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Small Business Jobs and Credit Act Offers Tax Break
Published on Sep 28, 2010
Read 'Small Business Jobs and Credit Act Offers Tax Break' at 'Time to Start Up,' the small business blog by BizFilings.
Psst! Did you know that the recently passed Small Business Jobs and Credit Act includes a new tax break for self-employed individuals who pay their own health insurance premiums?
Current law dictates the self-employed are allowed to deduct premiums they pay for themselves and their immediate families from their income prior to computing income tax - but not before they configure their Social Security and Medicare tax (aka self-employment tax).
Under the Small Business Jobs and Credit Act signed into law by President Obama yesterday afternoon, self-employed individuals are allowed to deduct premiums from their income BEFORE calculating self-employment tax, but ONLY for 2010. According to Kathleen Pender, business journalist and writer of the Net Worth column published in the San Francisco Chronicle, "the bill will give the self-employed the same tax break that employers get on health insurance premiums they pay for their employees."
According to her column, most self-employed individuals will save 15.3 percent of whatever they pay in premiums. "A person who pays $12,000 a year in premiums would generally save $1,836."
There is a catch. The tax break is much less for higher-income individuals "because they don't owe Social Security tax on income above $106,800 in 2010."
"Remember that there are two parts to the self-employment tax: The Social Security portion is 12.4 percent on the first $106,800 in annual income, but nothing on income that exceeds that amount. (Income means self-employment income plus wages from a job, if any.) The Medicare tax is 2.9 percent on every dollar of income. Suppose you have $150,000 in income this year and pay $12,000 in insurance premiums, which reduces your income to $138,000. This new deduction saves you nothing on Social Security taxes because you don't owe Social Security tax on income above $106,800. However, the deduction will reduce your Medicare tax because you owe Medicare tax on all of your income. The deduction will save you 2.9 percent of $12,000 or $348," writes Pender.
According to MarketWatch.com, "the one-year tax deduction for sole proprietors on health care costs for payroll tax purposes on their 2010 tax returns is expected to save self-employed business owners approximately $456 to $968 in taxes next year."
For more information, visit The National Association for the Self-Employed (NASE).
How will the Small Business Jobs and Credit Act help your plight as a small business owner?