I’m Self-Employed, Can I Have an HSA?

Did you know: you actually can have an HSA if you’re self-employed! Another bonus? Contributing to an HSA can help offset your annual tax bill. And as any freelancer or self-employed worker will tell you... that's a win.
by Julia Rubano November 7, 2019
Being self-employed definitely has its perks. From flexible working hours to the ability to work from anywhere to, oh yeah, being your own boss… it can be pretty awesome. But self-employment does fall short in a few areas, such as the typical employer-provided benefits like health insurance, 401(k) matches, and access to tax-advantaged tools like a health savings account (HSA).

Qualifying for an HSA

Qualifying for an HSA is simple. You do need to be enrolled in a high-deductible healthcare plan (HDHP), which is a plan with a deductible of $1,350 for an individual or $2,700 for a family that is designated as a “consumer-driven health plan” by the IRS (more on that below).

If you don’t have an HDHP but know you want one, Healthcare.gov has you covered. And if you just got off your parents’ health insurance plan and aren’t quite sure what a deductible is, think of it this way: it’s basically how much you’re responsible for paying before your health insurance kicks in.

But not all HDHPs allow you to open an HSA, so be sure to do your research before you sign on the dotted line. The main distinction is that almost none of your medical expenses are deferred (besides standard well visits, etc.) until you’ve met your deductible. Many ACA plans, even the high-deductible ones, pay some of your medical expenses pre-deductible, so they aren’t allowed to be designated as HSA-eligible by the IRS. You also cannot be covered under any other health insurance plans, be enrolled in Medicare, or be claimed as a dependent by someone else in order to qualify for an HSA. Bummer! But you still have options.

Still on board? Read on.  

HSA Contributions and Deductions 

Once your new CDHP takes effect, usually on January 1, start contributing to your newly-minted HSA. Be sure to keep the IRS contribution limits in mind. For 2019, you can contribute up to $3,500 as an individual and $7,000 for a family. And if you’re 55 or older, you can contribute an extra $1,000 to your HSA annually—called a “catch-up contribution,” similar to what you can do with your IRA when you turn 50. If you’re self-employed, you can’t contribute more than your net income from the previous year into your HSA, despite the IRS limits. 

It’s important to note that these contribution limits are not merely suggested amounts. In other words, you’ll pay a 6% tax if you exceed them. So watch it!

Benefits of an HSA

Okay, HSAs may not be the sexiest thing in the world. We get that. But these tax-advantaged accounts can actually save you big bucks in the long run. And, well, what’s sexier than that? First and foremost, your HSA can help offset the cost of medical care, since you can use your HSA funds to pay for eligible items and services. Think expenses like deductibles, co-pays, allergy medication, pain relievers, even certain medical supplies. Even chiropractor or massage services if you get a doctor’s note!

One of the benefits of contributing to an HSA as a traditional employee is the ability to contribute pre-tax dollars. But the rules are a bit more complicated when you’re self-employed. You’re likely getting paid as a contractor, which means you’ll get a 1099 form at the end of the year and be responsible for paying your own taxes. (If you contributed to an HSA, you’ll file a line-item deduction on your Schedule C.)

So technically, the money you contribute to your HSA as a self-employed worker is “pre-tax” — you just have to pay the taxes at the end of the year when you file your return. Though you’ll miss out on the automatic payroll deductions like traditional employees, contributing to your HSA is extra-cool when you’re self-employed because it helps you reduce your tax burden at the end of the year.

Remember, a Schedule C is the IRS tax form that a sole proprietor (that’s you!) uses to report a net income or loss. But you’ll still be able to deduct your HSA contributions from your taxable income, a boom come tax season. 
Another fringe benefit of an HSA? It forces you to earmark funds specifically for healthcare costs. In other words, setting that money aside prevents you from spending it, since making an early HSA withdrawal or a distribution for anything other than qualified medical expenses will cost you a hefty tax penalty, plus income taxes on that amount (yikes!). 

Use it For Retirement

Your HSA can also operate as a supplement to your retirement plan focused on helping you save for inevitable medical expenses as you get older. As a self-employed worker, you don’t have access to your own 401(k) and an employer match. Instead, you probably contribute to a Roth or Traditional IRA.  Ah, here’s where your HSA comes in. Unlike a flexible spending account (FSA), an HSA doesn’t follow the “use it or lose it” rule. Instead, at the end of December, your unused funds roll right on over to the next year. That, coupled with a solid HSA investment plan, could really help boost your retirement savings.

If you’re self-employed and you think an HSA isn’t for you, think again. An HSA offers many benefits to those in the side gig economy, from offsetting the costs of medical care to lowering your tax burden at the end of the year, even serving as a defacto retirement savings account. Because even if you work from anywhere, set your own hours and be your own boss doesn’t mean you are immune from worrying about things like taxes and saving for retirement. Life, man.    

Take the first step
in taking care of you.