How Independent Contractors are Affected by the Affordable Health Care Act (Obamacare)

7% of workers are considered independent contractors

Just over 7% of workers in the United States are considered independent contractors by the Bureau of Labor Statistics, and these self-employed individuals are directly affected by the Affordable Health Care Act.

There are over 10M individuals in the United States who are classified as independent contractors and will be impacted by the Affordable Health Care Act – both negatively and positively. The Affordable Health Care Act will directly affect the US income tax returns of independent contractors. If you are an independent contractor, you can save money on your US income tax return by making a strategic tax plan ahead of time.

Benefits to Affordable Health Care Act

There are benefits to the ACA, including no refusals due to pre-existing conditions, benefits for children (and adult children) from policies held by parents, and a motivation to purchase health insurance. While penalties outlined in the Affordable Health Care Act may be viewed as a negative, the positive side is that it encourages independent contractors who are without health insurance to purchase a policy. This is especially beneficial to independent contractors who had previously been denied health care due to a pre-existing condition. The Affordable Health Care Act prevents applicants from being denied for conditions diagnosed before insurance was sought.

Another benefit of the Affordable Health Care Act is that there are no lifetime coverage limits. Additionally annual limits are being phased out this year.  Furthermore, children and adult children (up to 26 years of age) are covered under their parents’ health insurance plans.

Penalties for failure to acquire qualifying health plan

There are penalties for failure to acquire a qualifying health insurance plan, and the penalty (or tax, as the Supreme Court calls it) will begin to be assessed this year (2014). If your annual earnings are in a high bracket (greater than $200K for individuals or $250K for married couples) you will owe an additional Medicare tax – whether you are insured or not.

The penalty for failure to purchase a qualifying health insurance plan is in the amount of either $1,360 or 2.5% of your gross income – which ever number is higher.

If you are an individual earning more than $200K per year or a married couple earning more than $250K per year, you already owe a Medicare tax in the amount of 3.8% on your investment income (this tax started in 2013). You also owe a 0.9% tax on your salary income. If you have a Subchapter S or a partnership, your business could also be liable for these taxes. If at all possible, try purchasing insurance through your company instead of as an individual to avoid these taxes.

A 40% excise tax on high-dollar health insurance plans is scheduled to begin in the year 2018. A ‘high-dollar health insurance plan’ is defined as having a premium of $10,200 or higher for a single individual or a premium costing at least $27,500 for families. These thresholds will not be adjusted for inflation between now and 2018.

Additional taxation

High income earners may not be the only group liable for additional taxes. If you have an insurance plan with a high deductible, you could be facing additional taxation. There is a $2,500 limitation on contributions to flexible health care spending accounts. This $2,500 limitation leaves your income subject to Social Security taxes and US income taxes. If you have a health insurance plan with a high deductible and you are paying the out-of-pocket expenses with a flexible spending account, the additional taxes for which you are liable could be very high. To avoid these punitive taxes, consider a more comprehensive insurance plan with a lower deductible.

IN 2013, the itemized deduction floor for medical expenses was raised from 7.5% to 10%. This increase made it virtually impossible for workers with health insurance to claim a medical expense deduction. Switching from a health insurance plan with a high deductible to a more comprehensive plan will also help you qualify for this deduction.

Research your plans

When it comes to selecting a health insurance plan, research will pay off handsomely. Try expanding your search to include your University for group alumni plans, checking with companies or individuals with whom you work, getting referrals from your state insurance department, and more. The following list is a series of steps you can take to find the most comprehensive healthcare plan.

You may be leaving an employer to become self-employed. If you were working for an employer that offered a group health coverage plan, you may have eligibility for coverage through COBRA. If your employer was paying all or part of your premium, you may be responsible for the cost of COBRA, but it still may cost less than an individual health insurance plan.

Check with your current insurance provider if you have other types of insurance like auto, homeowner, or life insurance. See if your current provider offers health insurance. If they do, you probably qualify for a ‘bundling’ discount.

The university you attended may have a group policy established for alumni, so take the time to call them. Also, if you belong to any associations, there may be a group policy for which you qualify.

As an independent contractor, you may work with a wide variety of other contracting companies or individuals. Reach out to these individuals and/or companies to see if their health insurance plan extends coverage to sub-contractors.

Get in touch with the insurance department in your state for recommendations on health insurance providers in your home town.

Make sure to call around and check with multiple health insurance carriers to compare rates and coverage options.

Self employed & living abroad - you may be exempt

If you are a self-employed expat living and working abroad - you may be exempt from the requirement to purchase U.S. health insurance.

Even if business income is reported to you on U.S. form 1099-MISC or 1099-K, you are considered having “Essential Minimum Coverage”  

(A) for the months that occur during a period of 12 consecutive months where you are present in a foreign country during at least 330 full days.

or

(B) for the entire period you are a bona fide resident of a foreign country