Generally, a self-employed individual (sole proprietor) subject to self-employment taxes is allowed a deduction equal to the Federal deduction for the employer-equivalent portion of self-employment taxes, as calculated on Schedule SE and reported on line 27* of Form 1040. The deduction is taken as an adjustment to net income for business license tax and business income tax purposes. No deduction is allowed for self-employment taxes included in line 27* that relate to self-employment income from a pass-through interest in a Partnership or S-Corporation.
Additionally, self-employed individuals who are allowed a federal adjustment for a portion of their health insurance expenses may take a deduction which equals the federal deduction as an adjustment to net income for business license tax and business income tax purposes.
Example: Sally Lawrence, a sole proprietor, files a Schedule C and a Schedule SE. Ms. Lawrence also pays $4,000 in health insurance premiums. The net income on Schedule C is $50,000. The deduction for the employer-equivalent portion of self-employment tax is $3,532. This amount is reported on line 27* of Form 1040 to compute AGI and is an allowable subtraction on line 4 of the City/County Form SP. Additionally, $1,000 of the health insurance premiums are deducted on page 1, line 29*, of the Form 1040. Ms. Lawrence is allowed a deduction of $4,532 ($3,532 plus $1,000) from net income.
A Partnership or an S-Corporation is not allowed either the deduction for the employer-equivalent portion of self-employment taxes or the deduction for self-employed payment of health insurance premiums. The expenses allowed as adjustments on the individual partner’s or shareholder’s Form 1040 are not expenses of the Partnership or of the S-Corporation.
*Line number reference is based on the 2011 Form 1040.
Submitted for inclusion in PPD September 17, 2002.
Originally adopted as Bureau of Licenses Administrative Rule 600.93-4 November 23, 1993, amended as 600.93-4A August 29, 1994 (health insurance premium deduction added) and December 26, 2000 (housekeeping changes).
Amended by Director of Revenue Bureau October 11, 2012.