Small Business Health Insurance Write Off – Health insurance isn’t cheap, and it can be a big burden if you’re running a small business and have no other way to get it (ie, an employer or spouse with an employer who provides health care).
I know this because it made me think twice about my decision to quit my full-time job and start focusing on my small business.
Small Business Health Insurance Write Off
So, I had to think twice about making the decision to become self-employed when I learned that without the help of my former employer, the high cost of our health insurance was more than a $1,000 per month deductible.
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Unfortunately, this is not available to all small business owners, and even if you qualify for a discount, there are some differences in how much of a discount you get compared to traditional health insurance premiums.
If you take advantage of this exemption, there are some important rules and requirements for registration that you should keep in mind.
Businesses are generally allowed to deduct from their business income expenses that are “ordinary and necessary” to run their business.
Unfortunately, the IRS does not consider medical, dental, or long-term insurance (referred to in this section as “health insurance”) to be “ordinary and necessary” for business owners.
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Today, if you own and operate a small business, you may qualify for a deduction for your health insurance, but that is still not a business deduction.
You take this deduction on your tax return as an “above the line” deduction, meaning you can take it whether you itemize it on your personal income or not.
However, there are certain restrictions and rules if you want to use this exception.
There are two main hurdles you must overcome before you can qualify for the self-employed health insurance discount:
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If these two limitations do not eliminate your ability to claim the self-employed health insurance discount, you need to understand how to set up and pay your health insurance premiums.
If your business is a sole proprietorship (or an LLC is considered a sole proprietorship by the IRS), filing is easy.
Just set up the plan in your name or business name and pay the premiums.
Either you or the business can pay the premium, but the business cannot take a business deduction for the first payment.
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Make it clear on your tax return how much you paid for health insurance and whether the business or yourself paid.
If your business is a partnership (or an LLC is considered a partnership by the IRS), you can also set up an arrangement in your name or the name of the partnership.
If the plan is in a partnership name, the partnership must pay the premiums and report the payments to you as “guaranteed payments” on the partnership’s return.
The partnership does not have to report the employee’s premiums as an insurance deduction, which can deduct other employees’ health insurance premiums.
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You can pay the premium yourself, but the partnership must reimburse you for these premium payments and classify the payments as “guaranteed payments.”
The explanation may confuse you, but the bottom line is that you still have to pay self-employment tax on your health insurance premiums.
Partnerships are exempt on their income, which you report as self-employment income on your personal income, but tax deductible on your personal income.
Again, as a result, the premiums you pay are income tax deductible, but cannot be deducted from the income for which self-employment tax is calculated, as I discuss a little later in this post. .
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As I mentioned to sole proprietors, the most important thing is to make sure that you clearly report the amount paid for the partner’s health insurance to your tax preparer.
If your business is considered an S-corporation by the IRS and you own more than 2% of the business, the treatment and cause of the owner’s health insurance premiums is that of a partnership.
If the business pays premiums, it must include the premiums on your W-2 and properly count them as wages.
If you pay premiums, the business wants to reimburse you, and it is necessary to count the money as wages on your W-2.
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You will include the reward cash in your personal income, but you will also take an “over tax” deduction.
Also, before you prepare your W-2s and tax returns each year, make sure your accounting and payroll company knows how much you paid for business owner health insurance.
This goes back to the fact that the IRS does not consider health insurance for business owners to be a normal and necessary business expense.
Although relief is provided through self-employed health insurance deductions, this reduces your tax bill.
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For example, if your business had a taxable profit before you had self-employment health insurance coverage of $50,000 and you paid $10,000 in health insurance per year, you would pay income tax on $40,000 plus self-employment tax. A total of $50,000.
The self-employment tax rate is 15.3%, so that’s a fair difference compared to how this deduction is treated for other traditional workers.
For employees, the business must deduct premiums due to income tax and self-employment tax.
Workers must deduct the premiums they pay from both income and payroll taxes (one of the tax breaks traditionally given to workers).
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Although it can get worse; Business owners may not even have a self-employed health insurance discount, and the difference in how these payments are handled can leave some aspiring small business owners scratching their heads.
In a previous article, I pointed out that to qualify for the self-employment health insurance exemption, you cannot qualify for any employer-provided health insurance coverage and your business must have self-employment tax.
What if you don’t qualify for a self-employed health insurance discount because of one or all of these limitations, but you still pay for health insurance yourself?
You may be eligible for a deduction if you claim a deduction on your personal tax return.
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If your total out-of-pocket medical expenses, premiums, and out-of-pocket costs for prescriptions and services exceed 10% of your income, you can report deductible expenses that are not deducted anywhere on your personal Schedule A. Tax paid and more than 10% is deducted from your personal taxable income.
10% of income is usually the upper limit, but as health insurance premiums continue to rise, it doesn’t make sense if that’s the only way you can get a discount.
The Affordable Care Act (aka Obamacare) was a severe blow to America’s small business owners.
Insurance premiums continue to rise, and you and your family are penalized if you don’t have “minimum essential coverage.”
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In 2017, the penalty is 2.5% of household income (at the national average cost of a bronze plan in the health insurance market) or $695 for an adult and $347.50 for a child under 18 (up to $2,085).
But I think most people can agree that, right now, America’s small business owners are underserved by affordable health insurance.
Fortunately, there is a tax break for small business owners who must purchase health insurance through the self-employed health insurance discount for those who are not restricted by the above limitations.
For small businesses that are able and willing, Obamacare introduced a credit to subsidize your employees and provide health insurance.
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This loan is more than I want to discuss in this post, but you can learn more about it here.
In case you haven’t heard, the tax code will be rewritten starting in 2018.
As a small business owner, you should have a basic understanding of all of these.
Stay up to date by signing up for my email account or connecting with me on Facebook or Twitter. One of the easiest ways to reduce your income tax bill is to make sure you claim any tax relief for your small business.
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A tax deduction (or “tax write-off”) is an amount you can deduct from your taxable income. You take the total cost and deduct it from your taxable income. Basically, tax reporting allows you to pay a smaller tax bill. But that amount must meet the IRS’s tax return criteria.
Below is a complete list of exemptions generally available to self-employed businesses organized as sole proprietorships or partnerships. Some of these relate to running a business,
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