Learn How Your Business Can Pay for Your Insurance and Medical Expenses

If you are self-employed, your income is subject to acan write off your health insurance premiums on your
15.3% self-employment FICA tax. Added to a 28%1040, saving you Federal income taxes. But, you are
Federal income tax and a 5% state income tax, thisstill subject to FICA and state income taxes for these
could leave you paying nearly 50% of your income toexpenses. You are not able to write off any of the
the government. Fortunately, most self-employedother expenses listed above.
people qualify to set up an HRA or HealthUsing an HRA with a Health Savings Account
Reimbursement Arrangement. An HRA can enableSome financial advisors do not realize that you can
your business to reimburse you for health insurancehave an HRA along with a Health Savings Account
and out-of-pocket medical expenses, and will save(HSA). You can of course. The only caveat is that the
you an extra $3,000 each year.HRA cannot reimburse for expenses that could apply
Health Reimbursement Arrangements for thetoward the deductible of the HSA, such as doctor
Self-Employedvisits or prescription drugs. But, it can cover any
A Health Reimbursement Arrangement is simply aninsurance premiums and preventive care.
agreement which enables your business to coverThe potential savings are substantial. Let's assume a
employee's medical expenses, including individual healthbusiness owner is in a 28% tax bracket, has an HSA
insurance premiums, as a tax-free fringe benefit. Thisplan, and is incurring the following expenses.
tax benefit was established in Section 105 of the IRS- Health insurance premiums - $7,000
tax code in 1955, when General Electric lobbied for a- Preventive expenses - $1,000
business reimbursement rule to give it more flexibility in- Other insurance - $2,000
creating employee benefits.The self-employed business owner can write off the
Anyone set up as an S-corp or C-corp qualifies to set$7,000 premium on Federal income taxes, saving 28%
up an HRA. If you are a Schedule C or Schedule Fof that or $1,960. If the HSA is fully funded, an
sole proprietor, an HRA is allowed if your spouse canadditional $1,582 will be saved off of Federal income
work at least part time in the business. You will betaxes and $282.50 from state income taxes. So, in
setting up an employee benefits package that coverstotal, the business owner's taxes will go down by
health insurance premiums, disability insurance$3,824.50.
premiums, long-term care premiums, and evenOnce an HRA is set up, the entire $10,000 in expenses
out-of-pocket medical expenses such as dentallisted above can be reimbursed by the business. So,
coverage.the business owner would be saving a total of $2,800
An HRA makes your taxes go down because whenfrom Federal income taxes, $500 from state income
you get to write off medical expenses on yourtaxes, and $1,530 in self-employment taxes. The
Schedule C, you avoid paying Federal income taxes,business owner will also get to take advantage of the
state income taxes, and the 15.3% FICAsame $1,960 in HSA tax savings, for a total tax
self-employment tax. Not only can the businessreduction of $6,790.
reimburse you for the cost of health insuranceSmart business owners take advantage of all the tax
premiums, but you can also set up the HRA todeductions for which they qualify. You can reimburse
reimburse for dental coverage, preventive care,health insurance expenses from the beginning of the
disability insurance, long-term care insurance, and otheryear, but out-of-pocket expenses only from the date
out-of-pocket medical expenses.your HRA begins.
If you are self-employed but do not have an HRA, you