Personal Deduction For Health Insurance Premiums
The fact that you’re not entitled to claim employee health insurance as a tax-free fringe benefit when you have an S corporation is not good. But things aren’t all bad for S corporation shareholders. You may still be able to take a personal income tax deduction for the health insurance premiums paid by your corporation.
Self-employed people are allowed to deduct health insurance premiums for themselves, their spouses, and their dependents. When you’re an S corporation owner with more than 2% of the company stock, you’re treated the same as a self-employed person when it comes to deducting health insurance premiums.
This is not a business deduction. It is a special personal deduction you take on the first page of your Form 1040 as self-employed health insurance. If you have Medicare coverage, you may deduct your Medicare premiums as part of this deductionthis includes all Medicare parts . Your insurance can also cover your children up to age 27 , whether or not they are your dependents.
The amount of the premiums must be included in your employee wages on your annual Form W-2, and you must include the amount as wages on your Form 1040. Your S corporation deducts the amount as employee compensation on its own return.
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How Many Employees Do You Need To Qualify For Group Health Insurance
A group varies by state. Sixteen states, including New York, Colorado, Connecticut, Delaware, Florida, and Hawaii allow self-employed individuals to purchase insurance as a group of one.
Alabama, Alaska, Arizona, and many other states consider a group to be at least two. Visit the National Association of Insurance Commissioners site to find out the rules in your state.
Health Insurance Strategies For Llc Owners
- 2 min read
As a business owner, it’s your responsibility to offer your employees healthcare. Or is it? If your business operates as a Limited Liability Corporation, here are the different options you have for paying for health insurance for you, and your employees.
As a small business owner, offering employees affordable health insurance may be one of your biggest concerns. The expense of covering employeesincluding your own familycan be costly. Paying for health insurance can be challenging, but as a business owner, there are many other things you have to consider. The government has different regulations you must follow depending on the structure of your business. If you have a limited liability corporation , here are some specific details you should know.
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Hsas Allow Insureds To Pay For Medical Expenses With Pre
Although being self-employed means that theres no employer footing the bill for health insurance, it also gives entrepreneurs a lot of flexibility in terms of what type of health insurance they purchase. One popular option is an HSA-qualified high deductible health plan .
Although some people have expressed concerns that market reforms under the ACA would be incompatible with HSAs, that has not proved to be the case, and HSA-qualified plans are still a popular choice in the individual market.
Coverage under an HDHP makes the insured eligible to open an HSA and make pre-tax contributions that can be used later to pay for medical expenses. In 2021, the contribution limit is $3,600 for people who have individual coverage under an HDHP, and $7,200 for those who have family coverage under an HDHP.
As is the case with the self-employed health insurance deduction, HSA contributions are deducted above the line on the 1040, which means the deduction is available to filers regardless of whether they itemize deductions. And there are no income limits in terms of who can contribute to an HSA anyone who has an HSA-qualified HDHP can contribute to an HSA with pre-tax money. You have until the tax filing deadline to make some or all of your HSA contributions.
Qualified Small Employer Health Reimbursement Arrangement
This reimbursement option is for small businesses that dont offer group health plans. QSEHRA allows small businesses to set aside pretax dollars and reimburse employees for medical expenses.
Employees can also use QSEHRA to cover their individual health insurance premiums.
The IRS sets the limits for maximum QSEHRA contributions. These currently stand at $5,150 for single coverage or $10,450 for family coverage.
All costs need to be documented.
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Can I Have An Hsa If I’m Self
The short answer is yes. But theres a little more to it than that.
At its core, a self-employed HSA option is very similar to options for employers. Since an HSA isnt a type of insurance, it comes down to you as a self-employed individual needing to have an HSA-compatible health plan. According to HSA rules set by the IRS, you can only open an HSA if youre covered by an HSA-eligible high-deductible health plan . Learn more about HDHPs and other HSA basics. So if youre a self-employed individual covered under a qualified plan, you may open and contribute to an HSA.
Youre not eligible for a self-employed HSA if youre covered by your spouses health insurance plan that isnt a qualified HDHP. Youre also not eligible for a self-employed HSA option if youre claimed as a dependent on another persons tax return or if youre enrolled in Medicare or Medicaid.
Assuming youre already enrolled in an HSA-qualified HDHP, a self-employed HSA can be not only a crucial path to tax savings on your healthcare expenses, but also an integral part of a bigger picture financial wellness program and retirement plan. Because the reality isself-employed individuals and small business owners most often dont save as much for retirement compared to those who are traditionally employed. Leveraging an HSA can help you save big on qualified medical expenses while doing double-duty as a retirement account for you.
Deducting Health Insurance Your Business Provides You As A Business Expense
Joe, a successful financial consultant, hires his wife, Martha, to work as his employee assistant. He pays her $25,000 per year and provides her with a health insurance policy. This covers both of them and their two children. The annual policy premiums are $10,000. Joe may deduct the $10,000 as a business expense for his consulting practice. He may deduct the 10,000 not only from his $100,000 income for income tax purposes but also from his self-employment income as well. He saves $4,500 in federal and state taxes by taking this deduction. If you do this and you’re self-employed, do not take the health insurance deduction for self-employed people. You’re betterâÃÂ® off deducting all your health insurance premiums as a business expense.
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Health Insurance As A Business Expense
A self-employed individual can deduct premiums for medical, dental and long-term care insurance for himself or herself, a spouse and any dependents provided he or she is not eligible to get insurance through any employer or a spouse’s employer. The policy can be in the name of the individual or in the name of the business, but the Schedule C, Profit and Loss From Business, must show a net profit. This deduction, however, is taken on Form 1040, individual tax return, and not as a business expense on the Schedule C.
Partners in a legal partnership also can get deductible medical insurance, either as individuals or through the partnership. Either way, the premiums will be reported to a partner as gross income on a Schedule K-1 of a Form 1065, Partner’s Share of Income, Deductions, Credits. Since partnerships do not pay business taxes, passing through profits or losses to the partners’ tax returns, the only deduction is a personal one. A partner deducts health insurance premiums from his or her taxes just like a sole proprietor.
S corporations are a special class of corporation under federal tax law, designed for small businesses. They also do not pay business income taxes, passing through profits or losses to owners’ tax returns, so the small business health insurance deduction for shareholders is treated much like those for partners.
Generally, health insurance premiums paid by an employer aren’t subject to income or other taxes.
B Paying Via Your Limited Company
If your limited company pays the premium on your behalf and is treated as a business cost then a taxable Benefit in Kind arises on which you will pay personal tax. The level of personal tax depends on your marginal rate of tax and, if this takes your taxable income above £100,000, whether or not you lose your personal allowances.
The company itself will gain Corporation Tax Relief but will have to pay Employers NI contributions.
Using the same example above, if the company pays the same gross premium of £1,000 then it will have a Class 1A National Insurance liability of £138.
This total of £1,138 does give corporation tax relief though of £216, a net cost of £922.
As a higher rate taxpayer, you would be taxed 40% on the gross premium and will receive a tax demand for £400. But it doesnt end there, in order to meet this additional personal tax bill you would need to draw further dividends, which in turn are taxed and paid from post-tax profits. In effect costing £730 from your gross contracting company income.
The total cost to the company is, therefore, £1,652 if you are taxed at the higher rate which is less than if you were to pay it personally.
But, of course, it is marginal and the existence of a Benefit In Kind adds to the complexity of both the company and your own tax affairs.
All calculations are of course based on your individual circumstances so I would advise speaking to your accountant to decide the best approach.
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Do Small Businesses Have To Offer Health Insurance
According to the Affordable Care Act, businesses with fewer than 50 employees do not have to provide healthcare insurance for employees.
If your business has more than 50 full-time employees, it is required to offer healthcare coverage.
Generally, a full-time employee is defined as working 30 hours per week. However, there are nuances to consider when calculating who qualifies as a full-time employee. See this IRS guidance for more information.
If an Applicable Large Employer does not offer healthcare coverage, they are liable for the IRSs no coverage penalty, which amounts to $2,500 per full-time employee.
Get A Health Insurance Quote From Wpa 25% Discount
Thanks to our long-standing partnership with WPA, we have access to special introductory terms for our visitors.
WPA has a special introductory offer, from May 2020, which provides:
- a 25% discount on your first years premium
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- a further 5% discount from year 3 onwards
To get a quote or to ask any questions, please complete this form, and our dedicated representative, Steve Sargent, will get back to you right away.
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Qualifying For Marketplace Savings
To get a premium tax credit or reduction of your out-of-pocket costs, youll need to provide an estimate of your household income to the Marketplace for the year youre getting coverage. This can be challenging for business owners whose income may vary. You should provide your best estimate. Talk to your tax professional for advice on how to estimate your household income.
If you qualify for a premium tax credit and/or reduction of your out-of-pocket costs and your expected household income changes during the year, you should return to the Marketplace and update your estimated income as soon as possible. At the end of the year, if you make more than what you reported to the Marketplace, you may have to pay back some or all of the premium tax credits that you received in advance. If you make less, you could get additional premium tax credits when you file your taxes.
Insurance Premiums For Employees
If your LLC provides group health insurance for its employees, the business can deduct the premium payments from its earnings as a business expense, regardless of whether it is taxed as a sole proprietorship, partnership, or corporation. Note that a corporation can only deduct the cost of insurance for bona fide employees, not for nonemployee shareholders.
If you’re ready to get your company off the ground, consider the many benefits of forming an LLC. The ability to deduct health insurance premiums is just one benefit of establishing your business under this type of structure.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.
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Do Sole Proprietorships Get Group Health Insurance
Being a sole proprietor can make things easy when it comesto taxes, but it can get tricky when health insurance shopping. Group healthinsurance plans do not always apply to sole proprietorships.
For a sole proprietor business to qualify for a small businessplan, it would have to have one common-law employee, excluding the owner andspouse. Without that one qualified employee, the business owner can only getindividual health insurance. eHealth has a variety of options for individualand family health insurance for you to explore in this situation.
Failing To File Tax Returns Will Prevent Advance Payments In The Next Year
The IRS reminds taxpayers who received advance payments of the premium tax credit that they should file their tax return timely to ensure they can receive advance payments next year from their Marketplace.
If advance payments of the premium tax credit were paid on behalf of you or an individual in your family, and you do not file a tax return reconciling those payments, you will not be eligible for advance payments of the premium tax credit or cost-sharing reductions to help pay for your Marketplace health insurance coverage in the next year. This means you will be responsible for the full cost of your monthly premiums and all covered services. In addition, we may contact you to pay back some or all of the advance payments of the premium tax credit.
If you have a question about the information shown on your Form 1095-A, or about receiving Form 1095-A, or about a letter you received, contact your Marketplace as shown in the table below or visit HealthCare.gov/taxes.
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How Does The Irs Determine 2% Shareholders
The Internal Revenue Service has defined a 2% shareholder as a person who owns more than 2 percent of outstanding stock of an S corporation. Self-employed owners are able to deduct health insurance premiums for themselves and their dependents. There is a deduction that is labeled an offset for this group of shareholders. The health care premiums paid are reportable in the itemized deductions as expenses for medical and dental.
In order to get this deduction, the shareholder must have the S corporation pay the premiums . For clarity, consider the following elements:
- Who pays the premiums?
Deductions For The Self
Self-employed taxpayers and other business entities can deduct business-related insurance premiums, including health and dental insurance premiums, as well as long-term care premiums. Vehicle insurance can also be deducted if the taxpayer elected to report actual expenses and is not taking the standard mileage rate.
Be sure to keep documentation of all premiums paid toward eligible insurance expenses, as well as any other deductible expenses that you plan to claim, such as computer equipment or a home office.
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Heres The Hra Strategy If Youre Self
- Hire your spouse as a W-2 employee:
- Your spouses salary can just be the amount you want to reimburse through the HRA, but it must be a fair wage for what they are doing
- Its a good idea to have an employment contract and time sheet for record-keeping purposes
- Save all your medical bills and records and have your company reimburse the bills each month from a separate account
This strategy only works if you dont hire any other W-2 employees that would be eligible for either ICHRA, QSEHRA or a One-Person 105 HRA and assumes that you and your spouse dont own any other businesses that have employees . Youll need to keep good records, too.
Buying Group Health Insurance With Employees
If you have at least one employee , you can buy group health insurance through an agent, directly from an insurance company, or through the public exchange. Basically, you have more options for how you can buy a group health policy when youre a self-employed business owner with employees.
Anther option is a stand-alone health reimbursement account . This is an employer-funded account from which you can be reimbursed tax-free for qualified medical expenses. There are several types of HRS, including the Individual Coverage HRA available to businesses of any size, and the Qualified Small Employer HRA , available to business with up to 49 employees.8,9 These two types of HRAs are considered an alternative to job-based health coverage, and require enrollment in a health plan for the money to be used.10
For a QSEHRA, the business owner sets an allowance for the QSEHRA, then employees maintain minimum essential health coverage and submit their medical expenses for tax-free reimbursement. Employees can be reimbursed up to $5,300 per year for individuals and up to $10,700 per year for families.11
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