One of the lesser-known provisions of the Small Business Jobs and Credit Act is a tax credit for self-employed individuals, for their medical premiums. Here's how it works:
If you are self-employed, you may deduct the cost of health insurance for yourself and your spouses, dependents, and children under 27 years old as of the end of the tax year in your calculation of net earnings from self-employment for purposes of figuring self-employment taxes. This provision applies to tax years beginning after 2009 (that is, for 2010).
A change in this deduction for 2011: Congress did not extend the deduction to be taken against self-employment taxes. For 2011 and in future, unless Congress acts again, the deduction can only be taken against income taxes. Read more about this change on the Tax Planning site.
The information below is applicable for 2010 only. No deduction of health insurance can be made against self-employment taxes in 2011 or beyond.
How Does This Tax Credit Work?
Note that this credit is applied to self-employment tax (SECA tax), the Social Security and Medicare taxes for self-employed business owners. (SECA is the self-employed equivalent to FICA taxes on employees.) So the tax credit reduces the amount you pay for self-employment taxes.
How Do I Get This Tax Credit?
Self-employment taxes are calculated using Schedule SE. This schedule bases the self-employment taxes on the amount of your business net income.
1. First, you will determine your net profit or loss from your business on Schedule C.
2. Then, since this is a tax credit, you should be able to subtract the amount of your health plan premiums from the total net profit, before the self-employment tax calculation is worked.
Are There Restrictions on this Tax Credit?
Since the tax credit reduces self-employment tax, if you don't pay this tax, you can't get the credit. It is only available to self-employed individuals, not corporate owners (who are not self-employed).