Owner-employees may be able to take advantage of similar benefits, but only if they do some extra planning for their business. As usual, the business must have a formal medical plan in writing. Rules for LLCs will follow the business structure they have elected for tax purposes.
When you own a regular C-corporation, as an employee of your corporation you are entitled to all the benefits described above. However, remember, you must be on payroll to qualify for employee benefits. Don’t short-change yourself by taking draws instead of payroll. Not only do you lose the right to all these benefits, you will also face IRS penalties for not taking wages or salaries.
S-corporations cannot offer benefits to shareholders who own 2% or more of the company. There are a whole host of restrictions when it comes to shareholders, and the spouses of shareholders. However, IRS Revenue Ruling 91-26 allows the S-corporation to pay health-insurance premiums for shareholder-employees, as long as the premiums are added to wages. The employees may deduct those premiums on their personal tax returns as self-employed health insurance.
Partnerships and sole proprietorships (Schedule C) may only deduct medical expenses on their business return if the owner hires his/her spouse. The spouse cannot just be on payroll in name only. Many business owners and tax-deduction promoters have gotten into deep trouble for this practice. The spouse must actually work for the business (keep time cards or other proof of employment). The business can provide full family health insurance and medical reimbursements to the spouse-employee.
