Many Canadians work as independent contractors or consultants across a wide variety of fields.
Contractors and consultants usually have more freedom, flexibility and favorable fiscal conditions as compared to employees.
However, it’s not always easy being a contractor. Competition is fierce, your clients are demanding, and there are rarely enough hours in a day to finish your to-do list. Now you’re facing another challenge: finding health insurance.
Finding affordable medical insurance for independent contractors and consultants isn't easy. Your research and experience probably reveals expensive monthly premiums, costly co-insurance payments, and a restricted claim list. You might feel as though health and dental benefit plans are not feasible if you are a contractor or consultant. Don’t worry – there is light at the end of the tunnel.
As a contractor, there's 3 ways to pay for your medical expenses:
- Traditional Health Insurance
- Out of Pocket
- Health Spending Account
The first option is to use a traditional health insurance plan, generally sold by big insurance companies. Big insurance has been very successful in marketing these traditional plans as absolutely necessary for contractors and consultants seeking to responsibly implement coverage.
However, the fact is that many independent contractors discover insurance plans are very expensive, restrictive, and complicated. Perhaps somewhat suprisingly, they are often inferior to simply paying for all health and dental costs out of their own pocket.
That brings us to the second option: paying for medical expenses without insurance. By opting to self-insure, the contractor or consultant is on the right path: it's generally less expensive than traditional insurance -- but they may soon discover the tax consequences of paying for a medical expense personally (with after-tax dollars).
The third option is a Health Spending Account (or HSA). A Health Spending Account is a plan set up between a contractor or consultant and an administrator for the tax-free reimbursement of medical and dental expenses.
By using a Health Spending Account, 100% of your out-of-pocket medical expenses can be deducted from your income. The is a critical and often overlooked tax deduction for independent contractors and consultants in Canada.
Let's take a look at a $1,000 medical expense that you had to pay for out0of-pocket (either uncovered by your insurance plan or just because you have no insurance).
Instead of paying for the $1,000 personally as an after-tax expense, set up a Health Spending Account with your business. Your business will deduct 100% of the cost and you won't have to declare the $1,000 as part of your personal income.
If you earn $140,000, you'll save about 30% on every dollar you spend on medical expenses.
No Premiums and 100% Coverage
Want to learn more about a Health Spending Account? If you're an independent contractor or consultant, take a look at Olympia's Beginner's Guide to Health Spending Accounts.