Can I Deduct My Health Insurance Premiums if I Am Self-Employed for Social Security Computation?
The Small Business Jobs and Credit Act of 2010 contains a provision that allows self-employed persons to deduct medical insurance costs paid in 2010 from their income in determining their net profit. This results in a lower self-employment tax liability. The self employment tax covers payment for Social Security and Medicare for the self-employed person.
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Self-Employment Tax
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All workers are required to contribute to Social Security and Medicare. Employees pay half of this through payroll deductions and their employers pay the other half. Self-employed persons are required to pay the full 15.3 percent, the self-employment tax, based on their net profit. Self-employed workers were always allowed to deduct medical insurance costs from their earnings for income tax reduction, but not for self-employment tax reduction. The new 2010 law allows this deduction for lowering this tax.
Eligible Persons
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Self-employed workers, including general partners in a business and paid workers of an S-Corporation of which the worker owns more than 2 percent of the stock, are eligible to take this self-employment tax deduction. Workers who are sole proprietors, single-member limited liability companies or single-owner S-Corporations must file a Schedule C or Schedule E with form 1040. A worker who is eligible for coverage by a health plan subsidized by any employer of his own or that of a family member is not allowed this deduction.
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What Is Deductible
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Premiums paid for medical care insurance policies and long-term care policies in 2010 are deductible. The business of the self-employed person must own the policy and the policies can cover the worker plus a spouse and any children up to 27 years old. Other related costs such as medical co-payments are not deductible from self-employment tax. The deductions result in a savings of 15.3 percent of the deducted amount. The deduction amount cannot exceed the earned income of the self-employed person.
Other Provisions
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The 2010 law and the deduction it provides only applies to eligible deductible expenses paid in 2010, to be applied to 2010 tax year return filings. The allowed deduction is pending an extension by Congress. All other health related costs other than insurance premiums, while not eligible for this deduction, can be part of itemized tax deductions. Any allowed deductible premium amount not claimed for the self-employment tax can also be part of itemized deductions for income tax.
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References
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