This article last updated on November 2017
If you're one of the 15 million self-employed workers in America, then you probably already know that buying health insurance hasn't always been easy or affordable. From finding a plan that covers pre-existing conditions to simply buying insurance to cover basic preventive care, you may have struggled in the past to protect yourself or your family during medical crises. Fortunately for you, the Affordable Care Act changes the rules when it comes to health insurance.
Entrepreneurs straddle the line between individual and business, and the new healthcare law can be confusing for both groups of workers. Do you qualify as a business for health insurance purposes, or can you use the individual marketplace to buy a plan? You're not alone in the confusion. Though the ACA was signed into law in 2010, millions of people continue to ask questions about how the new law affects them and their business. We're here to clear up some of the confusion. The following article discusses the impact of Obamacare on self-employed workers.
Entrepreneur vs. Employer
Some people have trouble identifying as self-employed workers due to the nature of their work. For example, you might assume that Realtors who associate with national realty companies are considered employees of those companies. Actually, real estate agents are typically self-employed. Just over 10 percent of the American workforce is made up of self-employed people. How do you distinguish between a sole proprietor and an employer?
According to the HealthCare.gov website, a self-employed person is someone who works independently of any employees. In other words, if you work as a graphic designer and don't pay someone to work for you, then you're considered self-employed. Even self-employed people who hire occasional contract workers to complete certain tasks are still considered self-employed for tax purposes.
On the flip side, sole proprietors who hire someone to work part-time or full-time on a regular basis are considered small business owners for tax and health insurance purposes. If you pay someone a salary and report their wages to the government using a W-2 form at the end of the year, then you've crossed the line into employer territory. We'll discuss your health insurance responsibilities as an employer in a later section.
It's important to note the distinction between entrepreneurs and employers because the rules on buying health insurance differ substantially for each group. For all intents and purposes, self-employed workers are treated as individuals on the health insurance exchange sites. Whether you walk dogs, write web content, style hair or sell houses, you're expected to meet certain obligations as a self-employed worker in the United States. Under the Affordable Care Act, every eligible American citizen must purchase some type of health insurance or face a penalty fee known as the “shared responsibility fee” or “non-compliance fee.” This fee is a tax, and the IRS will collect the tax when you file your return each year.
As an individual, keep in mind that the marketplace, or health insurance exchange site, is only open once per year for open enrollment. The next enrollment period begins on November 1, 2017 and runs through December 15, 2017. If you don't purchase a health insurance plan during this period, then you may have to pay a fee when you file taxes the following year. Note that the fee only applies to the months that you lack insurance.
Insuring the Self-Employed
One of the perks of Obamacare is that insurance plans that are created after March 23, 2010 have to offer 10 essential benefits. You may not need or use some of these benefits, but they're available to everyone who purchases a new plan on or off the Marketplace. If you're enrolled in a plan through your spouse's employer, then you may fall within the grandfathered clause. This clause allows businesses to continue offering outdated plans as long as they existed before the ACA became law. Check with your provider to see if your plan covers the following 10 essential benefits:
- Emergency services
- Hospitalization and related care
- Laboratory testing
- Maternity care before, during and after labor
- Mental and behavioral healthcare
- Outpatient services such as walk-in care
- Pediatric care
- Prescription medication
- Preventive care and wellness visits
- Rehabilitative services including equipment
Finding comprehensive coverage has traditionally been difficult for self-employed workers because insurance companies tend to take a conservative approach to offering benefits. Now, you have the option to purchase any plan and receive access to at least 10 basic benefits. Coverage doesn't necessarily preclude payment. Depending on the type of plan you buy, you'll still have to pay co-pays or meet a deductible to enjoy some of the benefits, but your plan will cover these things regardless of the level of plan you buy.
Tax Breaks and Deductions
Keeping tabs on your income as a self-employed worker can be tricky, which is part of why the government requires freelancers and other self-employed professionals to submit quarterly estimated taxes. As you probably know, preparing your own taxes can also be a huge headache. How do you know what to pay Uncle Sam when your income fluctuates so widely each month? Each person develops his own system over time to deal with the chore of taxes, but health insurance throws another wrench into the calculations.
As we outlined above, individuals must buy health insurance or pay a penalty fee when they file taxes for the year. In 2017, the fee is $695 per uninsured adult and $347.50 per uninsured child, per household, or 2.5 percent of your household's total taxable income, whichever is greater. The fee will go up in 2018. On the upside, you can still take the tax deduction for health insurance if you purchase a qualifying plan during the year.
The government offers a number of tax deductions and credits to self-employed people in an effort to help them offset the cost of doing business. For example, you may be able to write off the cost of your home office if you use it solely for work during the year. One of the most important tax deductions is health insurance. This deduction allows self-employed people to write off the cost of their medical, dental or long-term care insurance as long as the following parameters are met:
- You earned a net profit from your business.
- A partner in your business reported net earnings.
- You used an alternate method to report net earnings.
- You earned wages as a shareholder.
- The insurance policy was in your name, your business partner's name or the S corporation's name.
The deduction applies to premiums, and you can only take this deduction if you or your spouse didn't have the option to enroll in an employer-sponsored healthcare plan during the year. There's also a limit on how much you can deduct. You can only deduct the cost of insurance and un-reimbursed medical expenses that exceed 10 percent of your adjusted gross income for the year.
There are other advantages to enrolling in a health insurance plan under Obamacare. Even with the tax deduction, many small business owners and entrepreneurs found it difficult to afford health insurance prior to 2010. Now, you have the option to use government subsidies to buy insurance on the Marketplace. These subsidies help lower monthly premium costs, and millions of people have already taken advantage of the program. Regarding taxes, subsidies are not considered taxable income. You won't be able to claim them as a credit, but they also don't count against you for income purposes.
The above information is not intended to be taken as tax advice. You may have a completely different tax situation depending on the type of business that you run, so make sure to talk to your accountant or tax adviser about your personal situation and how Obamacare fits in with your business.
Entrepreneurial Job Growth
In an era that requires more technical knowledge and internet savvy, you might assume that freelance web developers and other self-employed entrepreneurs would be running the show by now. Predictions from several years ago included the idea that the workforce was heading toward self-employment as a primary job source. Unfortunately, the economy didn't live up to expectations, and self-employment is actually on the decline. Since the economic recession over the past five years, self-employment as a whole has seen a decrease in the number of jobs available as well as the number of jobs pursued by entrepreneurs. Self-employment is one area that hasn't quite recovered since the U.S. economy took a turn for the better.
Obamacare's Impact on Growth
The Affordable Care Act does more than offer insurance to freelancers and self-employed individuals: Over the next few years, experts agree that the new healthcare law should actually stimulate entrepreneurial job growth. In March 2014, Co-Director for the Center for Economic and Policy Research Dean Baker testified that the Affordable Care Act would have a direct and positive impact on job growth for self-employed workers. In his testimony, Baker noted that “it is reasonable to conclude that the ACA will increase self-employment by between 15-25 percent when its effects are fully felt in the next few years.”
How does a healthcare law stimulate job growth? The ACA impacts job growth by giving entrepreneurs the motive and opportunity they need to branch out on their own. For millions of workers in the United States, working a standard 9-to-5 job is a means to an end. Employers know that they can keep workers on board as long as they offer health insurance. Before 2010, there weren't many health insurance options for people who wanted to start their own business or work as a freelancer. The Affordable Care Act changed the game. Now, people who want to work for themselves can have their cake and eat it too.
By giving people more options for buying health insurance, the ACA encourages workers who might want to become self-employed to seek new employment opportunities. Businesses will grow and expand, new companies will form, and the self-employment job rate will recover over time.
Small Business Retention
Because the ACA requires certain businesses to start providing health insurance for full-time employees, America should see job growth in other areas as well. Competition breeds growth, and competitive businesses will soon start offering health insurance to keep their workforce intact. One of the primary reasons people stay in jobs they dislike is the benefits package. As we mentioned above, this has kept entrepreneurial people from branching out on their own in the past.
In the business world, new benefits options will force business owners to re-evaluate their health insurance plans to make sure that they remain competitive in the marketplace. For people just entering the workforce, health insurance will be all but a guarantee, and companies that want to attract top talent will need to consider supplying appropriate coverage. Even small businesses will need to assess their health insurance policies given new competition. Opponents of the ACA claim that the new healthcare law will stomp out business growth. In reality, the new law may encourage growth across multiple fields.
Using the Individual Marketplace
Because self-employed workers qualify as individuals for health insurance purposes, you can use the individual marketplace if you're self-employed. The health insurance exchange site was designed to help people see all of their health insurance options at once so that they could make better decisions about buying healthcare. To sign up for health insurance through the exchange site, visit HealthCare.gov and find your state. You'll be guided through the process. As mentioned above, the marketplace is only open during select times, but you can still see your options and get a general idea of your premiums by visiting the site year-round.
Use of Subsidies for the Self-Employed
One of the best features of Obamacare and the Marketplace is the availability of subsidies to help offset the cost of monthly premiums. If you earn between 100 and 400 percent of the federal poverty level (FPL), then you may qualify for a subsidy. This government credit allows you to purchase insurance for less than you might pay off-marketplace, but there are some restrictions. Most significant, the subsidy allotment is based on your adjusted gross income. Calculating adjusted gross income if you're self-employed can be not only difficult but seemingly impossible.
Income varies widely for people who run their own businesses or work independently as contractors. You might have a great year and earn close to six figures, but you may experience leaner years in which you barely earn a profit at all. When calculating your income for health insurance purposes on the marketplace, it's easy to see how you might overestimate or underestimate your income.
The government doesn't expect perfection when it comes to income calculations for the self-employed, but it does expect you to report changes in your income that could affect the amount of your subsidies. If you earn more money than you initially reported when you received subsidies, then you may owe the excess amount back to the government when you file taxes for the year.
Experts recommend that self-employed workers calculate their earnings on a monthly or quarterly basis to make sure they still qualify for their appropriate subsidies. If you notice a substantial change in your income, then contact the exchange you used to enroll and notify officials of the increase. Doing so could help you avoid a surprise bill from the government in April. The subsidy system isn't perfect, but it's a good start for helping people afford health insurance.
Insurance for Small Business Owners
Throughout this article, we've focused on self-employed individuals who don't have any employees. In this section, we'll highlight some of the major points about Obamacare as it relates to small business owners.
- Businesses that employ more than 50 full-time equivalent workers must offer health insurance to their full-time staff.
- The government defines a full-time equivalent employee as one who works more than 30 hours per week or 130 hours per month.
- The health insurance plan offered to full-time workers cannot cost more than 9.69 percent of an employee's total income for the year. If it does, it's considered “unaffordable.”
- Businesses that meet the full-time worker guidelines must offer insurance to at least 95 percent of their full-time workforce, along with dependents.
- Businesses with fewer than 50 full-time employees will not have to offer health insurance, but they may be eligible for tax credits to help pay for employee premiums if they do decide to offer insurance.
The bottom line is that employers in the U.S. will have to shoulder some of the burden of Obamacare by offering health insurance, but not all employers will be required to participate in what's called the “employer shared responsibility.” Businesses with more than 50 full-time workers must offer insurance or pay a fine, but businesses with fewer than 50 full-time workers won't have to pay a fine. According to the Treasury Department, about 96 percent of employers are small businesses, which means that nearly all businesses are exempt from the employer mandate to provide coverage
If you grow your business beyond self-employment and decide to hire a few workers, know that you may be able to apply for tax credits to help offset the cost of providing insurance. Plus, you can use a special website called the Small Business Health Options Program or SHOP to buy plans for your employees. The SHOP is only available to small businesses with fewer than 50 full-time workers. Unlike the Marketplace, which is only open for general enrollment once per year, the SHOP is open year-round so that you can browse plans and find one that works for your employees.
Protecting Your Future
Getting insurance helps protect yourself, your loved ones and others in the long run. With access to preventive care and wellness visits, people who buy insurance today will make it easier for Americans to become healthier and enjoy more productive lives in the future. Before Obamacare became law, insurance may not have been in your budget as a self-employed professional. Now, you can take advantage of lower rates and subsidies to find a plan that meets your needs, and you may even get a tax break for it. For more information on your health insurance options under Obamacare, visit HealthCare.gov or check out our other articles on the impact of the Affordable Care Act.