Going out on your own to fulfill a dream of owning your own business or freelancing full-time can be exciting and terrifying all in the same moment. You are responsible for earning enough income to pay the bills, and provide yourself and your family with benefits like life insurance, health insurance and retirement savings.
It might be tempting to skip putting a portion of each check away in savings for taxes, thinking you’ll make it up when a bigger check arrives down the road. It’s even more tempting to forgo buying health insurance or putting 10% away in a retirement account, assuming you’ll get around to it when your business is more stable. The reality is, when you are self-employed, you have to step out on the right foot immediately, or bad business decisions can make your dream of being an entrepreneur slip away quickly. The good news is, there are tax advantages and cost assistance opportunities for small business owners, particularly for buying and maintaining a health insurance plan. Here are five factors to consider:
Cost Assistance On The Individual Marketplace
Depending on when you leave your “real job” and go out on your own, you may qualify for cost assistance in the form of a tax credit when you purchase a health insurance plan from your state exchange or the federal marketplace. The tax credit, also known as a tax subsidy, if determined by your total annual household income. If you fall between the 100%-400% federal poverty level, you can qualify for a subsidy to help lower the monthly cost of your health insurance premium.
See If You Qualify For Cost Reductions
Individuals and families who are under 250% of the federal poverty level, but make too much to qualify for Medicaid assistance are eligible for cost reductions on not only their monthly health insurance premium, but also on the plan’s deductible, coinsurance and co-payments. The catch? You must purchase a Silver plan on the marketplace in order to qualify. (Health insurance plans are Bronze, Silver, Gold or Platinum, with Bronze being the least expensive plan and Platinum being the most expensive.)
Get a Health Insurance Premium Deduction
Your health insurance premium can be a tax write-off during the months that neither you nor your spouse were eligible for health insurance through an employer. You must, however, generate more earned income at your business than the expense of your total insurance premium for the year, in order to qualify for the deduction.
Check Into Medical Bill Deductions
If the total amount of your medical expenses exceeds 10% of your gross adjusted income, you can deduct medical bills as well. This includes expenses for doctors, surgeons, mental health professionals, chiropractors, hospital care, acupuncture and more. Find a complete list of deductions on the IRS website.
Enroll in a Tax-Free Health Savings Account
Health Savings Accounts (HSA’s) are available for anyone with a qualifying high deductible health insurance plan. Qualifying health plans include those with a minimum $1,300 deductible for individuals and $2,600 deductible for families. With these qualifications, the IRS allows individuals to deposit $3,350 and families to deposit $6,750 of tax deferred money into an HSA to pay for health care expenses.
Keeping financial records is key to making sure you are fully aware of the financial position of your business, whether you own a small five employee shop or are a solopreneur slugging it out on your laptop every day. The same goes for health insurance and health care expenses. Save your invoices, explanation of benefits (EOB’s) and receipts, and reap the many health care benefits that come with self-employed life.