When you apply for coverage through an Affordable Care Act (ACA or Obamacare) health insurance marketplace, you’re required to provide an estimate of the coming year’s income. If you’re a salaried employee who brings home the same amount of money in each paycheck, that’s a straightforward request. But if you’re a self-employed person whose income varies from month to month and even from year to year, coming up with an accurate estimate can seem like a daunting challenge.
Since you can’t apply for premium tax credits without an income estimate, it’s essential that you figure this out. Here’s what you need to know about reporting your income as a self-employed person under Obamacare.
Come Up with Your Best Estimate
Determining a reasonable income estimate can involve a bit of guesswork. If you were engaged in the same line of work last year, start by thinking about how much you brought in during the previous year and use this information to guide you.
If you’re expecting any major income changes in the upcoming year, like a sales commission bonus or a new client, you might want to raise or lower your reported income accordingly. Let’s say you’ve taken on twice as many clients as you had last year for your marketing business. Because you’ll likely be earning more money as a result, you need to include that in your estimate. But let’s say you decided to downsize your business this year to spend more time with family. Adjust that loss of income when reporting to the Obamacare marketplace. You might qualify for a higher tax credit to reduce your premiums.
For those who are new to the self-employed game or just changed businesses this year, coming up with a reasonable estimate can be more challenging. Your business projections can be a good place to start. You can also look for information on what others in your field typically make.
Take Expenses into Account
Both the money that your self-employment business brings in and the money that goes out are taken into account when coming up with an income estimate for the health insurance marketplace. The number that you need to report is your net income.
First, determine how much money you expect to receive from customers and clients. Then, figure out how much mileage, materials and other expenses will cost.
Once you’ve determined your intake and your expenses for the year, you can estimate your net income. Subtract your expenses from the income that you’ll be bringing in. If the number that you get is in the black, you’ll report this amount as profit when applying for Obamacare. If it goes into the negatives, you’ll instead report a loss.
If it sounds like you’re doing your taxes just to get health insurance, that’s because you kind of are. You don’t need to be as thorough for the purpose of reporting income, but you need to have an idea of what you’ll net for the year so the government can dole out the right subsidies. Estimating as accurately as possible will also help you avoid having to pay subsidies back at tax time if you got too much (i.e., you underreported your income).
Provide Proof If Requested
It’s possible that you’ll be asked to show proof of your estimated income. Not everyone must show evidence, but it’s not an uncommon request. If your reported income can’t be electronically verified based on past IRS filings, you’ll probably be asked to submit documents that can back up your claims.
You may have a few options for the types of documents to submit. You could send in bank statements that show how much has come in and gone out. You could also provide recent 1099-MISC forms that you’ve received as an independent worker.
There’s also the option of turning in a business ledger. This is a record in which you list both your expenses and your profits over a particular span of time. Most states don’t require you to use a certain format for this. You can come up with your own ledger style or generate a report with accounting software.
Include Other Sources of Income
Your self-employment income isn’t the only money that you must report. If you also work as an employee, be sure to include that salary in your total income. In fact, you must report all income earned by anyone in your household.
Income doesn’t always come from a job. Other types of income that you may need to include in your total figure include alimony, capital gains, Social Security checks and unemployment payments.
Basically, your health insurance subsidies are calculated based on your modified adjusted gross income (MAGI). This is similar to the adjusted gross income (AGI) that you’ll see on your tax forms, but there are a few tweaks. Even those with years of experience in filing self-employment taxes can have a hard time understanding what exactly should go into calculating their Affordable Care Act MAGI, so if you need clarification for your situation, don’t hesitate to contact a tax professional.
Err on the Side of Caution
If you’re struggling to land on the right amount of income to report for the upcoming year, it’s usually better to overestimate your income than to underestimate it. The higher your reported income is, the less you will receive in advance premium tax credits.
Sure, receiving a small subsidy sounds like a bad thing. But if you don’t use the full amount for which you’re eligible, you’ll receive the difference back when you file your taxes next year.
On the other hand, like we mentioned above, if you underestimate your income and receive a higher subsidy than you actually qualify for, you could end up owing money when tax time rolls around. Unless you make over 400 percent of the federal poverty level, there’s a limit to how much you’ll have to repay. Still, it’s usually better to receive a tax refund than to have to pay the government back.
Update Throughout the Year
Fortunately, if you discover partway through the year that you’ve overestimated or underestimated your income, you aren’t stuck with those figures. Instead, you’re encouraged to update your income as often as needed, and your premium tax credit for the remainder of the year will shift accordingly. This could save you a big headache at tax time. Consider reevaluating your figures quarterly – when you should be paying quarterly estimated taxes anyway – so that your numbers are as accurate as possible throughout the year.
To update your reported income during the year, log in to your marketplace account. Select your current-year application and choose the “Report a Life Change Option.” Follow the prompts to enter your updated income information.
