Handbook / Health coverage

The premium tax credit for self-employed people, explained

For many people who leave a job to work for themselves, health insurance becomes their biggest personal cost. The premium tax credit can make Marketplace coverage affordable, but it is built around an income estimate, and self-employed income is hard to estimate. This guide explains how the credit works, what makes it different for business owners, and how to avoid an unwelcome bill at tax time. It deliberately avoids specific income limits and percentages, which change with legislation and the coverage year; HealthCare.gov shows current figures when you apply.

What the credit is

The IRS describes the premium tax credit as a refundable credit that helps eligible individuals and families cover premiums for health insurance bought through the Health Insurance Marketplace. To get it, you must meet certain requirements and file a tax return with Form 8962.

"Refundable" means you can receive it even if you owe no income tax.

Who qualifies

The IRS lists these requirements. You:

• have household income within a certain range
• do not file as married filing separately, with an exception for certain victims of domestic abuse and spousal abandonment
• cannot be claimed as a dependent by someone else

And in the same month, you or a family member:

• have Marketplace coverage, with your share of the premium paid by the due date of your return
• cannot get affordable employer-sponsored coverage that provides minimum value
• are not eligible for government coverage such as Medicaid, Medicare, CHIP or TRICARE

Being self-employed does not change these rules. It does change how hard it is to know your income in advance.

Advance payments

When you enroll, the IRS says the Marketplace determines whether you are eligible for advance payments of the premium tax credit, often called APTC. These are paid to your insurer on your behalf to lower your monthly premium. You can take all, some or none of the credit in advance.

The estimate is everything

HealthCare.gov says you estimate your expected income for the year when you apply, and that you can start with your household's adjusted gross income.

For a self-employed person, that means net business profit after expenses and adjustments, not gross receipts. A freelancer who bills a large amount but has substantial expenses has a much lower income for this purpose than the invoice total suggests.

Ways to estimate:

1. Start from last year. Take last year's net profit from Schedule C and other income.
2. Adjust for what you know. New contracts, lost clients, rate changes, planned time off.
3. Account for expenses. Include expected business costs.
4. Be realistic. An optimistic low estimate gives a bigger advance credit now and a bigger repayment risk later.

The guide on Marketplace health insurance covers estimating uneven income in more detail.

Report changes during the year

The IRS says that if you get advance payments, it is important to report life changes to the Marketplace as they happen, since changes in household, income or family size can affect your credit and your refund or balance due.

HealthCare.gov explains both directions:

• If income goes up, you may qualify for less help. If you do not report it and keep using the advance credit, you will have to pay back the difference when you file.
• If income goes down, you could qualify for more savings, or even Medicaid or CHIP.

Self-employed people benefit from a monthly check: compare year-to-date profit with the estimate and update the Marketplace if it has drifted. Good bookkeeping makes that check quick.

Reconciling at tax time

The IRS says that if you received advance payments in any amount, or plan to claim the credit, you must file a federal return and attach Form 8962. On that form you claim the credit and reconcile it with the advance payments. You must file to reconcile even if you are not otherwise required to file, and failing to reconcile can delay your refund and affect future advance payments.

The Marketplace provides Form 1095-A if you or a dependent had Marketplace coverage. You need it to complete Form 8962.

The result:

• If you used less advance credit than you qualify for, the difference increases your refund or reduces tax owed.
• If you used more, you may have to repay some or all of the excess, subject to rules in the Form 8962 instructions.

Business decisions and the credit

Because the credit depends on income, some business decisions affect it: timing of large expenses, retirement plan contributions that reduce adjusted gross income, and how much you pay yourself if you have a corporation. These interactions can be complex. Ask a tax professional before making decisions mainly for their effect on the credit.

Keep the paperwork

Keep your Marketplace application, any income documents you submitted, Form 1095-A, and a copy of Form 8962 with your tax records.

Estimate net income honestly, check it monthly, report changes promptly, and reconcile on Form 8962. That is how self-employed people use the premium tax credit without surprises.