Sole Proprietors Hire Spouses for the Tax Advantages Healthshare

Sole Proprietors Hire Spouses for the Tax Advantages

You may have read, correctly, that Healthcare Reimbursement Arrangements aren’t available if you’re self-employed.  However, an often overlooked tax advantage is how you can use an HRA when your spouse is employed by your business.  Here’s how that works.

While it’s accurate that you can’t participate directly in an HRA, you may as a member of an employee’s family.  You see an HRA is offered by employers to reimburse employees for a variety of healthcare costs, such as health insurance and deductibles and co-insurance.  With the flexibility of HRAs, other expenses like dental insurance may also be reimbursed.

If you employee your spouse as an W-2 employee, rather than a contractor, he or she can participate in an HRA just like your other employees.  You and your children’s healthcare expenses are also reimbursable.  This is only true for sole proprietorships.  And, you may not allow your spouse to participate in an HRA unless your other employees can, too.

Social Security Tax Benefits for Sole Proprietors

The money you pay employees and their covered family members via an HRA is an allowable business deduction for income tax.  When your spouse and children are covered through an HRA, you can also deduct that money for self-employment tax purposes.

Of course, these expenses are already deductible, but those deductions are limited.  Without an HRA, health insurance premiums are deductible for the self-employed whether or not they itemize deductions.  That applies only to income tax, though.  It does not reduce income for Social Security taxes (self-employment tax).  You still pay that tax on insurance premiums.

Once you establish an HRA for your spouse, though, Social Security taxes are eliminated for both employee and employer.

Medical Expense Tax Benefits for Sole Proprietors

Without an HRA, it’s true that medical expenses are tax deductible for self-employed people if they itemize deductions.  They can only write-off medical expenses when they exceed 10 percent of adjusted gross income this year, though.  Having an HRA allows you to deduct medical costs as a business expense independent of what percentage of adjusted gross income they may be.

To get these deductions, it may be worth only paying your spouse a salary if salaries for each of you aren’t in the budget.  Read more information about HRAs at www.HSAforAmerica.com/HRA.htm.

I have been in the health insurance business for over 12 years. I'm passionate about Health Savings Accounts and enjoy blogging about them. I am also a husband and father of 2 beautiful children.
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  • Rob

    This is so interesting. As a self employed person I had never looked at it this way. I think I need to hire my wife into the company to get some of these tax benefits hah. In all seriousness though I do know that one of the main tax advantages of running a sole proprietorship is that you can deduct the cost of health insurance for yourself, your spouse and any dependents. Do you know if I would still be able to deduct the cost of health insurance for my spouse if she was my employee as well?

  • Jim McFadden

    You are correct that a sole proprietor can deduct the cost of the insurance premiums from the federal tax return. The problem with taking that approach lies in the fact that you would still be paying FICA taxes (15%) on the funds used to pay your insurance premiums. Utilizing an HRA to reimburse these expenses through your business is the only way to truly make your premiums 100% tax free, including avoiding the FICA tax.

    If you were to make your wife an employee, and reimburse the insurance premiums from your business, then you would not be eligible to take the same deduction a second time on your personal tax returns. Being able to do so sounds like a great idea, but there is no legal way to take that deduction twice.

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