SMALL BUSINESS TIPS
DEDUCT YOUR MEDICAL EXPENSES
BY HIRING YOUR SPOUSE
What Business Types Qualify?
This option is available to you if you operate your business as one of the following:
A sole proprietorship
A partnership (provided your spouse is not a partner in the business)
An LLC taxed as a sole proprietorship or partnership
A real estate rental business
A farm business
If your business is organized as an S-Corporation than this option will not be available to you.
While insurance premiums and out-of-pocket medical expenses can be deducted as itemized deductions, the limitations placed on those deductions make it difficult to realize any actual benefit. However, if you operate your own business, you may be able to get around these limitations by hiring your spouse and paying them through tax-free fringe benefits, including reimbursing them for medical expenses and insurance premiums.
How Does This Work?
Hire Your Spouse:
Your spouse needs to be operating as a real employee for the business, performing services at your direction that benefit the business. Your spouse should not be a co-owner of the business and should not have any title in the business assets or control over the business bank account. To substantiate their role as an employee your spouse should keep a timesheet to document the hours that they worked and the tasks that they completed.
Don’t Pay Cash Wages:
If you pay your spouse cash wages for working in your business you are simply moving money around without creating any tax savings. In fact, you are likely increasing your tax burden by converting qualified business income to non-qualified wage income. Instead of paying them cash wages you can compensate them through tax-free employee benefits which can provide you with a sizeable tax break and avoid the need to file payroll tax returns.
Establish a Medical Reimbursement Arrangement:
A medical reimbursement arrangement allows you to compensate your spouse for their work by reimbursing out-of-pocket medical expenses and health insurance premiums. This provides the business with tax-deductible compensation expenses and tax-free income to your spouse.
If your spouse is your only employee, you can easily establish a 105-HRA plan to reimburse them for their medical expenses by signing an agreement between yourself and your spouse. If you have additional employees you will need to establish an ICHRA plan, which has additional requirements. If you have multiple employees and want to establish a medical reimbursement arrangement, please reach out to us for more guidance.
To qualify the insurance premiums for reimbursement your spouse should purchase a health insurance plan in their name that covers the entire family (including you). Then you, as the employer, reimburse your spouse for the premiums. The reimbursement arrangement can also be used to reimburse your spouse for any out-of-pocket expenses that the insurance doesn’t cover, including deductibles, copays, and prescriptions for your entire family.
Pay a Reasonable Amount:
To make sure the employee benefits you pay your spouse can withstand IRS scrutiny, make sure that the amount they are compensated is reasonable for the work that they are performing. A good rule of thumb is not to compensate your spouse more than you would compensate someone else for those same services.
Consider Other Fringe Benefits:
While health insurance and medical expenses are typically the largest items you can provide to your spouse as employee benefits, there are other benefits that you may also be able to provide:
Education. You can reimburse your spouse for job-related education expenses
Life Insurance. You can provide your employees with up to $50,000 in group term life insurance coverage
Working Condition Fringe Benefits. You can reimburse your spouse employee for expenses that help them do their job. For example, you can reimburse the cost of a cell phone they use for work and they are not required to track how much of their phone use is for business.
Hiring your spouse to work for your business can provide some meaningful tax benefits by allowing you to deduct personal expenses that otherwise would not be deductible. To qualify for these deductions, you need to follow some simple guidelines:
make sure your spouse is operating as your bona fide employee
establish a formal medical reimbursement arrangement
compensate fairly for the services provided
If you would like assistance establishing a medical reimbursement plan for your spouse or other employees, please give us a call.