Self-Employment Tax on Healthcare

Self-employed individuals, unlike large corporations, cannot deduct the cost of their health insurance as a business expense. Although NSBA won the first battle in 2003 allowing self-employed individuals to deduct the cost of health insurance for income tax purposes, they still are not on par with large businesses, meaning more must be done.
 
At issue is the 15.3 percent tax that self-employed individuals must pay on their employer-provided health insurance costs to which nobody else is subjected. This significant tariff comes in the form of FICA payroll taxes, commonly referred to as payroll or self-employment taxes. The self-employment tax rate on net earnings is the sum of 12.4 percent for Social Security (old age, survivors, and disability insurance), and 2.9 percent for Medicare (hospital insurance).   
 
While the important change in 2003 enabled small-business owners to deduct the cost of health care from their income, that income already has been exposed to the payroll tax. Thus, the self-employed effectively pay the self-employment tax on income used to purchase health care.  
 
The self-employed pay an average of $12,106 per year for health insurance. Because they cannot deduct this as an ordinary business expense, the 15.3 percent payroll tax they alone pay on their premiums amounts to $1,852.22 in extra tax that only the self-employed pay. This is money that could be used to reinvest and grow the business, hire part-time help or cover the ever-increasing costs of health insurance. This additional 15.3 percent tax makes already disturbingly high-priced health care cost even more by adding thousands of dollars to the cost of an individual’s health care.
 
This additional tax on entrepreneur’s health care was highlighted in the NSBA’s “Tax Equity Report.” In the 110th Congress, NSBA was successful in persuading legislators in both the House and Senate to introduce bi-partisan legislation (H.R. 3660 and S. 2239) that would solve the problem. Both measures would allow the self-employed to fully deduct their health insurance premiums on their income tax and their self-employment tax (FICA tax). Therefore, the self-employed finally would achieve parity with corporations that are currently allowed to deduct their health coverage costs as an ordinary business expense.  
 
The NSBA-led coalition had one of the most successful legislative sessions in the 110th with over 70 cosponsors on the House bill and a commitment from Sen. Max Baucus (D-Mont.) to include this legislative language in his health care reform package for the 111th Congress. The Coalition will be continuing our efforts in the 111th to remove this significant inequity within the tax code that penalizes self-employed Americans and makes it increasingly difficult for them to afford quality health care coverage.
 
NSBA believes legislators must realize that placing additional taxes on small-business owners’ health insurance is not a sound policy position. Lawmakers ought to encourage the adoption of health insurance by the self-employed, not price it out of their reach. NSBA continues to work with Congress to correct this targeted, but very important, roadblock to health care parity for small businesses.   

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