Not long ago I met a friend of a friend for lunch, as a favor. I had been asked to review her business idea and give her my opinion of it. I listened to her business idea (a unique interactive spiritual book) and felt it had an extremely narrow niche, but good promise within that niche.
This entrepreneur was working a day job. She seemed to want to devote full-time to getting the product manufactured and distributed for sale, yet kept talking about that day as far in the future. “Someday,” she said several times with a wistful look in her eye.
Was it money — lack of savings — preventing her from pursuing her dream? Not exactly. Her husband was self-employed and they had income coming in.
After a few probing questions, I finally got to the bottom of why she felt her entrepreneurial dream would have to wait. “I have to provide health insurance for my family. I get that from my current job and we can’t afford to purchase health insurance on our own,” she said.
A few more probing questions later I determined that she currently paid several hundred dollars a month for her family’s contribution toward the premiums. But when I asked her if she had priced out health insurance premiums for her own policy independent of an employer, she had not. “Isn’t it three or four thousand dollars a month?”
I then explained that most self-employed were able to get insurance for less than that in the state where I live (Ohio), and suggested she seek out a quote and get the facts.
But the biggest misconception was that she had absolutely no clue about the 100% Federal income tax deduction — dollar for dollar — for premiums for a self-employed health insurance policy.
That highlighted a problem that tends to have a chilling effect on entrepreneurship and startups: the myth of unattainable health care.
For a number of years here in the United States we have been conditioned to listen to stories of prohibitively high health insurance costs. Such a good job has been done raising awareness, that now entrepreneurs are running scared.
Sometimes in the midst of talking about all the problems, we can lose sight of the good news. All this awareness raising has led to some positive gains that make healthcare more affordable and available to small businesses, especially self-employed small businesses.
Readers from outside the United States may find this entire article puzzling. No, we do not have government-supported healthcare available (at least, the majority of small business owners do not). For the most part we have to find health insurance and pay the premiums on our own.
A recent report issued by the Office of Advocacy of the Small Business Administration illustrates, those Federal income tax deductions have had a proven effect on small businesses: they have kept them from going out of business. The health insurance deduction decreased the likelihood of exiting the business by 10.8% for single filers, and 64.9% for married filers.
Does this mean all the health insurance issues affecting small business have been solved? No. Health insurance has been and continues to be a huge issue for small businesses in the United States. First of all, the income tax deduction I mentioned is for Federal income taxes and not payroll taxes. In other words, the self-employed entrepreneur can deduct the cost of the premiums on a Federal income tax return, but still has to pay Social Security taxes on those premium dollars. Second, the deduction applies only to the self-employed small business. Small businesses trying to provide health insurance coverage to their employees are still at a disadvantage. Third, the overall cost of premiums can be too high for many small businesses, and certain insurance laws have kept rates higher for small businesses than for large corporations.
On the other hand, this Federal income tax deduction that went into effect permanently a few years ago can get overlooked in the public’s eye. It surprises me how many would-be entrepreneurs simply do not seem to be aware of it, despite this latest compelling evidence that the tax deduction helps entrepreneurs stay self-employed and in business.
Read the SBA Office of Advocacy report, “Health Insurance Deductibility and Entrepreneurial Survival” (PDF).
Yes, it is true that self-employed people can get this deduction, but you have to be careful in that the health policy you get is an individual one, which means that they can change the rates on you when you use it too much.
Instead, self-employed folks are better off getting into groups like NASE (National Association for Self-Employed) and using their health benefit programs, as they are group programs and your rates won’t change if you have a major incident one year.
I used to have an individual policy, but have recently switched. And covering a healthy family of 4 costs about $625 a month (in Virginia), which includes medical, dental and vision.
I wonder whether that set of statistics about business failure really show that deductions keep businesses from closing. I perhaps wonder if claiming the deduction isn’t a proxy measure of managerial competance — i.e. if they can’t figure out to claim a significant tax deduction, they’re probably struggling with other finance and management issues as well.
Hi Optimus, yes, I don’t know if it is a question of competence. Maybe it’s about knowledge. Many new entrepreneurs and new business owners — not to mention aspiring ones — often don’t know that much about tax regulations and benefits.
Many people comparing prices and claims experience find that association and other group policies are definitely the way to go.
Let’s hope we get some changes in Federal law passed here in the U.S. expanding association healthcare plans. That way affordable options which spread the risk out over larger pools will be more widely available.