You nailed it. When I started my own consulting business I just about fell out of my chair when my accountant said I couldn’t write off my health coverage. I pay about $19K a year and that’s after taxes so more like $25K+.
[1] - https://www.irs.gov/publications/p535/ch06.html#en_US_2016_p...
In general I think the point is, why can corporations just straight write off premiums for their employees when self-employed types have all these special rules to follow vs just a standard deduction?
If you're a sole proprietor, the tax impact should be equivalent whether you choose to take draws or salary:
> Sole proprietors and members of partnerships are free to pay themselves — or otherwise take the profits out of their businesses — whenever they’d like. Payroll withholdings do not apply, but each individual essentially pays the equivalent on his or her reported income at tax time.
https://quickbooks.intuit.com/r/payroll/salary-or-draw-how-t...
Yes, I could continue to pay myself just $65,000, but the IRS could come knocking and say, "you said you paid for health insurance through S-Corp payroll, so that means you only gave yourself a $45,000 salary which is not fair and reasonable.
There's a lot of other good reasons to incorporate as well. Use an S-corp election (as an LLC) and you can get out of paying the SE tax on a significant portion of your income. There are some limitations and you need to bill over a certain amount, but anybody who makes a six-figure income consulting should be doing so under an LLC, not as a 1099 contractor.
Going from being an employee to being 1099 and SE is still getting fucked on taxes, just in a different position.
If you're serious about freelancing, your income should be split between a W2 and a K1.
I am not a CPA. This is what I pay him to do for me.