In a similar way to contract templates, health insurance can be messy, especially for a freelancer. When you’re tasked with researching, comparing, and buying your policy all on your own, it may feel like a completely overwhelming process. Even with the ever-changing news cycle, and all of the changes freelancers are facing with today’s health market, there are some good things happening with health care for freelancers. One of them is the self-employed health insurance deduction! Here’s everything you need to know about qualifying for and claiming this very valuable deduction.
Note: If you want to claim the self-employed health deduction as well as maximize your tax savings, try Bonsai Tax. Our app scans all your bank/credit card receipts to discover tax-write offs. Users typically save $5,600. Try a 14-day free trial today and see how much you'll save.
This is a very straight-forward item to claim on your federal income taxes. According to the IRS, you can take this deduction for medical, dental or long-term care insurance premiums that self-employed people purchase for themselves and their families (including children who attend college up to certain age and dependents who aren’t your own children.) This is also one of the largest deductions you can take in a given year, with 100% of the cost of premiums being deductible.
Note that this is a special perk for freelancers that is not the same as a typical business deduction. This special personal deduction doesn’t count against your self-employment taxes, but rather your federal, states, and local income taxes. Claiming it can significantly decrease the amount of personal income tax owed, and can help you owe less at the end of the year – or even increase a refund!
You will be taking this deduction on your 1040, not your schedule C, so look for questions regarding how much you paid in health insurance premiums during the year. It’s a good idea to keep bank or credit card statements to get the exact amount you paid out. (All of the popular tax filing software and online programs include questions to help you determine if you can take this deduction, and they will put the correct info on the right form to help you claim it.)
Because this is a special deduction for business owners, you cannot take it if you have access to a health insurance plan with your employer. This is important to know, because many freelancers also have regular jobs with a traditional employee arrangement and the ability to purchase benefits. You also can’t take the deduction if you have access to a health plan through your spouse’s employer.
If your business is just starting, or a hobby, and you haven’t made enough money to claim a profit for the year, you cannot claim this deduction. If you make even just a little bit of profit, however, you can claim as much as you made for the year (just not more.) You need to claim the deduction for the business that you designate as the health insurance plan sponsor.
(This means that you can’t combine use profit from one business to take the deduction for another. You can, however, designate one business as a plan sponsor for dental insurance, and another for medical, making it easier to take the entire deduction from businesses who aren’t profiting so well.)
One other important thing to note is that COBRA (Consolidated Omnibus Budget Reconciliation Act) plans are treated differently. This insurance is provided to many workers who leave their jobs but still have access to benefits. The premiums you pay aren’t eligible for this deduction, even though you pay it out of pocket. Because your former employer is still considered the plan sponsor (and not you), it is categorized as an employer health plan.
Now that you know the financial and tax benefits of claiming a self-employed health insurance deduction for your freelance business, it’s wise to pick a plan that covers your needs well. With the ACA (Affordable Care Act) set to make changes in the near future, not everything you see on the current healthcare.gov site will be a permanent offering. In fact, coverage plans will likely change from this year to the next, and people residing in different states (and even counties!) will have completely different coverage options.
If you’ve taken a look at the HealthCare.gov site during open enrollment and see something you like, now is the time to enroll. Open enrollment only lasts from November 1st through December 15th, 2017. (If you need to enroll outside of the dates, you’ll have to wait until the next open enrollment period. Exceptions can be made in the instance of a change in life event, such as marriage, birth, or change in income.)
You can also choose to find healthcare from a marketplace like ehealthinsurance.com or a licensed agent. They can show you a number of options, including those listed on the ACA, as well as short-term plans. Short-term plans do not meet the requirements of the ACA, and so you may be subject to paying a fine by using one. However, many freelancers find that the plans are cheap enough that they save money over buying an ACA plan, especially if they do not qualify for a subsidy. If you are in good health and qualify for a short-term plan, you can generally pay less per month and get lower deductibles and premiums.
(Note: Short-term plans are only good for 3 months, so you will have to renew your plan at the end of each term. Short-term plans do not cover pre-existing conditions, and those with certain health conditions will not qualify. Your deductibles will also start over with each plan.
Short-term plans can be a good option for those in good health who do not want or need the comprehensive plans offered by the ACA and can afford to pay for tax penalties. If your state didn’t expand Medicaid, you may also find short-term plans as your only affordable option.)
Finally, you may qualify for Medicaid through your state, depending on your age, health and income status. Check with your state Health and Human Services office for details and an application.
This is a question that only you can answer, but for most people, health insurance can offer the freedom and flexibility to get problems taken care of while they are still in a preventative phase and before they become costlier. Freelancers do not have the benefit of paid vacation, sick days, or flex time, so it is extremely important that they stay in good health. It may also be a good idea to invest in disability insurance and life insurance to cover the unexpected.
It’s also important to remember that self-employment health insurance comes in a variety of coverage amounts. If you don’t foresee needing much care, you can always opt for a plan with a higher deductible and co-pay in exchange for a lower premium. Many freelancers who are in good health do fine with what experts call a “catastrophic plan.” These plans cover three office visits a year without having to pay the deductible. The government requires plan purchases to be under 30 or qualify by claiming an economic hardship, however.
Many people who find health insurance slightly unaffordable can justify the price when factoring in the tax savings. The self-employed health insurance deduction can take hundreds of even thousands off of your tax bill, making it a good investment for many. If you are on the fence and trying to decide between a plan that covers more but that costs more, too, see if you the tax savings might make it worth the higher price.
Freelancers generally have more obstacles than those getting benefits through an employer, so this one tax perk is very popular among independent contractors. With sole proprietors paying more social security and disability tax, it’s also a nice way to make up for the responsibility freelancers have to cover both the employer and employee payroll tax burdens. In some cases, it more than makes up for the added tax liability!
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A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?