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.