What Do I Need To Know About Deducting Self-Employed Health Insurance? PLUS: Last Minute Medical Plan Strategies

End of year is around the corner which brings up this idea of S Corp owner health insurance and health benefits in general for small business owners. 

When you are self-employed your health insurance premiums for yourself and your family must be treated a certain way to ensure a tax deduction.

We’re going to jump into the proper way to handle health premiums if you are self-employed and then discuss various other health options before year-end.

How do I report self-employed health insurance premiums as a sole proprietor or single member LLC?

Basically any entity structure outside of a C or S Corporation…

• Simply deduct your self-employed health insurance on Schedule 1 of your personal tax return (Form 1040).
• You do not take the deduction on your Schedule C.

How do I report self-employed health insurance premiums as an S Corporation owner?

There are a few hoops you need to jump through…

• As an S Corp there are a few steps you need to take to ensure you are properly getting the deduction for your insurance premiums to the S Corp owner(s).
  1. 1) Have the S Corp Pay for the Insurance – This can be done directly out of the business bank account or you can reimburse yourself for it through an Accountable Plan. You will deduct the expense as wages on the S Corp side.
  2. 2) Gross Up W2 Payroll – You will take that insurance expense paid and gross up the payroll wages for the owner(s). If the plan is non-discriminatory, then no FICA taxes need to be withheld. This also will add to your “reasonable salary” as an S Corp owner. If you use a software like Gusto you can simply send a request at year-end to get this added in.
  3. 3) Deduct on Personal Tax Return – Finally that income that was reported to you in wages for the insurance will be deducted on Schedule 1 of your personal tax return (Form 1040).
• Again a couple hoops you have to jump through. Essentially you get a deduction on the business tax return, include it as income on your personal tax return, and then get a deduction on your personal tax return. The net result is one deduction for it!
• It is important to note that this treatment is only for the S Corp owners. If you have other employees you would not follow this same treatment.
• Here is an article Gusto put together as well.

What Other Health Related Options Are Available to Small Business?

If you have less than 50 employees you are not required to offer health insurance although you can and may want to.

• If you did not obtain a PPP loan, then you should make sure to claim the federal tax credit equal to 100 percent of required emergency sick leave and emergency family leave payments made pursuant to the FFCRA. And as long as you are doing that, make sure to obtain the employee retention tax credit (ERC) too.
• If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2020 deductions, and then put yourself on a monthly reimbursement schedule in 2021.
• If you want to but have not implemented a QSEHRA (Qualified Small Employer Health Reimbursement Arrangement), make sure to get that done properly now. You are late, so you could suffer a $50-per-employee penalty should you be found out. A QSEHRA is a company funded, tax-free health benefit used to reimburse employees for personal health care expenses.
• Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2020 and possibly in prior years.
• Utilize and contribute to a Health Savings Account (HSA) if you have a high deductible health plan. Maximum contributions for 2020 is $3,550 for self-only or $7,100 for families.

That’s what we have for now as it relates to year-end health items. Be sure that if you are operating as an S Corp you are following the procedure correctly to ensure you receive a full deduction for your health insurance premiums.

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.