Quitting Your Day Job: How Entrepreneurs Pay for Health Insurance
Updated: Oct 28, 2019
Maintaining stable health insurance can prevent entrepreneurs from leaving day jobs and starting their own business.
How do self-employed entrepreneurs pay for health insurance?
Before starting their own full-time businesses, many entrepreneurs worked “day jobs,” where they were either unhappy or unsatisfied. For most, the 9-to-5 hustle paid the bills and funded dream projects, if you're lucky. And, for 155 million Americans under 65 years-old, steady employment also provides health insurance. Maintaining stable health insurance can prevent even ambitious entrepreneurs from taking the leap and leaving a day job to start their own business—especially after government mandates were issued for healthcare. So, how do the self-employed get health insurance?
Depending on the size of your small business and your location, you may qualify for a range of healthcare options. Too, there are a number of tax credits and deductions available to owners of small businesses. Initially, the state in which your business is located and the number of employees you have determine which health insurance benefits your business qualifies for.
Currently, many employers purchase small group insurance for their companies because prices per employee are lower than purchasing individual insurance. In 2018, the difference between individual and group health insurance monthly costs was 7% ($350 vs. $325). Certain states allow businesses to purchase small group insurance, even if they have only one employee (can be the owner). These states include Colorado, Connecticut, Delaware, Florida, Hawaii, Iowa, Louisiana, Maine, Massachusetts, Mississippi, New Hampshire, New York, North Carolina, Rhode Island, Vermont, and Washington.
For small businesses with two or more full-time employees (who are not the spouse or family of the owner), the federal government offers tax credits, employee healthcare reimbursement programs, and a specialized insurance marketplace known as SHOP (small businesses health insurance program).
Below is a breakdown of the general health insurance options for self-employed small business owners. For more detailed information specific to your business and industry, consult an insurance agent or broker. Health insurance consultants may represent one or several insurance companies and can provide professional guidance.
Individual Health Plans for Entrepreneurs
Because individually-purchased health insurance is generally more expensive per person than group plans, small businesses that qualify for small group insurance (in select states, listed above) should strongly consider that option.
For entrepreneurs in states that do not qualify for small group health insurance, individual healthcare plans are available through the Affordable Care Act (ACA) marketplace as well as private (or commercial) health insurers. The ACA marketplace at healthcare.gov provides individual health insurance plan options. Additionally, some insurance plans offer Health Savings Accounts (HSA); between approximately $3,000 and $7,000 can be deducted for individuals and families with these plans.
People in certain states or with certain income levels may qualify for premium tax credits to reduce the cost of their insurance. If you decide to buy a private insurance plan, you won’t be able to qualify for the federal government’s insurance subsidies to reduce cost.
Are there any health insurance tax credits for self-employed business owners?
The good news for self-employed entrepreneurs is that you may be able to deduct all of the cost of your healthcare premiums from your taxes (and your dental and long-term insurance too). This deduction can also be applied to your dependents up to 26 years-old and spouses. Of course, these deductions (filed on your Form 1040) depend on several factors:
Your business must make a profit (meaning that it can not post a loss or no earnings each year).
You don’t qualify for other health insurance through your or your spouse’s employment.
To ensure your taxes are accurate for yourself and your business, it is recommended that entrepreneurs hire a tax consultant.
Membership Organization Health Insurance for Entrepreneurs
Depending on your background or the industry your small business operates in, you may qualify for an organization’s group health insurance plan. Some membership organizations offer their members the option to purchase health insurance, bringing down the cost of each member’s costs. Although changes to guaranteed minimum insurance coverage has reduced the number of organizations offering group health insurance (many still offer supplemental health coverage), a number of prominent organizations still carry the membership benefit.
Membership healthcare coverage is ideal for people who may not always have a job or present employment, but are still a member of the organization. Alumni groups, Greek organizations (sororities and fraternities), professional clubs, and unions may offer health insurance as an optional benefit of membership. Examples of these organizations include:
Alliance for Affordable Services
Affiliated Workers Association
Association for Computing Machinery
Writers Guild of America
Health Insurance Options for Small Businesses with Employees
If your business has two or more employees, you may qualify for special health insurance tax credits, deductions, premiums, and carrier options. Typically, the employee must be full-time and not the owner’s relative or spouse (though other qualifications may exist depending on your location). Some options include:
Self-insured plans: Employees typically pay a premium to their employer each month and the business assumes the responsibility of paying claims.
SHOP marketplace plans: SHOP is a public insurance marketplace and comes with certain restrictions to be able to qualify or make use of the tax credits.
Private, commercial group insurance
Though small business insurance was 31% cheaper than the cost of individual insurance plans per person in 2018, your business’s insurance is still required to follow all of the applicable state and federal insurance regulations. As such, these options are best discussed with a health insurance consultant to guarantee the most accurate coverage for your employees.
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“Membership Organizations and Health Insurance” by Mila Araujo. Updated March 12, 2019. Accessed August 31, 2019, via https://www.thebalance.com/membership-organizations-and-health-insurance-2645660
“Number of people with health insurance via jobs remained steady with Obamacare” by Dan Mangan. Updated July 14, 2016. Accessed September 2, 2019, via https://www.cnbc.com/2016/07/13/number-of-people-with-health-insurance-via-jobs-remained-steady-with-obamacare.html
“Self-Insured Group Health Plans” by the Self-Insurance Institute of America, Inc. Accessed August 31, 2019, via https://www.siia.org/i4a/pages/index.cfm?pageID=4546
“The Best Way to Buy Group Health Insurance for Self-Employed Workers”. Published September 10, 2018. Accessed August 31, 2019, via https://www.healthmarkets.com/resources/small-business-health-insurance/how-to-buy-group-health-insurance-for-self-employed/
“The Self-Employed Health Insurance Deduction: A Valuable Personal Deduction” by Stephen Fishman, J.D. Accessed September 2, 2019, via https://www.nolo.com/legal-encyclopedia/the-self-employed-health-insurance-deduction-a-valuable-personal-deduction.html
“What Do Small Business Owners Do for Health Insurance?” by Manasa Reddigari. Published November 28, 2018. Accessed August 31, 2019, via https://www.microsoft.com/en-us/microsoft-365/growth-center/resources/small-business-owners-health-insurance