonsa, but if you’re already taking an income tax deduction on your premiums, you can’t also include them as an itemized business expense.
4. Look ahead to next year. Starting with a health savings account or HSA, which may really save you money. These are essentially savings accounts that are linked to high deductible health insurance plans. High deductible plans are less expensive, so the idea is that you put the money you save on premiums into the HSA, and it’s there should you need it to meet your deductible in the case of a major procedure or medical emergency. In 2011, you can contribute $3,050 for a single plan or $6,150 for a family plan, and the minimum plan deductible is set at $1,200 for singles and $2,400 for families. The best part: Your contributions are tax-deductible. “Say you’re a family and you’re within $5,000 of the next lowest tax bracket, and you’re able to write off that full contribution of $6,150, you’ll fall down to the next tax bracket and that could save you hundreds, maybe even a thousand, dollars,” explains Mendonsa. The money you save in the HSA also continues to grow if you don’t use it. If you already have an HSA, and you haven’t maxed it out for 2010, you have until April 18 to do so.
5. Get help. A lot of these things are fairly complicated, so it may be time to involve a tax accountant. Most small businesses should have one on call anyway, so you can make sure all your bases are covered and you’re getting the deductions you deserve. Businesses and self-employed people are also a bit more likely to be audited than individuals.
Jean Chatzky is financial editor of NBC's "Today" show, a contributing editor at More magazine and author of "Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved." She recently launched the Jean Chatzky Score Builder in partnership with smartcredit.com. Check out her blog at jeanchatzky.com and follow her on Twitter and Facebook.
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