Under current law, self-employed taxpayers can deduct qualified health insurance premiums as an “above-the-line” adjustment to income. In doing so they reduce their federal income tax – either the “regular” income tax or the dreaded Alternative Minimum Tax (AMT). By being able to deduct the premiums as a business expense on Schedule C they would also be able to reduce their self-employment tax – the sole proprietor’s equivalent of FICA (Social Security and Medicare) tax.
If this law is passed, an individual reporting net earnings from self-employment in excess of $12,000 who pays $12,000 for health insurance premiums for himself and his family would be able to reduce their self-employment tax by up to $1,696.
While the actual self-employment tax rate is 15.3%, the tax is applied to 92.35% of net earnings from self-employment – so the effective self-employment tax rate is actually 14.13%.
A one-man corporation can pay the sole shareholder a salary, subject to FICA tax, and also provide health insurance coverage to the shareholder/employee income tax-free and FICA tax-free. H.R. 3660 would put sole-proprietorships, and one-man LLCs opting to be taxed as a sole proprietorship, on equal footing with one-man corporations.
Sounds only fair to me!
While we are on the subject of Congress, both Acting IRS Commissioner Linda Stiff and Treasury Secretary Henry M Paulson have reached out to Congress concerning the problems that the IRS will face without immediate legislation to provide an AMT “fix” for 2007. But no word yet from the House Ways and Means Committee on the extenders bill promised for this week.