For many freelancers, especially those who have previously worked for someone else, the words “Open Enrollment season” uttered at this time of year may bring up distant memories of when they actually had an employer to help cover the cost of their health insurance. Now, unless your spouse or significant other has coverage that you are eligible for, you’re on the hook for paying for health insurance.
So let’s look at some common questions about taxes and health insurance:
Which has lesser tax implications—paying for your own insurance or receiving it through an employer?
No matter whether you are a W-2 or a 1099 employee or a freelance business owner, from a tax perspective, this is pretty much a wash, as long as the health insurance plans are comparable in terms of overall cost and quality.
Consider this example: You are employed and pay $500 a month out of every paycheck (pre-tax) for a cafeteria health plan with your employer also subsidizing some of the cost. If you become self-employed and choose the same for your type of plan at the same cost and your business turns a profit, you can claim the full cost of the premium as a deduction on page one of your Form 1040.
Is it advantageous to pay for insurance yourself vs. receiving it through an employer?
All things being equal in terms of the quality and cost of the health insurance you are considering, from a tax perspective if you are self-employed and buying your own insurance you can claim the cost on your annual tax return. If you are not self-employed, or you do not have a profit from your self-employment activities, you can report the cost on Schedule A of your tax return as an itemized deduction.
However, this is not as beneficial because of the limitation on claiming medical expenses (7.5 percent of your Annual Gross Income) and an increased standard deduction of $12,000.
Regardless of whether you have your own health insurance and have to pay all of your own medical expenses or you have an employer-sponsored plan and only pay for deductibles and copays, setting money aside in an HSA (Health Spending Account) will benefit you because the money is set aside before tax and can be used to pay your medical bills.
How will tax reform affect health insurance costs?
Something else to consider in regard to tax implications and health insurance is the penalty for not carrying health coverage, which was put in place as part of the Affordable Care Act. For this coming tax season, this penalty still exists (unless you qualify and file for an exemption with the ACA marketplace). However, under the Tax Cuts and Jobs Act in 2019 taxpayers will no longer face the levy of $695 per person or 2.5 percent of income, whichever was higher, if they choose not to carry health insurance.
As far as the actual cost of health insurance and the Affordable Care Act insurance exchanges, experts think the exchanges will survive in 2019 given that there are some federal subsidies available to lower premiums and make these kind of plans attractive to some consumers.
Another potential benefit for freelancers in need of health insurance is a recently proposed rule by the Trump administration that loosens the definition of what type of individuals or businesses can purchase "group” healthcare.
In effect, the rule would change the definition of “employer,” and circumvent some of the Obamacare regulations, allowing single people or small groups to form an association and offer health plans. This rule would also require that an association plan insure people with pre-existing conditions but does not have to cover all 10 “essential” health benefits, which may reduce the cost of these plans.
While everyone should have access to affordable health care, the fact is that health insurance is generally still a costly benefit for employers, employees, and freelancers.
Making sure that you are deducting all possible health insurance costs on your tax return and using an HSA to pay for any medical costs should help to offset at least some of the associated tax burden.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.