An Obamacare guide for freelancers and the self-employed

Lately we’ve been attending a bunch of workshops geared towards helping various communities navigate the Affordable Care Act. It’s mostly for the Q&A’s– we know Obamacare as well as anyone, but it’s always helpful to hear what parts of the law are confusing to people who are new to the whole thing. At a recent ACA workshop for working artists we heard one question that was particularly hard to answer:

• To get the subsidy to pay for insurance, you have to estimate your annual income. But what do you do if you have no idea what your annual income will be?

That’s a concern for anyone who freelances or is self-employed, and it makes navigating the new system particularly difficult for these folk. In this post, we explain why and offer seven tips that should make the process a little easier.

[UPDATE 11/9/15: The poverty level income figures we mention below have been updated for 2016.]

Why Obamacare coverage could be great for freelancers

Currently, about 17 million Americans work as either a freelancer, contractor, or owner of a micro-business. If you include temps and part-timers, it’s over 40 million people, or about a third of the U.S. workforce— and according to the most recent survey we could find (from 2006), almost 40% of them lack health insurance.

Anecdotes from freelancers show how hard it could be to get decent coverage before Obamacare:

On NPR, one freelance writer and editor described finding a plan that cost $600 per month: “It covered nothing. It was a huge deductible and literally, the first time you filed a claim you would be dropped.”

Writing in Salon, a freelancer with type-1 diabetes detailed an exchange with a health insurance representative: “’So are you trying to tell me that even if I were willing to give you a million dollars a month, you would still not let me join your health plan?’ I asked one representative. She said yes and hung up.”

Then there are the people who would rather freelance or start their own business, but are afraid to leave their current employer because it would mean losing their health insurance– a phenomenon known as “job lock.” According to a 2006 Watson Wyatt study, two thirds of top-performing employees said healthcare benefits were an important reason to stay with a company.

So, for current and future self-employed workers, Obamacare is likely a great deal– they’ll finally be able to find decent insurance without a traditional employer and often get help paying for it. But first, they have to get through the Obamacare application process.

Why applying for Obamacare coverage is less great

To shop for plans, first you have to estimate your annual income, and getting that right is important: if you overestimate, your subsidy might be too small, but if you underestimate, you might owe the IRS money when tax time comes around. (Or even worse, if you live in a state that doesn’t expand Medicaid and your underestimation puts your income below the poverty line, you won’t be eligible for any help paying for insurance.)

Yet, for many self-employed individuals, estimating annual income is all but impossible– it can vary wildly from month-to-month, year-to-year, depending on their luck landing assignments, contracts, sales, etc. One woman in the audience during an Obamacare for artists workshop I attended put it this way:

“The people who write these laws have no idea how things work in the real world.”

7 tips for the self-employed when shopping for plans

Even though navigating Obamacare can be a huuuuge pain for freelancers, the potential benefits are too good to pass up. Here are some tips that will help if you’re self-employed and applying for insurance on the Obamacare website.

1. Make sure you’re actually a freelancer/self-employed and not a small business

This might seem obvious, but just in case: if you have any employees (people you send a W2 at the end of the year) you’re considered an “employer,” and can buy insurance on the small business marketplace. If you just hire independent contractors for some work, then you’re still considered self-employed and you’ll only buy coverage on the individual marketplace. Healthcare.gov has more info here.

2. You won’t get in trouble if your income estimate is wrong

The government will try to verify your income when you apply for Obamacare coverage, but it’s mainly geared towards catching obvious lies or mistakes– for example a person who has a full-time job and says they’re unemployed. Here’s how it works:

In the 36 states using the federal exchange, the estimates of all applications are then checked against Internal Revenue Service and Social Security records, looking for large discrepancies. If the amount supplied can’t be confirmed through federal records, it will be checked against wage information employers send to Equifax, a credit reporting agency. After a rule change this summer, states that have built their own exchanges don’t have to check every applicant for 2014, verifying only a sample of participants, said Timothy Jost, professor of law at Washington and Lee University.

If the estimate still can’t be verified, the exchange will request additional documentation from the applicant.

If you’re a freelancer or independent contractor you can send them your most recent 1099’s or a self-employment ledger and the government should take your word that it’s accurate. Says Jost:

“Our tax system is largely an honor system. For most Americans, there’s no way you can verify in advance what your income will be in a year. All you can do is make your best guess.”

UPDATE: A bunch of people have been asking what a self-employment ledger is, since that’s one of the things the IRS says freelancers can provide to verify their income. For most states, there’s no official form– anything that clearly breaks down your income and expenses is a “self-employed ledger.”

For an example of a self-employment ledger that you can use as a template, one of the commenters mentioned that South Dakota has a good one here. Also, New York is one of the few states that includes a self-employment ledger form as part of its online Obamacare application– you can see a screenshot of that here. You don’t have to copy them exactly, but those should give you a good idea of what kind of info the IRS is asking you to provide in a self-employment ledger.

And for more on income verification, Consumers Union has a good guide here.

UPDATE 2: Another commenter has pointed out that you can use accounting software, like Quicken, to generate a ledger as well.

3. It’s probably better to estimate too high than too low, otherwise you could owe money later 

One reason the income verification isn’t more strict is that the IRS will reconcile your tax return with your Obamacare application at tax time. If you knowingly provided false information, you could face fines or even criminal charges, but if you simply guessed wrong you don’t have to worry. Also, if it turns out you were owed a bigger subsidy because you overestimated your income for the year, you’ll get that extra money in your tax refund.

The potential problem for freelancers is that if your income was higher than you expected, you’ll have to pay back the extra subsidy credit you got. There are some limits to how much you’ll owe the IRS if you guess wrong, which, like the subsidy itself, is on a sliding scale:

Those are still hefty tax bills, but it’s nice to know that you won’t go bankrupt if you get the estimate wrong. And if you really want to avoid owing money at tax time then you can either choose not to apply your entire subsidy to your monthly premium (again, you’ll get the leftover in your refund) or…

4. If your income changes, tell the insurance marketplace

A recent study in the journal Health Affairs found that the number of people owing repayments could be reduced up to 40%, and the median repayment reduced by 60%, if people simply report income changes to their Obamacare marketplace.

You can do this as often as you want, so if you land a bunch of new clients, or a big project ends, or you have a great month selling pirate guinea pig portraits on Etsy— log onto your state’s marketplace and let them know. (In reality this probably means every few months adding all your 1099’s and subtracting any deductions– more on those in a sec. We just wanted an excuse to use this picture:)

5. For those living in states that don’t expand Medicaid: If you overestimate your income, you don’t have to repay anything

True to the stereotype of the starving artist, many of the ones I’ve talked to have incomes hovering right around the federal poverty line (FPL- $11,770 for an individual). If you live in a state that doesn’t expand Medicaid and your income is below that line, you’re especially screwed– you’re not eligible for subsidies to buy private coverage, and unless you were eligible for Medicaid under the old rules, you can’t get that either.

But say you estimate that your income will be over the FPL and thus qualify a subsidy to pay for private insurance– if your actual income at the end of the year is lower than FPL, you don’t have to pay anything back. And in many cases the federal subsidy will be enough to cover the entire cost of private insurance on the marketplace.

Now to be clear, we’re not saying that you should lie to the federal government. But, if you live in a state that didn’t expand, and you’re not sure whether next year’s income will be above or below that line, you probably want to go with the higher estimate.

6. Keep in mind the exchange is asking for your Modified Adjusted Gross Income

The health marketplace isn’t asking for total income but something called Modified Adjusted Gross Income (MAGI): basically your Adjusted Gross Income (line 4 on 1040-EZ, line 21 on 1040A, or line 37 on 1040) plus a handful of other types of income that are explained here.

The Atlantic’s Garance Franke-Ruta explains why this distinction is especially important for self-employed workers:

The difference between gross income and adjusted gross income is not going to be huge for most people who are lower- to middle-class and get paid through W2s. But for people paid through 1099s and piecemeal work, adjusted gross income can be thousands of dollars lower than gross income, since it’s the figure that comes after all the Schedule C deductions (such as for home office, internet, business use of a phone, computer equipment, etc.).

She also notes that calculating MAGI is not easy:

If you’ve never lived in the world of piecework and Schedule C deductions, imagine saving all your expense receipts for an entire year and then having to do them before you can begin to calculate what your MAGI is. This is, in fact, exactly what has to happen. […]

In short, for the self-employed, applying for Obamacare subsidies can be as much fun as doing your taxes, because—depending on the state forms—it can actually involve doing part of your taxes.

Many freelancers and self-employed individuals find it’s easier to do their taxes quarterly anyways– if you do that, then just make sure to report it to the health marketplace too. If not, then when you’re estimating your annual income, keep in mind that the marketplaces are asking for something a little different from– and something that’s likely to be lower than– total gross income.

7. Take a close look at the “Silver” plans

Obamacare plans are ranked as bronze, silver, gold, or platinum, based on their out-of-pocket costs. Cheaper plans come with high out-of-pocket costs– a problem for everyone, but especially independent workers who might have long gaps with little or no income. However, if you make less than 250% of the poverty line ($29,425 for an individual), you’re eligible for reduced cost-sharing… but only on silver plans. For more info, check out our earlier post here.

The TL;DR conclusion

Here’s the main take-away: estimating annual income can be difficult if you’re self-employed, but it’s okay if you’re off. To avoid owing taxes later (1) estimate a little high (you’ll get the money back in your tax refund if you guess too high) and (2) if your income changes let your marketplace know.