Mon, September 27, 2010
Small Business Jobs Act: Self-Employment Tax Break for Health Insurance Costs
The Small Business Jobs Act of 2010, signed today by the president, offers a number of tax law changes in addition to the provision of credit resources for small businesses. A tax break that has received little attention is a one-time opportunity for reduction of the self-employment tax.
Self-employed workers pay a 15.3% Social Security/Medicare tax on their net earnings. The tax is often referred to as the self-employment tax. This is twice the rate paid by individuals who aren’t self-employed; for them, half the tax is borne by the employer. Normally, the rules do not permit the cost of health insurance to be deducted from gross income for the purpose of calculating self-employment tax.
In lobbying leading up to the present bill, small-business advocates argued that the self-employed should not be required to pay self-employment tax on the cost of health insurance. As a consequence, for 2010 only, Section 2042 of the Act provides that health insurance premiums paid by the self-employed for themselves and their families can be deducted from gross income for the purpose of calculating self-employment tax.
It remains to be seen whether this provision will be extended beyond the 2010 tax year, but for now it’s a small break for small business owners.
