Explaining Obamacare Subsidies for the Self-Employed

By Karen E. Klein 

Question: In signing up for insurance on an Obamacare exchange, what happens if I underestimate my self-employed income for 2014? I make between negative and $50,000 per year, so my income varies widely. Will there be a fine? What if I overestimate—will I take the subsidies off my tax amount?

Answer: This is a tricky issue, particularly for self-employed people like you whose income fluctuates significantly year over year. If you overestimate, you may not qualify for government subsidies that you need to help you pay for individual insurance coverage on the state or federal marketplaces.

But if you underestimate what you’ll make, you could get a nasty surprise in the form of a bill asking you to repay all or part of that subsidy back to the IRS. In a study published this month in the journal Health Affairs, researchers estimated that nearly 40 percent of households that qualify for subsidies on their health insurance purchases might have to pay something back if their income goes up during the year and they don’t properly report that.

The situation is akin to one in which self-employed people who pay estimated quarterly taxes are advised to increase their payments when they earn additional income in a particular quarter. Self-employed people sometimes find they owe more taxes than expected the following April 15 if they don’t adjust their quarterly payments as their income fluctuates during the year.

Similarly, the repayment of insurance subsidies would be done via the individual’s tax return for the year in question. So if you underestimated your income for 2014 and didn’t make adjustments in your premium subsidies during that year, you’d potentially have to repay some amount through your 1040 in April 2015.

Sharon Stiller, partner and director of the employment law practice at New York City law firm Abrams Fensterman, says that the electronic marketplaces will use data from tax filings and the Social Security Administration to verify the household income figures that individuals put on their electronic insurance applications.

“The IRS will reconcile [insurance subsidies] when consumers file their annual tax returns at the end of the year, and it will recoup overpayments and provide refunds where appropriate, subject to statutory limits,” Stiller wrote in an e-mail. Subsidy repayments will be capped for lower-income people.

The way to avoid repayments—or underpayments of subsidies if your income is less than anticipated—is to notify promptly the marketplace you’re dealing with. If that communication takes place, and subsidies are adjusted promptly, the number of people who would owe repayments could be reduced by up to 41 percent, the Health Affairs study found.

But it’s up to the marketplace to make sure that its customers understand that obligation. “To avoid this problem, the authors recommend that the insurance exchanges educate consumers about the importance of timely reporting of any income changes and suggest other measures to minimize subsidy repayments,” the study states.

Katie Vlietstra, director of government affairs for the National Association for the Self-Employed, advises individuals who buy insurance through the Obamacare marketplaces to be as accurate as possible about their income estimates and keep the marketplace notified if there are major changes to their income during the year.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.