How to Actually Estimate Self-Employment Income During Open Recruitment
Buying health insurance sucks for everyone, but if you’re self-employed, it really sucks. Trying to estimate unpredictable returns is like a high-stakesNumberwang game where a prize is paid out for something that should be free.
The worst part is that following the instructions like a good little freelancer won’t help you because the instructions are wrong. Healthcare.gov and government exchange sites advise self-employed people to use their net monthly income as calculated income, but eligibility for premium tax credits, Medicaid, and CHIP is determined by a completely different number: Modified Adjusted Gross Income (MAGI) . MAGI will be below bottom line for most employees – often not much – so knowing how to measure it can save you a lot of money.
A small disclaimer: As always, consult with a tax professional if possible. If you cannot do this, be sure to read the instructions on Form 1040 for income adjustments to find out which apply. They are surprisingly straightforward.
Step 1. Assess your AGI
First, you need to know your Adjusted Gross Income (AGI), which is your net income minus certain adjustments . Self-employed workers with a steady and predictable income can simply use their AGI from last year’s tax return – this is line 7 on Form 1040 for 2018. If this is not you, assume your monthly earnings for 2020 and subtract any adjustments you qualify. per. They include things like:
- Student loan interest rate
- Penalties for early withdrawal of savings
- Payment of alimony
- IRA contributions
- Travel expenses of military personnel
- Certain caregiver costs
- HSA contributions
Self-employed people get several more options, including:
- 50% self-employment tax
- SEP and / or SIMPLE IRA contributions, up to a certain amount
- 100% of health insurance premiums (if their value is less than your total profit)
Using hypothetical premiums to calculate the number that determines these premiums is tricky, so it is probably easier to ignore them. But half of the tax burden of self-employment is a lot of money; when you consider, for example, the student loan interest rate and IRA fees, you may end up eligible for a larger tax credit than what is listed on the Marketplace website.
Step 2. Change this AGI
So now you have a rough idea of your AGI, but the tax credits are based on MAGI. What is the difference and how to get from here?
Naturally, the definition of MAGI changes depending on which specific deductions or credits you are looking at. (Hey, this is the US tax code after everything.) In this case, all you have to do is take AGI and add these types of income :
- Tax-free foreign income
- Tax Free Social Security Benefits
- Tax-free interest
For most people, MAGI will be very close or identical to AGI; if you don’t have any of the above income, you’re done.
You have until December 15th to update your 2020 application, so don’t panic if this is your first time hearing about MAGI. It’s also okay if you can’t give an accurate estimate of every single adjustment you expect to make. It is important to roughly know how much profit you will make this year and what adjustments you are applying for so that you can use them to your advantage.