More Self-Employed Bet On Not Getting Sick, Hurt

Published August 23, 2004

Dear Editor,

There’s no question the cost of health insurance is a burden to the self-employed (More self-employed bet on not getting sick, hurt, 08/23/04, Money). It is for this very reason the Self-Employed Health Insurance deduction was authorized by the Tax Reform Act of 1996. Today a self-employed person can deduct the cost of his or her health insurance premium.

If the folks you described operate as a sole-proprietorship or “C” corporation, the premiums are fully deductible by the corporation for both income and FICA tax. While helpful for the individual who takes on the simple and inexpensive process of creating a sole-proprietorship, the current legislation is flawed for the self-employed who do not.

Since the self-employed’s health insurance premiums are not considered a necessary business expense, as they are for the sole-proprietor, the premiums remain subject to the self-employment tax.

“C” corporations receive a deduction for health insurance premiums as a necessary business expense for the owner and any employees. Since the premiums paid for health insurance are not considered compensation to the owner or employee, they are not subject to the FICA tax.

Until the flaw is addressed by Congress with the Securing Access Value and Equality to Health Care Act (SAVE Act (H.R. 1236), it seems prudent for the self-employed to file their taxes as a sole-proprietorship.

Not only does this create affordable access to health insurance, it also provides the owner with legal protection against lawsuits for errors and omissions.