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  1. #1
    Join Date
    Mar 2009
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    3

    Default Can an Independent Contractor With W2 Get a Health Insurance Deduction

    I am a consultant in the corporate training design field in Illinois. I work as a independent contractor (or subcontractor) for short projects (from a few weeks to a few months in duration) at an hourly rate. I have to pay for my own health insurance and I am free to work for others, so I consider myself self-employed (and have filed a Schedule C in previous years).

    I am paid via either 1099-MISC and/or W2, depending on the payer's preference. In 2008 all my income was paid via W2 (two different payers). Neither W2 form considers me a "statutory employee" (box 13), therefore I can't declare W2 income on my Schedule C, and I didn't have any other income for this business practice, so it appears that my self-employment gross income is zero. If I understand the tax law correctly... since my Sch C income shows no profit, I can't deduct my health insurance premiums.

    Is this correct? If so, it seems unfair to me. Does this situation reflect a paradox or shortcoming in the tax code (e.g. not keeping up with current pay practices for independent contractors)? Or am I misunderstanding something?

    Thanks.

  2. #2
    Join Date
    Nov 2007
    Posts
    28

    Default Re: Independent Contractor W/W2 = No Health Ins Deduction

    Your grievance is with those who hire you. If you are being treated as an employee, but without benefits, you need to make the contract with the employer organization clearer. You need to make them understand that you are an independent contractor. Request thast the past employers ISSUE YOU 1099S AND CORRECTED W-2s, THAT IS ZERO W-2 WAGES. Being an employee and being self employed are two different things, as a matter of law.

  3. #3
    Join Date
    Mar 2009
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    3

    Default Re: Independent Contractor with W2 = No Health Ins Deduction?

    Quote Quoting Chippewa
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    Your grievance is with those who hire you. If you are being treated as an employee, but without benefits, you need to make the contract with the employer organization clearer. You need to make them understand that you are an independent contractor. Request thast the past employers ISSUE YOU 1099S AND CORRECTED W-2s, THAT IS ZERO W-2 WAGES. Being an employee and being self employed are two different things, as a matter of law.
    Be that as it may, "W2 Contractors" are becoming very widespread in my field, despite the apparent contradiction. In any case, I'm not interested in pursuing this grievance with past employers. There are pros/cons either way (W2 vs 1099). My immediate goal for this post is to understand the tax code as it applies to a "W2 Contractor" wishing to take a health insurance deduction. I gather from other sources that I can only do this via Sch A, and only if my total deductions exceed the standard deduction.

    As a secondary issue, I still wonder whether the "W2 Contractor" phenomenon is made possible by vague or outmoded tax code.

  4. #4
    Join Date
    Jul 2007
    Location
    Florida
    Posts
    2,344

    Default Re: Can an Independent Contractor With W2 Get a Health Insurance Deduction

    There is no such thing as a W-2 independent contractor. That is like saying my red car is blue. Neither terminology nor employer whims determine whether you were self-employed or an employee. The facts and circumstances relating to the work you did determine this, in accordance with the law. This is not determined by the tax code, but by the common law definition of "employee" as interpreted by the IRS.

    If you believe you were self-employed, you can file form SS-8 with the Internal Revenue Service and ask them to make a formal determination based on the cirucumstances. But as it stands now, you are considered an employee. Therefore, the only deduction available to you for medical insurance is the one available to all people who work as employees, which is on Schedule A (subject to the 7.5% of AGI exclusion).

  5. #5
    Join Date
    Mar 2009
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    3

    Default Re: Can an Independent Contractor With W2 Get a Health Insurance Deduction

    Quote Quoting Bubba Jimmy
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    There is no such thing as a W-2 independent contractor. That is like saying my red car is blue. Neither terminology nor employer whims determine whether you were self-employed or an employee.
    I just dug up the contract with one of the payers, and it is entitled "hourly employee agreement", with a waiver that stipulates "consultant waives and agrees to forego certain benefits which [payer] may provide to other employees...".

    So, I'm curious: What is the incentive for the payer to use W2 and not 1099-MISC? (The payer has to withhold taxes, so it would seem more costly for them.)

  6. #6
    Join Date
    Jul 2007
    Location
    Florida
    Posts
    2,344

    Default Re: Can an Independent Contractor With W2 Get a Health Insurance Deduction

    1099 independent contractors have later had changes of heart, filing form SS-8 to push some tax liability back onto the company that hired them and companies don't want that risk.

    Additionally, the IRS has gone after companies who mischaracterize employees as independent contractors when those workers failed to file returns and pay the taxes owed. They have held the company responsible for the medicare, social security, and federal withholding taxes that the company should have, but failed, to withhold. That can be very expensive. A number of years ago the IRS made an example out of a very very large computer company that cost them many many millions. So, it is safer for the company to insist that all of its workers have to be hired as employees and to execute an employment agreement detailing that fact.

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