Sole Proprietorships are awesome because, well, you’re doing your own thing! However, it can get a little tricky because there’s no separation between you and your business in the eyes of the IRS (i.e., you’re a “pass-through entity” or “disregard entity”) and owners are generally not considered to be employees even if you’re working for your company full-time. This includes Sole Proprietorships and Single-Member LLCs that did not elect corporate taxation.
What is a sole proprietorship?
Sole-Proprietorships are unincorporated businesses owned and operated by one individual with no distinction between the business and owner.
In a nutshell: The sole proprietor is not an employee and will not qualify for ICHRA. But there's still tax-friendly options.
What’s the best tax strategy for health insurance if I’m a sole proprietor?
The best strategy for you depends on whether you have W-2 employees and your marital status (bet you didn’t expect that—we’ll explain). If you’re single and work by yourself, or if you have W-2 employees or plan to hire soon, your best course of action is going to be to take the self-employed deduction for yourself and set up an ICHRA for your W-2 employees. That will get all your employees’ expenses into the business expense category. Unfortunately, you can’t get your personal insurance and medical expenses categorized that way, but we can still save some tax money by getting all your self-employed deductions.
If you are a sole proprietor and work for yourself and have no plans to hire, and you are married, then we can explore a few more options. You probably already know that HRAs only work for employees.
Although as a proprietor you generally are not eligible for an HRA because you’re not an employee, your spouse can be an employee and eligible for an HRA and health plan that covers you.
Here’s the HRA strategy if you’re a sole proprietor with no employees and you’re married:
- Hire your spouse as a W-2 employee:
- Your spouse’s salary can just be the amount you want to reimburse through the HRA, but it must be a fair wage for what they are doing (i.e., you can’t reimburse $100k through an HRA if your spouse is not actually doing that much work)
- It’s a good idea to have an employment contract and time sheet for record-keeping purposes
- Make your spouse the primary member on your family health plan
- Cover yourself as a dependent on your spouse’s major medical health plan
- Set up a One-Person 105 HRA, ICHRA, or QSEHRA for your spouse:
- Choose the One-Person 105 option if you have significant medical expenses or have other employees that are only excludable under the One-Person 105 rules (see Pro-Tip in the One-Person 105 HRA section above); the One-Person 105 HRA meets the HRA discrimination requirements because your spouse is the only eligible employee
- Choose QSEHRA if you have health expenses that are less than the QSEHRA reimbursement limit ($10,600 as of 2019) or have other employees that are excludable under the QSEHRA regulations so that your spouse is the only eligible employee for the QSEHRA (see the Reimbursement Rules section of our QSEHRA Guide)
- Choose an ICHRA if the reimbursement limits of QSEHRA are too restricting. There is no limits on ICHRA contributions.
- Save all your medical bills and records and have your company reimburse the bills each month from a separate account
This strategy only works if you don’t hire any other W-2 employees that would be eligible for either ICHRA, QSEHRA or a One-Person 105 HRA (make sure to look at those rules closely) and assumes that you and your spouse don’t own any other businesses that have employees (common ownership rules would likely apply and the plan would fail to meet Section 105 requirements). You’ll need to keep good records, too. This sounds like a loop-hole and it is, but it’s held up in tax court. The main case was Shellito v. Commissioner.
HRA ownership next steps
As always, we recommend that you speak with your CPA before making a decision about your benefits. To dive into more detail on HRAs, check out our small business tax strategy guide or our super popular post addressing the most commonly asked questions about the individual coverage HRA: our ICHRA FAQs.
A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.