Expensing of Self-employed Health Insurance Costs Reconsidered

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March 30, 2005--The reintroduction of the legislation to allow self-employed workers to fully deduct their health insurance premiums for tax purposes will create a level playing field for the over 14 million self-employed who are affected by the current tax laws, said the National Small Business Association (NSBA).

The bill called the "Equity for Our Nation's Self-Employed Act of 2005" (S.663) has been reintroduced by Sens. Jeff Bingaman (D-N.M.), Craig Thomas (R-Wyo.), and Johnny Isakson (R-Ga.).

The legislation passed in 2003 allowed small businesses to deduct health insurance premiums as it related to income tax. But the self-employed health insurance deduction still is not considered an ordinary and necessary business expense for the self-employed, as it is for a corporate entity. Therefore, the premiums are still subject to self-employment tax. Current tax laws require self-employed workers to pay 15.3% in self-employment tax on their health insurance premiums.

"This is a huge disincentive for the self-employed. They are treated differently than other businesses," said Kristie L. Darien, director of government affairs at the National Association of the Self-Employed (NASE). "The extra money that they pay in taxes is better invested in their businesses."

According to a study by the Henry J. Kaiser family foundation, the self-employed pay an average of $9,068 per year for health insurance. And because they cannot deduct this as business expense, they would pay $1,387 (15.3%) on this amount as payroll tax while large businesses can deduct this cost.

The reintroduced legislation is likely to become a part of a larger bill on tax reforms or it could be attached to a bill that looks at making healthcare more affordable, said Darien.

The NSBA has said that it will lobby in Congress for the passage of the reintroduced bill. It plans to speak to senators and Capitol Hill officials to make them aware of the problems faced by the self-employed workers.

The additional 15.3% tax paid by small businesses makes already healthcare extremely expensive, typically adding thousands of dollars to the cost of an individual's health care, said the NSBA.