Health Care Reform: What Does it Mean for Sole Proprietors?

Rural America is home to many small businesses, farms and ranches owned and managed by one person, sometimes with just a few employees. The new health care law impacts sole proprietors and their families differently than it impacts larger businesses.

Update - Good news for Sole Proprietors:
Under the new Small Business Jobs Acts, sole proprietors are able to deduct the full cost of health insurance for themselves and their families as a business expense for the 2010 tax year. Read about the Small Business Jobs Act here.

How Sole Proprietors and All Americans Benefit

Health care reform ends discrimination by insurance companies based on pre-existing conditions and gender. The new law also eliminates lifetime caps, restricts annual caps and ends the practices by which health insurance companies retroactively end a policy when someone becomes sick.

Sole Proprietors and their family member employees are eligible for:

Premium Subsidies and Cost Sharing Credits (Starting in 2014) – Subsidies and credits to lower premiums and cost-sharing requirements are available to individuals and families with incomes below 400 percent of the federal poverty line (below $88,000 a year for a family of four) who purchase coverage in the newly established exchanges.

The amount of the premium subsidies and credits are figured on a sliding scale, with those who make less getting a bigger credit and those who make more getting a smaller one. The subsidies and credits ensure that people do not have to pay more than a certain percentage of their income to purchase a comprehensive health insurance package. For example, a family of four with an income of two times the poverty line, or about $44,000, would pay no more than 6.3 percent of its income, or about $232 a month, for a family policy. Calculate your subsidy here.

Entry into High Risk Insurance Pools (Starting in 2010) - Health insurance pools that provide health insurance to those who have been denied coverage due to a pre-existing condition. These provide a bridge for coverage until 2014 when insurers will no longer be able to deny coverage to individuals based pre-existing conditions or current health status.

Buying Coverage in the Health Insurance Exchange (starting in 2014) – The Exchange will allow individuals and small businesses to pool together into a larger group. Three tiers of insurance plans that meet minimum benefit levels and include consumer protections will be available.

Sole Proprietors and the Small Business Tax Credit

Sole proprietors and their family member employees are not eligible for the transitional small business tax credit. However, sole proprietorships are able to receive small business tax credits for providing their non-family employees with health insurance if they meet the other eligibility requirements for the small business tax credit credit. The credit begins in 2010 and lasts for 6 years. Calculate your small business tax credit here.

Eligibility requirements of small business tax credit:

  • Fewer than 25 full-time equivalent employees
  • Average annual wages less than $50,000
  • Purchase health insurance for employees
  • Must contribute at least 50% of the cost of premium


Who else is excluded from receiving tax credits? Sole proprietors, partners, a 2% or more owner if employer is an S-corporation, a 5% or more owner of a C-corp, and relatives and household members of the above.

Can Sole Proprietors incorporate their businesses so their families are Eligible for Tax Credits? No. A special rule prevents owners and their family members from receiving the credit regardless of legal structure.