Medical Insurance Deduction for Business Owners
Posted April 3rd, 2008 by Diane Kennedy | permalink
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A lot of my clients start off with a small business that one person works while the spouse still has a full time job. That all leads up to a frequently missed deduction when it comes to medical insurance. In this case, the spouse has a job with medical insurance but has pay withheld to cover extra family members on the insurance policy.
The extra withholding for medical insurance from the spouse’s paycheck is a deduction for the business. The best way to handle the deduction is to have the business write a check monthly to reimburse for the expense. That deduction is then clearly on the books of the business and it’s a deduction on the tax return later!
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This is very interesting, particularly since S-corps owners can now receive medical benefits that aren’t considered taxable benefits.
So, if business owners also have W-2 income from another job that has medical benefits (e.g. you haven’t quit your day job yet), then is the strategy to have the small business reimburse the business owner(s) for the medical insurance premiums and other medical out of pocket expenses that were paid by the business owner? Would the small business then have a medical expense reimbursement plan that covers the premiums paid?
Many corporations that I know, including the one I work for, pay the medical premiums on a pre-tax basis (social security & medicare taken out but not withholding). How does this affect the reimbursement?
I have never been so happy to see a comment! I have a cold right now and I felt like my brain was all stuffed up. I wrote this blog post again and again, trying to make it sound coherent.
So, thank you Penny, for asking a question!
Yes, the small business would reimburse the business owner (and/or employed spouse) for the medical insurance premiums. Those would be a medical insurance deduction.
The only way that you get the out of pocket (meds, chiro, deductible, etc..) covered is if you have an HSA plan or a MERP (medical expense reimbursement plan). You can only do a MERP with a C Corp.
If the medical insurance is withheld from the employee’s pay through an HSA or cafeteria plan or the like, then the business still reimburses at the same amount.
Thanks, Diane! I hope you’re feeling better soon! I continually find your website to be a great source of info and I really appreciate your willingness to share and help others.
As a follow on question, what documentation would you need to have in order for the small business to reimburse the medical insurance premiums? Our health insurance is deducted from our W-2 paychecks and is one of the pre-tax items deducted, along with the 401(k).
Also, as I’ve posted previously, I have part time employees who work 400-750 hours per year, while we work about double (easily over 1000 hours) but not full time since we have full time W-2 jobs. Can I set some benefits, such as the medical insurance and retirement, as requiring 1000 hours to be eligible and other benefits, such as the college tuition reimbursement that I want to offer my college students, requiring less than 1000 with benefits scaled to hours worked?
Do you need to pick a consistent eligibility for all benefits offered to employees or can it vary with each benefit?
Thanks!
Can’t a sole proprietor do a MERP too? My husband started his photography business as a sole proprietor in 2006 and I am his sole employee. I work 32 hrs/week as an financial accountant outside the home, but then I am the business manager/accountant/receptionist for his business approx 20 hours/week.
I just recently realized that I had been missing out on BIG (medical,pension,travel) deductions by not paying myself as an employee. So, just this year I got him an EIN and he started paying me $500/mo plus medical reimbursement up to $15,000/year (a total compensation of $21,000 … approx $20/hr). I was in the process of setting up an employment contract, plan document, adoption agreement, etc.
Under his medical reimbursement plan he is reimbursing me for medical insurance premiums that are withheld from my paycheck at my outside job. I had my outside job start taking out my premiums after tax. I figured we shouldn’t get to deduct the premiums from my salary at work and then again from his business… that would be double deducting the premiums, right? Am I going about all of this right?
I’ve got to say I’ve looked at this very question again and again.
For a long time, there was a seminar promoter type who was touting Schedule C (Sole Prop) as a way to do MERP. I won’t mention his name here mainly because he was shut down hard by the IRS. He had claimed that he was an tax attorney (he had never been to law school), that he had never lost a tax fight (he’d lost most of them) and that you could take a lot of deductions that you can’t take.
But back when he was very active in his business (before the IRS made him take down his site) and sold 10,000 of his “kits” that promised huge tax savings, I spent a lot of time researching his claims of deductions. I could never find a way to take the MERP through a Schedule C. At best, it’s a grey area. It’s not specifically disallowed (like with an S Corp), but it’s also not specifically allowed (like with a C Corp).
I do know that everyone who bought one of his kits was audited and everyone I talked to after the fact, lost the MERP deduction through their Sole Prop.
Other than that, if you have an authoritative cite I’d love to see it.
Diane - I’m a little confused on the taxability of the pre-tax dollars often used to pay the medical insurance and the subsequent reimbursement by another company’s benefits. Are there any rule differences if the reimbursement is for premiums paid with before versus after tax dollars?
Diane,
I use Section 105 plans with my clients as a way that Sole Props can hire their spouses and pay them for services to the business as an employee up the limits of the HRA plan. This works great especially with a other wise non-outside employed spouse. The plan is under the employees’s name and covers the Sole Prop business owner and their children. The plan can be set up in conjunction with a HSA to cover the “other” things like vision, dental, copays, etc. and it is deductible as an employee benefit in addition to the wages paid to the spouse.
Here’s a IRS Technical Advice Memorandum http://www.association105.com/resources/105HRA/techadvmemo.pdf that pertains the use of an MRP with a sole proprietorship.
Here’s a couple websites that discuss the topic http://www.allbusiness.com/personal-finance/individual-taxes/660281-1.html and http://www.bizjournals.com/sacramento/stories/1996/11/18/smallb6.html I’ve come accross many websites saying practically the same thing.
Am I missing something important? I definitely don’t want to be deducting the expenses if it’s not legal! Thanks.
Is the following information outdated? http://www.coredocuments.com/docs/LetterRuling9409006.pdf http://taxlinks.com/ click on search our database link, then type in Revenue Ruling 71-588 https://www.wellsfargo.com/biz/education/protection/health Thanks!
Looks like this is a hot topic.
I’ll do some more research and open up a thread on it this next week on the Forum. It will probably be Wednesday or Thursday before I can do that, though.
One last quick question… what do you think of the following websites?
www.hireyourspouse.com I have been pondering buying the Spouse Employment Contract, just to make sure I’m not missing any deductions but after reading your post above I’m a little more hesitant!
Also I had been looking at the following website to help me make sure my employment contract & MERP plan were in compliance with all rules… http://105license.com/
Neither of these are the kit you were refering to above were they? If so I feel like a fool!
Hi, Diane:
…Sounds like you got quite a few things on your hands……a cold, server problems….Yikes! It must be the moon…lol….Please get well soon!
With regard to questions about a MER plan, what about LLCs? Especially, ‘disregraded’ LLCs….can a LLC have a MERP as well? I’m fortunate enough to receive retiree medical (health, dental & vision) insurance from my former employee but still have to pay my portion ($687 a month) of the premiums. I’m now a Real Estate Professional with a LLC. What’s the legal loophole to get reimbursed?
Much thanks,
Ingrid from Northern Kalifornia (lol)
Sorry to be cryptic on the guy who got in trouble for selling bad tax info. The person I was referencing was Dan Gleason with the Tax Toolbox. Those have been off the market for 3+ years now.
As far as buying a kit to employ your spouse, I think I would just question what the kit actually included for the cost.
And Ultra, on your question on the disregarded LLC. It is taxed the same as a Sole Proprietorship, so the rules of the Sole Proprietorship would be applicable for the LLC as well.
Thank you for the sympathy too! It has been a tough week with my cold, server problems and we have the “fun” house on the block so had 9 kids here for most of the weekend. (I’m not complaining about that, I know where my son is that way)
Although I find this thread very interesting, I’m confused over what I can & can’t do. Here’s my situation: A) I have an S-Corp with most of my income being earned as a 1099 Independent contractor and B) I have medical insurance (medical, dental & prescription) as a retirement benefit from my former employer for which I (personally) pay a monthly co-pay for me, my wife & family.
Am I to understand that my S-Corp can reimburse my personal account the medical co-pay and in doing so gain a deduction for my business? If so, can I reimburse the full amount even though it covers the whole family or must I prorate it? Also, how is the payment classified for the business and how is it treated on the personal side?
Your comments would be greatly appreciated.
I had to do some research to make sure I was up to date! I found some changes that I knew about, and some I didn’t.
I’ve started a thread at First Class Lounge Forum on “Medical Deductions for Businesses”.
If you’re not yet a member of the First Class Lounge, you can try it out for free for 30 days!
If I have a LLC taxed as C Corp, can I do a MERP? Can I reimburse the medical insurance premiums deducted from my W-2? Thanks!
Short answer “yes” - Come join us over at the FCL forum for more of the rules on LLCs, C Corps, S Corps, etc and medical expenses and medical insurance.
We have an LLC S-Corp in which both my husband & I are officers. He also has a FT corporate job with medical benefits. I know that I can reimburse the portion of the premium for my medical benefits by writing a check out of the S-Corp but can we also reimburse my husband’s premium since he is also an officer? Are there other requirments that we need to fulfill?
I have 2 separate questions on this topic:
1) My wife and I have a LLC taxed as a partnership with no employees. We purchased medical insurance through a professional organization since group coverage in Florida in our corporate name was too expensive. The policy is in the organizations group name and we are named as members. Is there a way to deduct the premiums? Would having the partnership make the payment help?
2) A friend retired and kept health coverage through his former employer. He formed an LLC unrecognized for tax purposes. Is the policy considered in his name and can he deduct the premiums?