In this installment of “did you know”, I talk about how you can do something that will save you money on your taxes.
A little background on health insurance premiums and how most sole proprietor business owners deduct the premiums from their taxes. When a business owner completes their taxes (or has someone do it for them), the health insurance premiums are deducted on 1040. This allows the business to deduct the premiums regardless whether they itemize or not. This reduces your AGI, right? Yes, it does, but it does not remove your health insurance premium from your self employment tax calculation. The self employment tax is 15.3%. How would you like to be able to include your health insurance premium as a business expense so you can save 15% of your health insurance premium per year? In the end, it will come out less than that, but I wanted to get your attention without getting into too much detail. It actually comes out to 14.1% minus the cost of the HRA.
You are probably wondering… “Wait, this sounds too good to be true. What are you talking about?” As you know, our tax code is complicated and is constantly changing. Currently, if you are a sole proprietor, you can accomplish this by creating a HRA or Health Reimbursement Account. This is not a HSA. A HRA can be used to reimburse health insurance premiums (and other health costs) as a business expense. This means that your health insurance is deducted from your profit calculation on Schedule C and so the health insurance premium is deducted prior to the self employment tax calculation.
Ok, so let’s get down to the dollars and cents of the savings. First, if your insurance premium is not more than about $3000 per year, then this is probably not for you as the savings would be about zero. I am going to take a very low-cost insurance premium as the first example and then a more average example, both for a family of 4.
Premium: 6000 annual, $500 per month
Savings with HRA: about $440 per year
I won’t bore you with the details of the calculation, but know that it takes the cost of the HRA into account and the number will be slightly different depending on what tax bracket you are in. Also, your business needs to have at least the amount of your premium in profit in order to take full advantage of this. In other words, if you don’t have a profit, you aren’t paying self employment tax anyway. Let’s look at a more realistic example for current cost of a family of 4 plan.
Premium: 10000 annual, $833.33 per month
Savings: about $1000 per year
If you are still with me, the next statement and question is usually “sounds too good to be true” and “what kind of hoops do I have to jump through?” There is a company that I work with that takes care of all the details and makes this process very easy. Yes, there is a cost, but I have factored that into my savings calculations above.
Is it stupid that you need to jump through hoops to take advantage of this? Yes, but I didn’t write the tax code. I just want to help you take full advantage of what the tax code gives us. The HRA solution is the way to save money for you and your family for just a little bit of effort. Would you refinance your mortgage if it would save you $1000 a year? If so, please contact me so I can help you take advantage of this tool and start saving money. This will be much easier and less painful than refinancing your mortgage.
As always, more to come…