HSAs Reduce Social Security and Self-Employment Tax
It’s not just federal income taxes that are impacted. If you contribute to your HSA through a payroll deduction, those contributions are not subject to Social Security, Medicare, or unemployment taxes.
This is especially significant for self-employed individuals who are otherwise subject to a self-employment tax rate of 15.3%. By reducing your taxable income, you are effectively saving on multiple layers of taxation.
For example, suppose you’re married and file jointly with an income of $150,000 per year.
As of 2023, that puts you in the 22% federal income tax bracket.
For the purposes of this illustration, both of you are self-employed, so you are both subject to the self-employment tax of 15.3%.
Every dollar you can contribute to your HSA reduces your self-employment tax by 15.3 cents. So if you contribute the maximum $7,750 allowable pre-tax to the HSA, you save $1,185.75 in self-employment taxes.
That’s in addition to your income tax savings. By contributing the maximum allowable for a couple for 2023, you would save an additional $1,705.
So accounting for both potential income tax and self-employment tax savings, our notional couple earning $150,000 per year could realistically save a combined $2,890 in taxes just by taking full advantage of their allowable HSA contributions for the year.
And in 2024, HSA contribution limits are increasing – allowing you to save even more money in income and self-employment taxes.
Since employee contributions lower EE & ER taxable S.S. and Medicare income, it would make sense that it would also reduce S.E. income. However, I have not been able to find this as a deduction in Lacerte. I am guessing that the article is incorrect.
