ObamaCare and Health Insurance for the Self-Employed

The Affordable Care Act (ObamaCare) has some important implications for how the self-employed go about obtaining, maintaining, and paying for health coverage.

If you’re self-employed, most of the healthcare provisions in the ACA apply to you.  Let’s take a look at how you’re affected by ObamaCare, how you can reduce the cost of coverage, and how you can take advantage of the health-related tax deductions.  We’ll also look at how S-corps are affected by the PPACA and we’ll give you some helpful tips and tricks for buying and managing your health insurance.

The biggest part of the ACA that’s unique to the self-employed is that health insurance premiums for you and your dependents are fully deductible on your tax return.
Ability to deduct medical and dental expenses doesn’t affect your ability to get tax credits or other cost assistance.
If you own a small business, and have at least one employee, you’ll want to look into small business tax credits through the SHOP.

What the Self-Employed Need to Know about the ACA

Here is a quick summary of how ObamaCare’s changes to health insurance work for the self-employed:

  • All individuals, included self-employed, must obtain and maintain Minimum Essential Coverage throughout the year or pay a Tax Penalty.
  • You can qualify for cost assistance – Premium Tax Credits, Cost Sharing Reduction Subsidies, Medicaid, and CHIP – based on your household income.
  • You can purchase individual health insurance and obtain cost assistance on the Federal Exchange or your state’s marketplace.
  • You can only purchase marketplace health insurance during open enrollment (check here for current open enrollment dates) unless you qualify for a special enrollment period.
  • Marketplace savings are based on your projected net income for the upcoming year.
  • If you end up making less or more than you projected, you must update your marketplace application as soon as possible or risk having to pay back some (or all) of the tax credits you received over the year.
  • Your insurance premiums are fully deductible.  The Self-Employed Health Insurance Tax Deduction allows you to reduce your adjusted gross income by the amount your household spends on health insurance premiums. Dental premiums are also included in the tax deduction for self-employed.
  • You cannot deduct your health coverage premiums if you were eligible for a group plan through your or your spouse’s employer.
  • Itemized medical deductions allow you to deduct most health care costs that exceed 10% of your adjusted gross income.
  • S-corporations with multiple employees or shareholders are no longer allowed to reimburse employees for their individual health insurance plans.

What Does is Mean to be Self-Employed?

You are considered self-employed for tax purposes if:

  1. You run a business on your own as a sole-proprietor, independent contractor, or freelancer that generates income and you have no employees.
  2. You are a member of a partnership that carries on trade or business.

If your business has even one other employee, then you are no longer considered self-employed.  In this case, you may be able to use the SHOP marketplace for small businesses to offer health insurance coverage to your employees.  This is especially important for shareholders in S-corporations (more information below).

Self-Employed Health Insurance Tax Deduction or Tax Credits?

If you have employees, your “ObamaCare benefit” is, if you qualify, access to generous small business healthcare tax credits for the cost of employee coverage. If you don’t have employees then your “ObamaCare benefit” is the generous  medical deduction opportunities.

If you are the sole employee of a business, you may hire independent contractors to do work and still be considered self-employed.

Does the ACA Apply to the Self-Employed?

Yes.  The ACA applies to those who are self-employed almost exactly the same as it applies to everyone else.

This means that you must obtain and maintain health insurance that meets the minimum essential benefits or you may have to pay the Tax Penalty.  For 2015, the tax penalty is the greater of $325 or 2% of your income, but in 2016, this fee will be raised to the greater of $695 or 2.5% of your income.

On the other hand, ObamaCare’s new benefits, rights, and protections apply to you as well.  Among other things, this means that now you can’t be denied for pre-existing conditions, you don’t have to worry about annual / lifetime dollar limits, and you may qualify for subsidies that will make your health care coverage much more affordable.

In this interview, healthcare advocate Michelle Katz gives practical advice for entrepreneurs on how to purchase medical coverage and thoroughly discusses the insurance implications of being self-employed.

Self-Employed Health Care Subsidies

Being self-employed does not affect your eligibility for Cost Assistance Subsidies.

If you are self-employed and make 100% – 400% of the Federal Poverty Level (FPL), you may be eligible for lower premiums by Premium Tax Credits.  For example, based on the 2014 FPL, the threshold for tax credit eligibility for an individual would be $46,680 and the threshold for a family of four would be $95,400.

Similarly, if you make between 100% – 250% of the FPL, you may be eligible for subsidies to help with out-of-pocket costs.  If you make less than 138% of the FPL, depending on your state, you may be eligible for Medicaid or CHIP.  See our page on ObamaCare Subsidies for more information on all of the available types of cost assistance.

Cost assistance can only be obtained by purchasing health insurance through the Federal Marketplace or a State Exchange.

Marketplace savings for the self-employed are based on your projected net income for the upcoming year.  Net income – the difference between your self-employment income and your business expenses – is what you report on Schedule C of your federal tax return and is what you will report to the Marketplace.  This may be difficult to accurately calculate, but it is important to try and estimate as accurately as possible.

Important: At any point during the year, if it looks like your income will be higher or lower than reported, make sure to update your Marketplace application as soon as possible.  Update your application if your business circumstances change.

If you end up making more than you reported on your Marketplace application, you could have to pay back some or all of the premium tax credits you took during the year.  If you end up making less than reported, you could qualify for more savings than you claimed during the year.

Learn about income from self-employment from the IRS.

Health Insurance and Tax Deductions

If you are self-employed, it’s likely that you’re already well-versed in tax deductions.  When it comes to your health care coverage, there are two important deductions you should be aware of:

  1. The Self-Employed Health Insurance Tax Deduction
  2. Itemized medical and dental expenses deductions

Find out more about filing taxes for ObamaCare.

The Self-Employed Health Insurance Tax Deduction

If you are self-employed, the health insurance premiums for you and your dependents are fully deductible on your tax return.

The Self-Employed Health Insurance Tax Deduction (found on Form 1040, Line 29) allows you to reduce your Adjusted Gross Income by the amount you pay in premiums on medical insurance, dental insurance, and qualified long-term care insurance for yourself, your spouse, and your dependents.

You cannot take the premium deduction if you were eligible for a group insurance plan from your or your spouse’s employer.

There are some conditions on eligibility for this deduction as well as restrictions on the ways in which qualifying coverage plans are established.  These conditions and restrictions vary depending on where your income is coming from and how you file your taxes.  The IRS lists these regulations in full in their Publication 535, Chapter 6.

Itemized Medical Expense Tax Deductions

You can list unreimbursed medical care expenses as itemized deductions in Form 1040, Schedule A.

You can only deduct expenses in excess of 10% or your Adjusted Gross Income.  For those who are filing and are over 65 years old, medical expenses in excess of 7.5% of your adjusted gross income can be deducted (although this will no longer be the case after 2016).

You cannot double-deduct.  If you deduct your insurance premiums on your 1040 as explained above, you cannot include them in your itemized medical expenses.

Visit Topic 502 on IRS.gov to learn more about what medical expenses can and cannot be deducted.

The ACA and S-Corporations

Many self-employed individuals form S-corps (or S-corporations) with their spouses.  In this situation, the IRS sees you not as self-employed, but as part of a business with two employees or shareholders.

Prior to 2008, more-than-2% shareholders in an S-corp could buy individual health plans and get reimbursed by the corporation by including the premiums as deductibles on their W2 forms.  However, the ACA does not allow employers to reimburse employees on health insurance premiums from individual health care plans.

According to the IRS, while a sole corporate employee of an S-corp can still be reimbursed for individual health insurance, if there are multiple shareholders or employees, they should not be reimbursed for their non-group health insurance plans.

Health Insurance Tips and Tricks for the Self-Employed:

Here is a quick list of tips and tricks that will help you get the best health plan, save money, and simplify the often-complex process of managing your health insurance while self-employed:

  • Make your projection of your next year’s net income a comprehensive estimation; take into account past experience, realistic expectations, industry standards, etc.
  • Keep careful records of all of your health care expenses and automate these records whenever possible.  This will make itemizing medical expenses much easier if you ever need or want to do so.
  • Explore all of your coverage options: the ACA gives the self-employed a lot of flexibility in the type of health insurance they choose.  Know your options, know your needs, and make an informed decision that works for you.
  • Even if you aren’t planning on changing coverage, try to reevaluate your medical needs and compare available marketplace plans during each open enrollment period.  You can let your plan auto-renew from year to year, but you might miss out on better, cheaper options.

For more generalized advice on purchasing health insurance, visit our page on Tips for Getting the Best Health Plan.