Eric Tyson - Small Business Taxes For Dummies

You can buy many health plans through agents, and you can also buy some directly from the insurer. When health insurance is sold both ways, buying through an agent usually doesn’t cost more.

Solicit proposals from the larger and older health insurers in your area. Larger plans can negotiate better rates from providers, and older plans are more likely to be here tomorrow. Nationally, Aetna, Anthem, Assurant, Blue Cross, Blue Shield, CIGNA, Kaiser Permanente, and UnitedHealth Group are among the older and bigger health insurers.

Also check with professional or other associations that you belong to, because plans offered by these groups sometimes provide decent benefits at a competitive price because of the purchasing-power clout that they possess. A competent independent insurance agent who specializes in health insurance can help you find insurers that are willing to offer you coverage.

Health insurance agents have a conflict of interest that’s common to all financial salespeople working on commission: The higher the premium plan they sell you, the bigger the commission they earn. So an agent may try to steer you into higher-cost plans and avoid suggesting some of the strategies I discuss in the following section for reducing your cost of coverage. (Good agents can help guide you to the best plans that cover preexisting conditions and offer the lowest costs for your medications. Be sure to provide them with this information and compare options carefully.)

Regarding out-of-pocket medical expenses, you can offer a flexible spending or healthcare reimbursement account. These accounts enable employees to pay for uncovered medical expenses with pretax dollars. The business saves on payroll taxes for the amounts deferred into these accounts. Employees can also use these accounts to pay for vision and dental care.

Be forewarned of the major stumbling blocks you face when saving through medical reimbursement accounts:

First, you need to elect to save money from your paycheck prior to the beginning of each plan year. The only exception is at the time of a “life change,” such as a family member’s death, marriage, spouse’s job change, divorce, or the birth of a child.

You also need to use the money within the year you save it because these accounts contain a “use it or lose it” feature (you have through two and one-half months of the end of the calendar year to spend that year’s money).

Health savings accounts (HSAs) are another option, especially for the self-employed and people who work for smaller firms. Employers with fewer than 50 employees can offer HSAs.

To qualify for an HSA, you must have a high-deductible (for 2021, at least $1,400 for individuals and $2,800 for families) health insurance policy. Then you can put money earmarked for medical expenses into an investment account that offers the tax benefits — deductible contributions and tax-deferred compounding — of a retirement account. And unlike a flexible spending account, you don’t have to deplete the HSA by the end of the year: Money can compound tax-deferred inside the HSA for years. Begin to investigate an HSA through insurers offering health plans you’re interested in or with the company you currently have coverage through.

Finally, you may be able to save on taxes if you have a substantial amount of healthcare expenditures in a year. You can deduct medical and dental expenses as an itemized deduction on Schedule A of IRS Form 1040 (see Chapter 9) to the extent that they exceed 7.5 percent of your adjusted gross income for those under age 65. Unless you’re a low-income earner, you need to have substantial expenses, usually caused by an accident or major illness, to take advantage of this tax break.

Companies can offer lots of other benefits to their employees. Here are the highlights of some other commonly considered ones:

Dependent care: Reimbursed costs for the care of kids under the age of 13 are tax-deductible to the business and a tax-free benefit for employees for up to $5,000 for a married couple filing jointly and $2,500 for others. Note that this is separate from the dependent care tax credit available on your federal tax forms.

Long-term-care insurance: As with the dependent care benefit, a business can provide long-term-care (LTC) insurance and deduct the cost of providing it, and the benefit is tax-free to the employee. Alternatively, individuals can pay for the cost of an LTC policy themselves and deduct the cost as an itemized deduction on Schedule A of their personal income tax return.

Group term life insurance: So long as a company has at least ten covered employees, it can deduct the cost of a provided term life policy, and the benefit is tax-free to employees for up to $50,000 of coverage.

Educational expense reimbursement: Educational costs that are directly related to an employee’s job may be deducted if paid by the business, and the benefit is tax-free to the employee.

Auto costs: You can write off the costs of using your car for certain business purposes, and a small business can deduct certain costs as well. Turn to Chapter 8for the details.

Meals: When a company provides food on-site, it can deduct all costs and provide a tax-free benefit to employees, subject to certain criteria being met. For example, if employees are working late or lack sufficient time to get their own food, the business may pay for the cost of a meal. The company can deduct snack costs and have a cafeteria that provides food at cost so long as the employees themselves pay for the actual cost of the food. Meals covered at restaurants by the business are only 50 percent deductible for tax purposes. To help the hard-hit restaurant industry struggling to recover from the COVID-19 government-mandated closures, for tax years 2021 and 2022, business meals provided by restaurants are 100 percent deductible for purchases from restaurants from which meals are available for immediate consumption.

Travel and hotels: These expenses are deductible for the company when the travel and hotel stays are primarily for business purposes (meal expenses on such trips are 50 percent deductible). That’s not to say that you can’t enjoy yourself on a trip and do non-work, fun stuff, but the primary purpose of the trip should be business, not pleasure.

Dues for civic organizations, small-business organizations, and trade associations: If you pay fees to join your local chamber of commerce, other civic clubs, or trade associations relevant to your business, these costs are deductible.

For more information on benefits and how they work from a tax standpoint, see IRS Publication 15-B, “Employer’s Tax Guide to Fringe Benefits.”

A variety of insurance and related benefits are tax-deductible to corporations for all employees. These benefits include

Health insurance

Disability insurance

Term life insurance (up to $50,000 in benefits per employee)

Dependent care plans (up to $5,000 per employee may be put away on a tax-deductible basis for childcare and/or care for elderly parents)