Calculating Health Insurance Subsidies When You’re Self-Employed

Many small-business owners struggle to obtain high-quality health insurance at affordable prices. The Affordable Care Act promises to change that, with the relaunch of the federal Health Insurance Marketplace.

When purchasing insurance through the Marketplace, you may state your estimated 2014 modified adjusted gross income (i.e., your household income after deductions) to determine how much of a tax credit you’ll be eligible for. To qualify, your modified adjusted gross income must be no more than 400 percent above the federal poverty level.

However, unlike corporate professionals with fixed salaries, small-business owners often earn considerably more or less than they anticipate in a given year. So, how do you calculate your eligibility for a subsidy, and what happens if your numbers are off? Here are three tips.

1. Estimate your future income. The Marketplace application asks you whether your adjusted gross income will be the same as, or higher or lower than, what you stated on your 2012 tax return. Although you should report this figure as accurately as possible (based on your tax returns from 2012 and previous years), you will not fall afoul of the IRS if your estimate is wrong. The Marketplace encourages you to log in over the course of the year to update your projected income, so you’ll have the opportunity to recalculate your insurance subsidy if necessary.

2. Claim an advance subsidy only if you’re comfortable with the possibility of repaying it. The Marketplace gives people who are eligible for a subsidy three choices: apply the entire amount directly to their health insurance premium; apply a percentage of the subsidy to their premium; or wait until the end of the year to claim the tax credit. If you earn more income than you stated on your initial application, you may be liable for repaying either some or all of the subsidy you applied to your health insurance premium.

Don’t want to deal with the possibility of a big tax bill at the end of the year should your 2014 income exceed your expectations? Consider waiting to apply the subsidy credit when you file your federal income taxes in 2015.

3. If you’re close to the subsidy threshold at the end of the year, consider taking business deductions that will lower your modified adjusted gross income. The Kaiser Family Foundation offers an online tool to help you calculate your household’s subsidy eligibility. Near the end of 2014, if you find you are no longer eligible for a subsidy due to greater than anticipated earnings, you may end up spending thousands of additional dollars on health insurance premiums.

If this happens, you could opt to lower your modified adjusted gross income by taking advantage of business deductions, such as purchasing new equipment or contributing to an eligible retirement plan. (If you’re married and your other half is self-employed, you may each make the maximum contribution to your retirement funds.) Talk with your accountant about your best retirement plan option, which may not only qualify you for a health-care subsidy, but also lower your taxable income.

About Kathryn Hawkins

Kathryn Hawkins is a principal at the content marketing agency Eucalypt Media. She's written about business, marketing, and entrepreneurship for publications including BNET,,, and owns and operates the positive news site Gimundo. Follow her on Twitter at @kathrynhawkins.
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