If you’re one of the more than 23 million self-employed Americans, there’s good news. This year when you calculate your taxes for 2010, you’ll be exempt from paying self-employment tax on the income that you spent on health-insurance premiums for yourself and your family.
Up until the 2010 tax year, self-employed individuals were required to pay both the employer and employee sides of the payroll tax, which is referred to as the self-employment tax. The tax totals a hefty 15.3 percent (12.4 percentage points for Social Security and 2.9 percentage points for Medicare).
The change in law was part of the Small Business Jobs and Credit Act that was signed into law last September. Before that, self-employed people were able to deduct their health-insurance premiums only from their income taxes, and any money that they spent on health-insurance premiums was subject to the 15.3 percent self-employment tax.
To qualify for the self-employment tax exemption, you must file IRS form 1040 Schedule C or Schedule E, pay self-employment tax on your income by using 1040 Schedule SE and have paid for an individual or family health-insurance policy in 2010. To calculate savings, multiply your annual health-insurance premiums by 15.3 percent (0.153).
Note that if your annual income exceeds $106,800, you will receive a lower tax benefit. Chances of the exemption being renewed are 50-50, says Kristie Arslan of Association for the Self-Employed, which is a lobbying group that pressed Congress for the deduction.