Health Insurance: A Primer (Part Two of Many)

Now, let’s talk a bit about health insurance premiums, the tax code, and how that relates to people who purchase their own health insurance rather than have it supplied as a “benefit” from their place of employment.

Let’s start with people who get health insurance from their employer. If you are in that category, be sure to thank your employer and thank Congress for the wonderful tax benefit that they have bestowed upon you.

For the sake of argument, let’s say you make $50,000 per year and your employer provides you with $15,000 worth of health insurance. Your taxable income for the year is $50,000. In addition, you pay 6.2% of that $50,000 in FICA and 1.45% of the $50,000 for Medicare. Your employer is required to take that out of your paycheck. In addition, your employer is required to match that contribution. A total of 7.65% is taken out of your check and your employer matches that amount. 15.3% of your salary is sent to the United States Treasury for Social Security and Medicare before any Federal income taxes are taken out.

Bottom line for the person above: $50,000 wages + $15,000 benefits = $65,000 total package. $3,825 is taken for FICA/Medicare for the year. Only the wages are taxed, NOT THE VALUE OF THE BENEFITS.

Stay with me now. This is important.

Here’s how the math works if you are a self-employed, make $50,000, and purchase your own health insurance. First of all, to purchase the same policy as the guy in the above scenario, you would have to make $65,000 in order for you both to have $50,000 to spend after purchasing health insurance. Being self-employed, means you double the FICA portion since you are the employee and the employer. Thus, all self-employed people from the start (before income tax) pay 15.3% of their income for FICA and Medicare.

Here’s the dirty little secret. If you are self-employed, you do get to subtract your health insurance premiums from your taxable income, BUT NOT FROM YOUR FICA/MEDICARE INCOME.

Bottom line: A self-employed person purchasing his own health insurance will pay FICA and Medicare to the tune of 15.3% on their health insurance premiums. For a $15,000 per year policy that translates into $2,295 more in taxes. All that because you are self-employed and purchasing your own health insurance.

In the first situation, the TOTAL FICA/Medicare taxes for the year taken are $3,825. (And, $3,825 is matched by the employer)

A self-employed person pays a TOTAL of $9,945 with the same salary and benefits because not only do they match the FICA, but they have to pay FICA on their health insurance premiums.

It gets even worse for those who are not self-employed and purchase their own health insurance. Not only do they pay FICA and Medicare on the health insurance premiums, they get to pay income tax on that amount, as well.

Lesson Number Two: If Congress really believed small businesses are the backbone of this country and cared about everyone having health insurance, they would have started with the simple fix of correcting the inequalities in the tax code. That fix would be quick and inexpensive. Either they are uninformed about them or they have a different agenda than making health insurance more affordable.