By Jason Watson
Posted September 2, 2014
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As you know, single-member LLCs are disregarded entities meaning that the IRS views them as a sole proprietors. Each state might recognize the difference, but for health care purposes and illustration, we will follow the IRS perspective.
As a sole proprietor you do not earn a salary. There is not a W-2 issued to you. Therefore you take the self-employed health insurance premium tax deduction on Line 29 of Form 1040. But this is not always ideal or the most elegant because of self-employment taxes. Huh? Let’s go to the numbers-
| Premiums | 10,000 | |
| Net Business Income | 100,000 | |
| No HRA | With HRA | |
| Form 1040 | Schedule C | |
| Net Business Income | 100,000 | 90,000 |
| SE Tax Deduction (50%) | 7,650 | 6,885 |
| Health Insurance Deduction | 10,000 | 0 |
| Adjusted Gross Income | 82,350 | 83,115 |
| SE Taxes | 15,300 | 13,770 |
| Income Taxes | 16,444 | 16,635 |
| Total Taxes Paid | 31,744 | 30,405 |
| Savings (Real? Yes, real money) | 1,339 |
There’s a lot of moving parts here. But two things to note- you pay slightly higher income taxes deducting the premiums on Schedule C, but you pay significantly lower self-employment taxes. If you have $15,000 in premiums, the savings is $2,008. Again, real money in your pocket.
What’s the catch? With the IRS there’s always a catch. To do this, you must adopt a Section 105 Health Reimbursement Arrangement (HRA), and as mentioned earlier the annual administrative cost is $400. Yet, the benefits exceed the costs. Economists love that scenario and you should too.
As a reminder, if you have an HRA you can lump a bunch more medical expenses including long-term care premiums as deductions to your business. So, the $90,000 figure you see above under Schedule C would decrease, and Yes, your savings would therefore increase. Beauty!
One thing to note. You must have enough business income to cover the cost of the premiums, otherwise they are limited.
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