Health Insurance Tax Benefits For Small-Business Owners

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Vlad Rusz is a CPA at Centaur Digital Corphelping busy business owners efficiently manage their accounting system.

Most business owners would agree that health insurance premiums should be deductible. After all, when you work as an employee, you typically pay your health insurance premiums pre-tax. Luckily, the IRS agrees, and most business owners can deduct their health insurance premiums. However, for small-business owners, it’s not as simple as a deduction that shows up on their pay stubs since they might not have any.

The following breakdown will explain the technicality of deducting health insurance premiums based on a business’s tax structure. Use this as an overview to ensure you are properly set up to take the deduction. In the end, you’ll also get a bonus tax strategy to help you save even more money on taxes.

Structure 1: Schedule C

The tax deduction for sole proprietors or single-member limited liability companies taxed as sole proprietors is the simplest. The sole proprietor takes a deduction on their personal income tax at the end of the year for premiums paid. It’s important to note this is not an itemized (Schedule A) deduction but an adjustment to income. No special systems are required. Simply track how much your premiums are, and make sure you deduct them on your taxes.

Structure 2: Partnerships

Partnerships need to report the amount of insurance premiums paid or reimbursed on each partner’s K-1. This amount is then transferred to the individual income tax return for the partner, who then deducts it like a sole proprietor. The premiums can be paid by the partnership directly or paid by the partner and then reimbursed.

Structure 3: S Corporation

Owner-employees of S corps have a bit more paperwork to ensure the deductibility of their premiums. The insurance premiums paid or reimbursed should be added to Box 1 of the W-2. The S corporation takes a deduction as wage expense for the amount of premiums paid or reimbursed. Make sure you properly report the amount of insurance premiums for owners to your payroll provider, as payments for owners are handled differently than for non-owners.

Structure 4: C Corporation

Owners of C corporations have it a bit easier since there is no flow through of income. AC corporation can simply reimburse or pay for the health insurance premiums. There are no additional steps the owner-employees must take on their personal income tax returns. In addition, C corp owners can take advantage of health reimbursement agreements for tax-free reimbursement of other medical costs.

Bonus Tax Strategy: Health Savings Account

Unless you itemize your personal deductions, you don’t get to deduct payments for medical expenses. An HSA allows you to bypass this restriction by making the contributions deductible while allowing you to use the distributions to pay for qualified medical expenses pre-tax.

Even if you don’t plan to use the HSA to save money for future medical expenses, simply contributing to your HSA and using it to pay for medical expenses will save you money. Thus, contributing enough to at least cover your out-of-pocket medical expenses can be a good strategy. You can even reimburse yourself from your account after you’ve paid out of pocket. This lets you create a tax benefit by contributing to your HSA after you’ve incurred the expense, and then immediately reimburse yourself.

In general, a business owner can deduct health insurance premiums. However, the mechanism by which you do so will differ based on your business tax structure. This is especially important for S Corps because of the special tax treatment for owners. There are more nuances and other pitfalls, but your accountant or tax preparer should be able to guide you through successfully deducting your health insurance premiums. And don’t forget about using an HSA if you are eligible; it’s free money!

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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