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Medical Copay as business expenses

I read recently that I could set up a simple employee benefit medical plan that would reimburse my wife and I for medical copays.  That would turn the copays into business expenses.  Is this true?  How does a person set up such a plan for his business.  It sounds like a self-insurance plan of some type.  Thanks.

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Accepted Solutions

Medical Copay as business expenses

If you are a sole proprietor, you cannot establish a Section 105 medical reimbursement plan solely for yourself and have your business reimburse you for out-of-pocket medical expenses on a tax-free basis— reimbursements are subject to state and federal income tax withholding.

However, if you can legitimately employ your spouse as a W-2 employee of your business, you can receive the benefit tax free. In this situation, the plan would be set up in your spouse’s name, and you would be listed as a dependent.

The key word here is “legitimately.” You can’t just put your spouse “on the books” to reap the tax advantages. Merely calling your spouse an “employee” is not sufficient. They must be a bona fide employee, meaning they must perform significant business duties and provide meaningful services to the business (part-time work, so long as it’s legitimate and non-trivial, counts). The IRS scrutinizes spousal employment, and you must be able to prove your spouse is actually a regular employee if the IRS comes knocking at your door.

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even if you can legitimately pay your spouse a salary, you must considered any additional costs.  the need to have a payroll file all required quarterly payroll tax returns pay at least Federal unemployment compensation taxes on the salary and maybe state payroll taxes as well. there may also be the need to carry workmen's compensation insurance. 

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I would suggest you sit down with a tax pro. perhaps electing S-Corporation status would be beneficial.  this may help in avoiding self-employment taxes on all the sole proprietorship's net earnings. salaries for owners  is required.  but not 100% so some of the earnings which would be taxed to the owners would escape the S.E tax. you are classified as an employee meaning an employee benefit plan could be set up.   but all this needs to be looked at by a tax pro to make sure it make sense economically

 

 

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2 Replies

Medical Copay as business expenses

If you are a sole proprietor, you cannot establish a Section 105 medical reimbursement plan solely for yourself and have your business reimburse you for out-of-pocket medical expenses on a tax-free basis— reimbursements are subject to state and federal income tax withholding.

However, if you can legitimately employ your spouse as a W-2 employee of your business, you can receive the benefit tax free. In this situation, the plan would be set up in your spouse’s name, and you would be listed as a dependent.

The key word here is “legitimately.” You can’t just put your spouse “on the books” to reap the tax advantages. Merely calling your spouse an “employee” is not sufficient. They must be a bona fide employee, meaning they must perform significant business duties and provide meaningful services to the business (part-time work, so long as it’s legitimate and non-trivial, counts). The IRS scrutinizes spousal employment, and you must be able to prove your spouse is actually a regular employee if the IRS comes knocking at your door.

******************************

even if you can legitimately pay your spouse a salary, you must considered any additional costs.  the need to have a payroll file all required quarterly payroll tax returns pay at least Federal unemployment compensation taxes on the salary and maybe state payroll taxes as well. there may also be the need to carry workmen's compensation insurance. 

******************************************

I would suggest you sit down with a tax pro. perhaps electing S-Corporation status would be beneficial.  this may help in avoiding self-employment taxes on all the sole proprietorship's net earnings. salaries for owners  is required.  but not 100% so some of the earnings which would be taxed to the owners would escape the S.E tax. you are classified as an employee meaning an employee benefit plan could be set up.   but all this needs to be looked at by a tax pro to make sure it make sense economically

 

 

Medical Copay as business expenses

Thanks very much.  That was an excellent answer.  I'll follow up with a tax pro as I'm trying to juggle a handful of eggs.

I'm and LLC, but you may be right about SCorp anyway.

I'm built like a roach, so my copays are painfully close to zero, but my wife has a chronic cancer, multiple myeloma, which means DEA schedule 2 palliative care and insurance tier 4+ meds.  She easily hits her insurance max every year for copay.

She also has zero income years in the last 30 years, so I've wondered whether I can employ her and replace some of the zero income years with positive income years and raise her social security benefit.  Since the 30 years are on the SSA website, a rough calculation of impact can be made - just not all the inflation fudge factors that SSA uses to calculate benefits.  Rough estimate.

A legitimate job is no problems, buy all the other cost impacts do have to be covered.  Thanks for the advice, especially about just tossing this whole bag into a tax expert's lap.

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