Deduction for One-Half of Self-Employment Tax

The federal Small Business Jobs Act of 2010 (Public Law 111-240, enacted September 27, 2010) provides that the deduction for health insurance costs of self-employed persons is taken into account when calculating the net earnings for purposes of determining the self-employment tax. This provision applies for taxable years beginning after December 31, 2009.

As of this date (December 13, 2010), Wisconsin has not adopted the provisions of the Small Business Jobs Act.

Federal Tax Treatment

The deduction for health insurance costs of self-employed persons reduces net income when determining self-employment tax. This reduces the amount of self-employment tax. This reduced amount of self-employment tax is then used to determine the deduction for one-half of self-employment tax.

Example: The taxpayer has $50,000 of net profit from Schedule C and claims a $4,000 self-employed health insurance deduction on line 29 of 2010 Form 1040. The self-employment tax is $6,500 based on net earnings of $46,000 after subtracting the $4,000. The deduction for one-half of self-employment tax is $3,250. (Amounts are rounded.)

Wisconsin Tax Treatment

Because Wisconsin has not adopted the provisions of the Small Business Jobs Act of 2010, the deduction for self-employed health insurance is not considered when determining the self-employment tax. This results in an increased deduction for one-half of self-employment tax for Wisconsin. The taxpayer must file Wisconsin Schedule I, Adjustments to Convert 2010 Federal Adjusted Gross Income and Itemized Deductions to the Amounts Allowable for Wisconsin, to adjust for the difference in the federal and Wisconsin deduction for one-half of self-employment tax.

Example: The facts are the same as in the federal example above. However, the deduction for self-employed health insurance is not considered when determining the self-employment tax. The taxpayer should recompute Schedule SE for Wisconsin without subtracting the amount of the self-employed health insurance deduction. For Wisconsin purposes, the self-employment tax is $7,065 based on earnings of $50,000. The Wisconsin deduction for one-half of self-employment tax is $3,533. (Amounts are rounded.) The taxpayer must file Wisconsin Schedule I to adjust for the difference between the federal and Wisconsin deduction for one-half of self-employment tax ($283).

Last updated December 14, 2010