Bill Seeks to Level the Playing Field for the Self-Employed

A federal bill introduced last month seeks to level the playing field between corporations and the self-employed with respect to tax deductions for health care costs. The legislation would eliminate the current requirement that the self-employed, partnerships and businesses established as limited liability corporations (LLCs) pay a 15.3% federal tax on their health insurance costs.

Instead it would put such entities in the same position as large corporations and incorporated small businesses, which are able to to deduct half of the cost of their employees’ health care premiums (as well as their own).

But the measure may face opposition among lawmakers because it would reduce federal tax revenues by $2 billion a year during a time when the government can ill afford to lose any more revenue into its coffers.

“Some lawmakers say that while it may be unfair, they can’t afford to lose that $2 billion,” says Scott Hauge, president of San Francisco-based advocacy group Small Business California. “I understand the argument, but it takes away the major argument that this is a simple equity question. Why should you pay more because of your business structure?”

“This is a simple equity question. Why should you pay more because of your business structure?” – Scott Hauge, Small Business California 

Bipartisan Tax Relief

The Equity for Our Nation’s Self-Employed Act has been introduced in both houses of Congress (H.R. 1470 and S. 725), but so far has not been debated nor acted upon. Congressmen Ron Kind (D-WI) and Wally Herger (R-CA), members of the House Ways and Means Committee, and Senators Jeff Bingaman (D-NM) and Orrin Hatch (R-UT) of the Senate Finance Committee are pushing for the bill in their respective chambers.

Lawmakers in the 108th Congress unsuccessfully introduced similar legislation in the 2003-2004 session.

The bill would allow the nation’s estimated 21 million self-employed individuals to deduct the cost of health care premiums from their self-employment tax (the self-employment equivalent to payroll taxes) as a business expense.

Self-employed individuals (as well as partnerships and LLCs) currently may deduct health care expenditures from their income tax liability – which is why Painter says many sole proprietors believe they already write it off – but not from the self-employment tax. According to the Kaiser Family Foundation, that averages $1,940 annually in extra taxes.

The legislation would allow sole proprietors, partners and LLCs to make a Schedule C deduction for health care costs by adding a line item to the tax form. Employees receiving health benefits from their employer do not claim the benefit as income on their taxes, so it’s difficult to compare corporations to self-employed individuals. But the bill is an attempt at equity, says Bill Rys, tax counsel for the National Federation of Independent Business. 

The tension between the desire for a more equitable tax code and the need to maintain a flow of revenue to pay for government programs is at the heart of whether this bill gets passed or not, Rys says. But he’s optimistic, given the rising trend in self-employment alongside the spike in health care costs.

“Revenue is always an issue when it comes to changing the tax policy, but I think this is a very common sense approach for the self-employed,” Rys says. “If they do pay more for [health insurance], then they’ll have to cut back on their business. This [bill] may help them expand, grow the business or make it more efficient.”

“Revenue is always an issue when it comes to changing the tax policy, but I think this is a very common sense approach for the self-employed.” – Bill Rys, National Federation of Independent Business 

Economic Stimulus for the Self-Employed

The cost of health care varies from person to person, depending on factors such as age, preexisting conditions and location, and can cost as much or more than a mortgage for some people. And since health tends to decline after a certain age, seasoned self-employed individuals often bear the biggest burden.

“I have been a business owner for over 30 years and health insurance for my husband and I is currently $1,900 per month, which is way more than our mortgage,” says Boston-based career and life coach Gail McMeekin. “My husband and I have both had health problems so I would use the tax savings to pay our deductible expenses and co-pays to doctors and on medical tests.” 

Self-employed public relations professional Martin Rabkin says he spends about $24,000 annually, or $2,000 per month, on health care. If the bill passes, Rabkin would save as much as $3,672 in taxes each year.

“The potential savings could very easily go towards paying for a long-term disability policy, what I feel is a smart move, or simply offsetting the high cost of coverage I am paying in New York State as a solo practitioner,” says Rabkin, based in the Hudson Valley, New York area. 

Self-employed Nancy Hanauer in Seattle says she chose a high-deductible plan costing roughly $162 per month to save money, but ended up paying the $2,500 deductible for a broken ankle and $1,500 in other medical costs not covered by her policy. Hanauer, founder of Hop to Signaroo, says medical and health insurance costs “have been one of the biggest expenses I’ve had to deal with as a small business owner.”

Most self-employed professionals interviewed for this article say they would put the tax savings into either better health insurance plans or supplemental health care packages, but some say they would reinvest the savings back into the company itself. Jack Leonard, a marketing professional based in Belmar, New Jersey, says his family spends about $24,000 annually on health insurance premiums.

“Any financial benefits from H.R. 1470 would go towards reducing our debt or keeping our businesses afloat during this recession/depression,” says Leonard, who owns Not Another Marketing Company, and whose wife is a self-employed real estate professional.   

“Any financial benefits from H.R. 1470 would go towards reducing our debt or keeping our businesses afloat during this recession/depression.” – Jack Leonard, Not Another Marketing Company 

While health care reform is at the top of President Obama’s agenda, there is no guarantee that this legislation will be signed into law. But with health care costs as high as they are, it is just another reflection of the many problems plaguing the country’s health care system.