1099 versus W2 - health insurance

I have been a 1099 consultant/contractor for the past 5 years. As a contractor I always buy my own health insurance and I deduct these premiums as part of my annual business expenses each year at tax time.

In 2012 I am taking a position with a new company as a W2 employee. This company has paid vacation and retirement but does not have group health insurance. Instead they offer a $128.00 a month reimbursement that can be put toward your own health care plan that you choose and buy as an individual.

So, I still need to buy my own health insurance even though I am W2. From what I have read online it appears that if I take this W2 position that I cannot deduct my health insurance premiums anymore as I was able to do as an 1099 contractor.

It appears that the federal government will only allow a w2 employee to deduct anything over 7.5% of Adjusted Gross Income. So for instance, If a person makes $100,000.00 and they pay $8000.00 a year in medical premiums then they can deduct $500.00 only.

Am I understanding this correctly? If so, doesn't it almost seem that the 1099 route is a better way to go here because I can deduct my medical premiums appropriately each year versus having to pay for it out of pocket and not be able to deduct this as a business expense.

It sounds like you have a pretty good idea of how this works. What you might want to do is ask your prospective employer to set up a Flexible Spending Arrangement (FSA) under Section 125 of the Internal Revenue Code. The easiest version is a premium only plan (sometimes called a POP 125). This is a plan that allows you to have your health insurance deducted from your pay before it is taxed for income taxes OR FICA and Medicare. The annual maintenance is not too onerous and I have used a company I found on the web named Core Documents to provide a usable plan and keep it updated when changes are made in the law.

Incidentally, as a 1099 contractor like any other small business person, you should not deduct the cost of your medical expenses on your Schedule C. The cost is only deductible on the front of your 1040. On the 2010 1040, it could be deducted on line 29.