Reduce Your Self-Employment Taxes with an HSA

Renée Sazci
March 10, 2020
2 min read

As a self-employed individual, chances are you'll look to try and find any way to reduce your tax burden. Here are a few ways you can do this with a health savings account.

As a freelancer, you know that not having - or having the wrong health insurance - is a liability for your health and your business. Going without means you’re likely not receiving the preventative healthcare covered by the Affordable Care Act - care that can prevent progressive and costly diagnoses. A high-deductible health plan, paired with a health savings account, could be the right coverage for your health and your wallet. Especially because, together, they offer freelancers a triple tax-advantage.

What is a High Deductible Health Plan (HDHP)?

High-Deductible Health Plans are a viable health insurance choice if you anticipate needing little more than preventative health services - or if you’re a frequent user who knows that they will exceed the out-of-pocket maximum, which can ultimately save you money on the copayments from a traditional HMO or PPO plan. The qualifications of High-Deductible Health Plans (HDHP) change from year-to-year, but for 2020, the IRS defines these plans as having a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s annual out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be any more than $6,900 for an individual or $13,800 for a family. These limits don’t apply to out-of-network services.

What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is an individual-owned, healthcare savings account, available to those enrolled in a high-deductible health plan. HSA funds can be used for qualifying healthcare expenses without federal tax liability or penalty. Also, funds deposited into an HSA are not subject to federal income tax, funds roll over year-to-year if unused, and reduce the amount of self-employment tax due. You can think of a Health Savings Account as a 401(k) for your health, but better. HSA contribution limits change annually based on the rate of inflation. For 2020, you can save - and deduct - a maximum of $3,550 for an individual and $7,100 for a family.

Tax Advantages for Freelancers

Insurance Premiums

If you are a freelancer filing as a sole proprietor you can deduct health, dental, and qualified long-term care insurance premiums that you paid to provide coverage to your spouse, dependents, and your children who were younger than 27 at year-end, even if they aren’t dependents. You can calculate the deduction by using the Self-Employed Health Insurance Deduction Worksheet in IRS publication 535.

HSA Contributions

You can also deduct the contributions that you made to your Health Savings Account. The maximum deductible contributions for the 2019 tax year are $3,500 for an individual and $7,000 for a family. These amounts have each increased by $50 for the 2020 tax year. The funds that you contribute are income tax deductions, plus they can serve as an investment vehicle similar to a 401(k). HSA contributions accrue tax-free and can be withdrawn for qualified medical expenses tax-free. Because of these features, HSAs are often referred to as triple tax-advantaged accounts.

Claim Your HSA Contributions on IRS Form 8889

When you claim your HSA contributions on IRS Form 8889, this money is exempt from getting taxed. This is one of the major draws of opening an HSA. The funds that you mark on IRS Form 8889 will not have to be marked as part of your taxable income - ensuring that you will have funds to save for healthcare and minimize how much you’ll have to pay in self-employment taxes.

Have More Tax-Related Questions?

The team over at Oxygen Bank have some tips to help freelancers get ready for tax season and reach their financial goals. Read 5 Tax Tips Every Freelancer Needs to Know.