Problem in maximizing the tax benefit of insurance and medical cost
If you are a small business owner, I am sure you are aware of the insurance cost and out-of-pocket medical expenses are soaring nowadays. Without proper tax planning, some of you may run into a situation that you get very little tax benefit with such significant cost for your family.
For example, if you are running your business as a sole proprietor and you hire your spouse to work for the business, the insurance and medical cost of your family can only be deducted under “adjustment to income” and “itemized deductions” in schedule A when there is no proper tax planning. The itemized deduction is subject to 7.5% of your adjusted gross income so you hardly get any significant benefit from it, not to mention that you may even go with standard deduction and get no benefit from itemized deduction.
What if I tell you that you taxpayers are on average save $3,500 annually from the tax benefit of the insurance and medical cost by a proper tax planning, will you be interested in learning more about it?
How much you could save with proper tax planning?
With a proper tax planning, you can now classify those costs as fringe benefit and deduct them as business expenses. To further illustrate, say your Federal tax bracket is 20%, self-employment tax is 15.3% and state income tax bracket is 9% totaled to 44.3%. If your annual medical cost for your family is $10,000, your tax saving would be around $4,430!
How?
I would like to introduce you a tax benefit plan under IRC section 105 HRA (Health Reimbursement Arrangement). Under this benefit plan, the insurance and medical cost your business reimburses you is treated as fringe benefit which will not be added to your W-2 income. In other words, your business can deduct the expenses legitimately while you, and your employees, do not need to report them as income. This is indeed a significant tax break to small businesses.
Which business entities can participate?
With LLC and Corporation, your family medical cost can be saved under this plan. You can save your family medical cost indirectly through sole proprietorship structure if you can hire your spouse in your business.
How to implement this plan?
You need to be careful to comply with certain rules and regulations in order to implement this plan in your business properly. Certain plan document, board minute, agreements and plan summary have to be set up and put in place. For sole proprietorship, you may also need to pay attention how to hire your spouse legitimately. Certain forms such as W-4, I-9, payment records and timesheet should be maintained. I don’t recommend you set up by yourself without consulting with your legal counsel or CPA in case you are not sure how to implement this plan properly.
Act now
You can still save money for the current year tax planning. Act now before and you still have a few more months before the year end.
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