Maximize Tax-Free Health Benefits with Your Spouse as an Employee

If you run a sole proprietorship or a single-member LLC taxed as a proprietorship, and your spouse is your only eligible employee, you have a unique opportunity to reduce your tax liability while providing tax-free health insurance benefits. This strategy not only helps cover your family’s medical expenses but also offers significant tax advantages.

Key Tax Benefits

When you reimburse your spouse for health insurance and medical expenses, you can unlock up to four key tax benefits:

1. Tax-Free Benefit for Your Spouse: The reimbursements are considered a tax-free benefit, meaning your spouse won’t pay income tax on the amount received.
2. Avoid the $100-a-Day Penalty: Small businesses with just one employee can legally reimburse individual health insurance without triggering the Affordable Care Act’s $100-a-day penalty for non-compliance.
3. Business Deduction: Your business can deduct the full reimbursement as a business expense, reducing both your income and self-employment tax obligations.
4. Potential Premium Tax Credits: If your household income qualifies, your spouse may still be eligible for government subsidies on health insurance purchased through an exchange, even with the reimbursement plan in place.

How the Plan Works

To fully comply with IRS regulations and maximize these tax benefits, follow these steps:

• Draft a written reimbursement plan in accordance with IRS Regulation Section 1.105-11(b).
• Ensure the health plan covers you, your spouse, and your dependents as a family plan.
• Require your spouse to submit proof of medical expenses on a monthly basis.

This approach is straightforward and highly effective for sole proprietors with a spouse actively involved in the business. It allows you to reduce taxes while efficiently managing your family’s healthcare costs.

For help with all your tax planning and business management needs, contact Illumination Wealth today.