Strategies for Small Businesses and Sole Proprietors to Save Money on Taxes -Part 6 of 10
Health care costs are no joke for small business owners and sole proprietors—they can be one of the biggest line items on your expense sheet. But here’s the good news: there are smart tax-saving strategies out there that can make those costs sting a little less. If you know where to look and how to leverage health care deductions, you can cut down your taxable income and make health coverage more affordable for yourself, your team, and your family. Let’s break down how you can make the tax code work for you when it comes to health care.
1. The Self-Employed Health Insurance Deduction
This is the golden ticket for sole proprietors and small business owners. The Self-Employed Health Insurance Deduction lets you knock 100% of the health insurance premiums you pay for yourself, your spouse, and your dependents right off your gross income. And since it’s an “above-the-line” deduction, it directly lowers your Adjusted Gross Income (AGI), which is huge.
The Fine Print:
- You need to be self-employed—either a sole proprietor, a partner, or an S corporation owner.
- No double-dipping. If you or your spouse has access to an employer-subsidized health plan, you’re out of luck.
- You can’t deduct more than your net business income.
Quick Tax Savings Example: If you’re a sole proprietor paying $15,000 in health insurance premiums and your business pulls in $50,000, you can deduct that full $15,000. That takes your taxable income down to $35,000 and lowers your AGI, possibly unlocking other credits and deductions in the process.
2. Health Savings Accounts (HSAs)
If you’ve got a high-deductible health plan (HDHP), it’s time to get cozy with Health Savings Accounts (HSAs). Why? Because they offer a triple tax advantage that’s hard to beat: contributions are tax-deductible, the funds grow tax-free, and you don’t pay taxes when you use them for qualified medical expenses.
Key Benefits:
- Contribution Limits for 2024: $4,150 for individuals, $8,300 for families, and an extra $1,000 if you’re 55+.
- Long-Term Savings: Unlike FSAs, your HSA funds roll over every year, so you’re building a nice nest egg for future medical expenses—or even retirement.
Example: Contribute $8,300 to your family’s HSA in 2024, and that’s $8,300 less on your taxable income. Plus, you’ve got a tax-free stash to handle medical expenses, from doctor visits to prescriptions.
3. Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
If you’re running a business with fewer than 50 full-time employees, QSEHRA might be your ticket to offering health benefits without breaking the bank. It lets you reimburse your employees for health insurance premiums and qualified medical expenses, all while giving your business a sweet tax deduction.
How It Works:
- You set a monthly allowance, and employees submit receipts to get reimbursed.
- Employees need to prove they have qualified health insurance coverage.
Tax Perks:
- Those reimbursements are tax-deductible for your business.
- Employees get reimbursed tax-free, making their health coverage easier to afford.
Example: You decide to offer a $300 monthly QSEHRA allowance to each of your 10 employees, adding up to $3,000 per employee per year. That’s $30,000 in total, fully deductible, and tax-free for your team.
4. Health Reimbursement Arrangement (HRA)
HRAs are another option for providing tax-free reimbursements for medical expenses, funded by you, the employer. Unlike QSEHRAs, HRAs don’t have size restrictions, so they can work for larger small businesses too.
HRA Benefits:
- Total control over reimbursement limits.
- Tax-deductible reimbursements that lower your business’s taxable income.
Types to Consider:
- Individual Coverage HRA (ICHRA): Reimburses employees for individual insurance and medical expenses.
- Group Coverage HRA: Supplements a group health plan, covering extra out-of-pocket costs.
Example: You set up an ICHRA with a $400 monthly limit. Employees can use these funds for premiums or out-of-pocket expenses. Your business deducts these reimbursements, keeping more money in your pocket come tax time.
5. Long-Term Care Insurance Deductions
If you’re self-employed, don’t overlook long-term care insurance deductions. The older you are, the more you can deduct. This deduction is above the line, so it directly reduces your AGI.
2024 Deduction Limits:
- Age 40 or under: $480
- Age 41-50: $890
- Age 51-60: $1,780
- Age 61-70: $4,770
- Age 71+: $5,960
6. Group Health Insurance Deductions
Offering group health insurance to your employees? Good call. Those premiums are 100% tax-deductible. Plus, offering health coverage is a strong recruiting tool, helping you keep talented employees while shaving down your taxable income.
Bonus: Small Business Health Care Tax Credit If you’ve got fewer than 25 employees with an average wage under $61,400, you might qualify for a tax credit worth up to 50% of your premium costs.
Example: Covering $50,000 in annual health insurance premiums for 15 employees? This credit could slash that cost by up to $25,000.
7. Deductions for Business-Related Medical Expenses
Some medical expenses can qualify as business deductions if they’re related to your line of work. Think health exams required for certifications or jobs that need specialized health checks.
Examples:
- Occupational Exams: A mandatory medical exam for your commercial driver’s license? Deductible.
- Safety Gear: First aid kits and other business-essential safety supplies? Also deductible.
8. Stay Organized to Maximize Deductions
All these strategies are great, but they only work if you stay organized. Keep every receipt, use accounting software to track expenses, and don’t skimp on documentation. And when in doubt, get a tax pro involved. They’ll make sure you’re not leaving money on the table or inadvertently crossing any IRS lines.
Pro Tip: Staying up-to-date on tax regulations is crucial. Health care tax laws can change, and you don’t want to miss out on new opportunities (or get blindsided by new rules).
Conclusion
Health care costs don’t have to drain your business’s resources. From the Self-Employed Health Insurance Deduction to HRAs and HSAs, there are plenty of ways to take advantage of tax-saving opportunities. Use these strategies, stay organized, and consult with a tax pro to make sure you’re maximizing every deduction you can. The result? More money stays in your business where it belongs, helping you grow and thrive.
