- July 22, 2022
- Posted by: Gunveen Bachher
- Category: U.S Taxes and Businesses
Health Care Tax Strategies For Small Business Owners
Health Care for Business Owners is one of the most powerful tax strategies.
Majority of the owners that I deal with do not use health care to maximize their tax savings. If you plan your medical costs and combine it with health care strategies, you can achieve phenomenal results. Below, I share with you some of the important tax strategies to do with health care:
1) Claim the Health Insurance Deduction the right way:
Health insurance is 100% deductible for a small business owner whether you cover your employees or not. If you are a small business owner, DO NOT itemize your costs.
For single owner LLC, you can take the deduction on the front page of your 1040.
S-Corp owners- Your W-2 as a shareholder/employee will indicate the amount of health insurance paid by the company on the shareholder’s behalf.
2) There is this Health Insurance Tax Credit- Take it!
The credit is available to those who pay for their employees’ health insurance premiums. It a dollar-for-dollar tax credit against any taxes you owe and up to 50% of any healthcare premiums you pay on behalf of your employees. You can cover half the cost of single( not family) health care coverage. Also, you as a business owner must have fewer than 25 full time equivalent employees, and those employees must have average wages of less than $50k a year. For rules, click on the link below:
Source: The Small Business Health Care Tax Credit
3) Use the Health Savings Account( HSA):
Already discussed in my previous mails to you, this strategy offers a huge opportunity for all small business owners.
Combine it with a high deductible plan health plan( HDHP) and if you are generally healthy, you can save massively on premiums.
More so, use a self directed HSA if you can. Your HSA can help you invest funds even into real estate.
HSA contributions are pre tax which means you deduct them from your gross income on the first page of your 1040( that might just help you lower your tax bracket too!) .
The tax deduction in 2021 for singles is $3,600 and $7,200 for families. The funds grow tax free and they get ‘roll- overred’ if not used.
Dec 15th – general deadline for most small business owners to enroll in a health insurance plan for the next year beginning Jan 1st. This is where you choose the HDHP plan if you’re interested in contributing to an HSA.
April 15th- Deadline to contribute to your HSA and receive the tax deduction for the previous year.
4) Health Reimbursement Arrangement( HRA):
This is only for business owners.
Benefits those with higher-than-average medical expenses.
If your annual medical expenses are more than $5,000 it might be worth the effort to set up an HRA for yourself.
Eg- you have $10k in medical expenses, and you have an HRA, you can immediately write off 100% of those expenses.
You can self administer the account.
The HRA will pay for itself at around $4,000- $5,000 in medical expenses + You are in the 20%- 25% tax bracket = $1,000- $2,000 in tax savings.
HRAs can be combined with HSAs.
Not all entity types might be eligible for an HRA such an S-Corp.
For example S-Corps aren’t eligible. Though having you ( an S-Corp owner) as a dependent on your wife’s LLC ( and that LLC is eligible to own an HRA) might help you claim that deduction. You get the idea!
Cons- setting up the entity structure can be a challenge and attention to bookkeeping might be required.
Bottom line: There is no penalty in 2021 and 2022 for not having qualifying insurance. Out of Platinum, Gold, Silver and Bronze plans, Platinum offers the most benefits but can be expensive. Bronze plans though will open doors to the HSA. Plan your taxes and your health care expenses. If you have more than $3,000 in annual out of pocket medical expenses eg. deductibles, copays, prescription drugs, dental, eye care etc., then you might just benefit from some planning. You could deduct 100% of these medical costs.