I just started working as an independent contractor/sole proprietor and buy my own health insurance.?

Question

It is my understanding that I may be able to include the cost of the insurance as a business expense if I pay for it as part of my business. I have not incorporated or anything like that--I just work on my own as a consultant with my computer, phone and my brain. I use my ss# as my tax i.d.

I'm confused by what it means to have my business cover the expense--I am "my business" and just pay for things like I always have.

Thanks for the help.

Answer 1

Hi Jodi,

I recently made a posting on my website that covers some of your questions: http://www.biztaxtalk.com/node/3. This also includes links to several IRS publications to help you get started.

If you are a sole proprietor, yes, you are your business although only certain expenses are deductible. See IRS Publication 535, Business Expenses for all the details on what's deductible and what's not. (link in the sources below).

You will probably get your health insurance in your personal name. New IRS guidance said this is OK. Previously, the insurance had to be in your business name to be deductible.

You will report most of your business expense on Schedule C, but health insurance expense actually goes on the first page of form 1040, line 29. Unfortunately, that means that health insurance costs cannot be used to reduce your income when calculating your self employment tax.

Don't forget to make your quarterly estimated tax payment and include your estimated self-employment tax along with your income tax when calculating payments.

Hope this helps!
Linda Coleman, EA
http://www.biztaxtalk.com

Answer 2

Well this is a tall order. You are asking for a whole lot of help for free. Normally this costs thousands of dinero. Do you have an attorney or accountant that is a true friend? Perhaps it would be best to go to them. However in the Cliff notes version... to do it right you must start a separate company even if you are the only employee! If you don't, the IRS will consider all of your income taxable income and take what ever money you generate at the highest rate possible. There are many reasons to do a C corp., Sub Chapter S, or LLC, however if you expect to make a decent cash flow the C Corp gives you the greatest flexibility. Yes, I know all about the "double" taxation of monies, but the corporate veil of protection is what you want to guard your personal assets, and you might as well set it up as if you were going to be the next Microsoft.

Stop thinking of yourself and your business as the same thing. The only way to do things properly is to separate the things you do as a business and the things you do as a person. If you want the benefits of a business you must properly account for the money in for the business and the money out for non business activities.

An example would be the classic business lunch. The government thinks that you will eat lunch anyway so if you go out for lunch they will not allow any deduction (unless you are away from home on a business trip). If you are with a client for lunch and you pick up the tab AND the relationship results in a sale, you can declare 1/2 of the lunch cost as a business expense, but only if you list the person, company and prove a sale. If you don't separate the company money from your money the IRS may disallow the expense.

Your company may chose to lease you a car - perfectly legitimate - as long as any one in your position can have the same benefits. I know you are the only person in your company; legally decisions made by you for your company are different than decisions made by you personally even if it just means that you get a car, as long as you properly document and back up your decisions.

Do you see why this isn't a question for this forum? Everything I have said above may be wrong for you if certain situations change. It isn't easy to run a small business, and I have been a small business consultant for 20 years. I am an OSHA outreach trainer and have incorporated businesses for the last 7 years. Talk to a knowledgeable business friend that you can trust which will not be able to make a dime from you and see what they say.

Answer 3

Go to "Office Depot" or similar office supply. Tell them you want a "Dome Accounting Ledger" They about $10.
When you are a sole proprietor you still have business expenses. At the end of the year you fill out a 1040, Profit and Loss Statement and send in your Taxes you owe, or nothing if you have enough deductions etc. What left over is your pay check. REMEMBER this VERY well. You also pay your Social Security, all 15 +/- % of it. Make sure you understand this on your 1040 and pay this. KEEP all your 1040 until you retire, KEEP them!!!! This way you do have proof you paid Social Security and they say you did not, hard to prove way down the road if you not have those 1040's. IF, social security still around.

Answer 4

Yes, you might be able to deduct health insurance costs. Go to irs.gov, download Publication 17, and do a FIND on "Health insurance costs for self-employed persons" - it's around page 141.

If you're just starting a business, you probably do want to consult with a CPA unless you're really up on tax law and rules. They'll guide you on what you can and can't deduct, and their suggestions might save you enough to pay their fee. And go to a CPA, not one of the mass-market tax preparation companies.

Answer 5

You really should consult an accountant to setup a record keeping system for the business. A separate bank account for the business is a good idea as well. The link below is for IRS Publication 334 (2005), Tax Guide for Small Business. It may be useful.

http://www.irs.gov/publications/p334/index.html

Answer 6

To have your "business" cover any of your expenses, you would have to incorporate, then you would be an employee of your business and "they" would cover expenses. As sole proprietor, you are the business and you pay for expenses. I've been self employed for a hundred years and know lots of the rules. Good Luck

Answer 7

Sometimes a local business club will offer a buy in to group insurance, or your church, or other civic organization. The problem is, people who want GROUP coverage, and don't want the exclusions of a private plan, usually have pre-existing conditions, so on the whole, this type of group coverage costs A LOT more than it would through the employer.

Answer 8

Exactly you are the business......it's complicated to explain, but it in general it's a tax write off so to speak. I would consult and acct and they can tell you how it's done.

Answer 9

Consult with a CPA, it would be worth you time.