Running a small business can sometimes feel like drinking from a fire hose, there is so much to learn and do and only so much time. Navigating business taxes (and snagging those possible deductions) is definitely a tricky part but it comes with some perks if you get it right.
We're zooming in on one business expense, in particular — health insurance, important for you and your employees, and potentially, a significant tax deduction. (Just a heads-up: We're not tax pros. Always a good idea to chat with your tax professional on how to make these deductions work best for your small business.)
The Perks of Offering Health Insurance
The job market today is super competitive, and throwing in health insurance might just be the game-changer for someone deciding between job offers.
We regularly hear from small business owners that missed out on great candidates because they didn’t have health insurance on the table.
Yes, health insurance can be a big cost on businesses, but there are smart ways to ease the financial sting, like tax deductions. Plus, opting for an ICHRA*, a pre-tax fix health benefit, versus a traditional group health plan can give small business owners more control over what they are able to comfortably afford.
*We delve into ICHRA later in the article. Hang tight!
Understanding Deductions on Health Insurance
How you (as the small business owner) can deduct health insurance-related expenses from your federal business taxes depends on the structure of your small business. Whether you are a sole proprietor, in a partnership, or running an S-Corporation or C-Corporation, the IRS guidelines outline specific deduction procedures for each. Let's unpack these guidelines so you can leverage those deductions.
First off, almost every business can offer health insurance as a tax-free perk to their non-owner employees and write off the expense, avoiding taxes on the premiums. The trickier bit comes in for the business owners. Figuring out how to deduct your costs is important -- since health insurance premiums are the largest chunk of healthcare expenses.
Can sole proprietors deduct their health insurance premiums?
For sole proprietors or single-member LLCs taxed the same way, getting a tax deduction is pretty straightforward. You simply take a deduction on your personal income tax for any premiums you've paid over the year. Remember, this isn't something you itemize (like on Schedule A) — it's an adjustment to your income. Just keep track of your premium amounts and remember to deduct them when doing your taxes.
The IRS details related to sole proprietorships and health insurance deductions can be found here.
Can partnerships deduct their health insurance premiums?
Partners receive similar treatment as sole proprietorships. Partnerships (or rather partners in partnerships) should report the insurance premiums they've paid or covered for each partner on their K-1 forms. Then, this amount goes onto the partner's individual tax return, where they can deduct it just like a sole proprietor would. (See above) Whether the partnership pays these premiums directly or reimburses the partners for them, it's all accounted for in the same way.
The IRS details on partnerships and taxes can be found here.
Can S-Corp owners deduct their health insurance premiums?
S-corp owners have a bit more paperwork when it comes to deducting their premiums. They can take a personal income tax deduction on the health insurance premiums their company pays. But, there's a catch: the health insurance policy has to be set up by the company.
For it to be accepted by the IRS, the company has to cover the S-corp owner’s insurance premium and report those premiums as part of the owner's gross wages on their Form W-2. The company can either pay the insurance company directly or reimburse the S-corp owner for the premiums.
Don't forget to chat with your payroll provider about this, since owner payments are managed differently than those for non-owners.
Check out the specifics on the IRS website here.
Can C-Corps deduct their health insurance premiums?
If you own a C-Corp, things are a bit simpler since the income doesn't flow through directly to you. A C-Corp can just cover or reimburse health insurance premiums without any fuss. As an owner-employee, you don't have to worry about extra steps on your personal income taxes. Plus, C corp owners can enjoy tax-free reimbursements for other medical costs through individual coverage health reimbursement arrangements also known as ICHRAs, a newish type of group health plan. (We'll get to this more in the next section.)
Dig into the nitty gritty details of employer-sponsored health insurance deductions directly from the IRS here.
Newer, Flexible Group Health Insurance: ICHRA
There is rising interest, especially among smaller businesses (those with fewer than 20 employees), in a relatively new kind of group health plan known as Individual Coverage Health Reimbursement Arrangement (ICHRA). How the owner gets treated in an ICHRA varies based on your business structure.
What's an ICHRA?
Instead of sticking to a traditional group health plan that offers just one carrier and plan for your small business team (a "one-size-fits-all" approach), an ICHRA lets businesses put aside pre-tax dollars so employees can pick their own health insurance from the marketplace.
With health insurance costs skyrocketing and everything getting more complicated, more small businesses are discovering that ICHRAs, like StretchDollar, are a flexible and wallet-friendly way to offer health benefits.
Here's a quick drawing that outlines the difference between a traditional group health plan and an ICHRA.
Can you deduct ICHRA contributions as a health insurance expense?
Yep, employers can deduct contributions to their employees' ICHRAs, similar to how they handle traditional group health insurance premiums. But when it comes to owners, the same deal applies.
- C-Corp owners -- They can participate in the ICHRA plan.
- S-Corps, sole proprietors, and partners - They can already take a deduction in a way that's more tax-friendly so they cannot participate in the ICHRA.
Quick Wrap Up
Generally, small business owners can write off health insurance premiums, but how you do it depends on your business's tax setup. (This is super important for S corps due to their unique tax rules for owners.)
At the end of the day, working with a tax professional can make a huge difference in making sure you're getting all the deductions you're entitled to.
Want to learn more about ICHRA pre-tax fixed health benefits for your small business? Contact StretchDollar here or get started and be done with your benefits in 10 minutes.
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