SELF-EMPLOYMENT TAX DEDUCTION AND HEALTH CARE PREMIUM DEDUCTION
Administrative Rules Adopted by Revenue Division Pursuant to Rule-Making Authority
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. No deduction is allowed for self-employment health insurance included in line 29* that relates to self-employment income from a pass-through interest in a Partnership or S-Corporation.
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.
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).
Submitted for inclusion in PPD September 17, 2002.
Amended by Director of Revenue Bureau October 11, 2012.
Amended by Director of Revenue Division October 1, 2015.