Watson CPA Group - Knowledgebase

Knowledgebase

Sole Proprietors and Single Member LLCs

Article ID: 237
Last updated: 24 Oct, 2014
Revision: 4
print  Print
share  Share
comment  Add comment
Views: 0
Comments: 0

By Jason Watson ()
Posted September 2, 2014

As you know, single-member LLCs are disregarded entities meaning that the IRS views them as a sole proprietors. Each state might recognize the difference, but for health care purposes and illustration, we will follow the IRS perspective.

As a sole proprietor you do not earn a salary. There is not a W-2 issued to you. Therefore you take the self-employed health insurance premium tax deduction on Line 29 of Form 1040. But this is not always ideal or the most elegant because of self-employment taxes. Huh? Let’s go to the numbers-

Premiums 10,000
Net Business Income 100,000
     
No HRA With HRA
Form 1040 Schedule C
Net Business Income 100,000 90,000
SE Tax Deduction (50%) 7,650 6,885
Health Insurance Deduction 10,000 0
Adjusted Gross Income 82,350 83,115
     
SE Taxes 15,300 13,770
Income Taxes 16,444 16,635
Total Taxes Paid 31,744 30,405
     
Savings (Real? Yes, real money) 1,339

There’s a lot of moving parts here. But two things to note- you pay slightly higher income taxes deducting the premiums on Schedule C, but you pay significantly lower self-employment taxes. If you have $15,000 in premiums, the savings is $2,008. Again, real money in your pocket.

What’s the catch? With the IRS there’s always a catch. To do this, you must adopt a Section 105 Health Reimbursement Arrangement (HRA), and as mentioned earlier the annual administrative cost is $400. Yet, the benefits exceed the costs. Economists love that scenario and you should too.

As a reminder, if you have an HRA you can lump a bunch more medical expenses including long-term care premiums as deductions to your business. So, the $90,000 figure you see above under Schedule C would decrease, and Yes, your savings would therefore increase. Beauty!

One thing to note. You must have enough business income to cover the cost of the premiums, otherwise they are limited.

Taxpayer's Comprehensive Guide to LLCs and S Corps
This KB article is an excerpt from our book which is available in paperback from Amazon, as a free PDF from us, and as an eBook for Kindle, Apple iBook, Barnes and Noble Nook, among others. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

www.watsoncpagroup.com/book

This article was:   Helpful | Not helpful Report an issue


Prev     Next
One Person Show or Husband-Wife Team, S Corporation       Multiple Employees