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2 tax benefits self-employed professionals should know about

 

2 tax benefits self-employed professionals should know about

Brandon Lafving
by Brandon Lafving, IRS contributor (@TechDragoon)

Undoubtedly the two biggest benefits of having an employer are health insurance and retirement plans, right? Wrong. Both of these pricey items are covered when you are self-employed, too.

While it is true that the government does not pay your health insurance for you when self-employed, you can claim a deduction for your health insurance premiums. That means the money you spend on health insurance is at least tax-free. Here is how to see if you qualify.

Claiming a Deduction for Health Insurance Premiums

A number of different types of businesspeople count as self-employed. For health insurance purposes, you can qualify either as self-employed individual who records a net profit on Schedule C, or Schedule C-EZ.  Farmers who file a Schedule F are also eligible.

If you are a member of a partnership who records net earnings on Schedule K-1 (Form 1065), health insurance is deductible. And even as a shareholder owning more than 2% of an S-Corporation, you can deduct health insurance from the wages you report on Form W-2.  

The health insurance policy can be in your name for all the above cases, or if there is a group involved, as with S-corporations or partnerships, the policy can be in the name of the partnership. Self-employed health plans can cover your entire family.

The sticking point – you can only claim a deduction as long as you record a net profit from your business. Of course, if your business does not make money, then it will not pay taxes in the first place. However, net losses can be applied to tax years in the future.

READ: Am I being taxed on my fringe benefit?

Retirement Plans

You can also eke out a retirement plan that is commensurate with your friends who are fully employed. There are plenty of options - solo 401(k)s, SEP-IRAs, Keogh plans and Simple IRAs. The limitations on these plans can be excitingly high. For a solo-k, also known as a Uni-k or One-participant-k, you can add 100% of your earnings each year, up to $17,000 in 2012 ($22,500 if 50 or older). And if you need to catch up on past years, the total deposit limit raises to $50,000.

All this being the case, the biggest difference in benefits between self-employment and employment is in the bookkeeping. The onus is on the individual to calculate the costs of living a fully insured life with retirement and reflecting those in your business costs. As it turns out, the biggest 'benefit' of being an employee is the simplicity of having someone else do your taxes/benefits for you. You can take care of everything else.