POSSIBLE BUSINESS BENEFITS FOR SOLE PROPRIETORS
As a sole proprietor, there are a number of tax
deductible fringe benefits that can reduce income and self-employment taxes.
Some of these benefits are available to partnerships and LLCs, but most are not
available to S corporations. In the case of a married sole proprietor,
especially one with children, these benefits can be substantial, with only a
nominal amount of additional effort required. Correct implementation and
documentation are critical to making these benefits pass IRS scrutiny, so tax
advice should be obtained before implementing and of the items outlined below.
Also, since all employees need to be covered, these programs are not generally
applicable if the business has other employees due to the cost. Some of the
areas that might be considered are outlined below.
MEDICAL INSURANCE PLAN.
It is possible to make the payment of medical and dental
insurance plan premiums for a sole proprietor’s family deductible as a business
expense, a pre-tax benefit. The sole proprietor employs his/her spouse to
provide services to the business and pays the spouse a salary based upon the
services performed. As an employee benefit, the business provides medical
insurance, which could include dental and vision insurance, to all employees of
the company and the coverage includes the family of the employee. Since the
sole proprietor is a family member of the spouse, the premiums of the sole
proprietor then become a tax deductible expense to the business.
MEDICAL EXPENSE REIMBURSEMENT PLAN.
It is possible to reimburse the spouse of a sole
proprietor for all medical and dental expenses incurred by the spouse and the
spouse’s family (including the sole owner/owner) as a deductible expense to the
business, a pre-tax benefit. In addition to the medical insurance plan outlined
above, a sole proprietor can offer a medical expense reimbursement plan to the
employee whereby the employer reimburses the employee for all medical, dental,
and vision costs not covered by the medical insurance policy for the employee
and the employee’s family. Again, this creates a tax deductible expense to the
business. There need to be some caution exercised in the limit on the amount of
the reimbursement so the combination of the salary and the medical reimbursement
equates to a reasonable salary for the services rendered by the spouse.
DEPENDENT CARE ASSISTANCE EXPENSE REIMBURSEMENT PLAN.
It is possible to reimburse the spouse of a sole
proprietor for all child care expenses paid as a deductible expense to the
business, a pre-tax benefit. A sole proprietor can offer a dependent care
reimbursement plan to its employees, including a spouse. The plan reimburses
the employee for dependent care costs incurred for a child or for a parent, as
allowed by the IRS guidelines. The typical use of this program is for day care
costs while the employee/spouse is working for the sole proprietor.
It is possible for a sole proprietor to establish a
retirement plan and make tax deductible contributions to the plan for a spouse,
a pre-tax benefit. Under a SEP plan, a SIMPLE plan, or a Keogh plan, the sole
proprietor can deduct the amounts contributed by the business to the retirement
plan on behalf of the employee/spouse. These amounts are limited based upon the
wages paid to the spouse. Under a SIMPLE plan, the spouse can also contribute
on a pre-tax basis to increase the funds going into the retirement plan.
LIFE INSURANCE POLICY OF UP TO $50,000.
It is possible for a sole proprietor to pay the insurance
premiums on a life insurance policy of up to $50,000 on a spouse as a deductible
expense, a pre-tax benefit. A sole proprietor can provide company paid life
insurance of up to $50,000 on each employee, and the cost is tax deductible with
no income to the employee for the premiums paid.
EMPLOYMENT OF YOUR CHILD IF UNDER 18 YEARS OF AGE.
A sole proprietor can engage the service of his/her child
under age 18, pay the child a tax deductible wage, pay no employment taxes on
the wages, and the child does not have to pay income taxes on the wages. The
wages need to be paid for work actually performed by the child for the business,
payments need to be actually made to the child, wages must be reasonable in
relationship to the services rendered, and records need to be maintained. This
is one of the better income-shifting tax strategies. As an example, a sole
proprietor parent in the 39.6% tax bracket pays his/her child $6,300 for
services rendered, saving $2,495 in federal income taxes. The child puts $2,000
of the earnings in a tax-deductible IRA, and has no income tax on the entire
$6,300 received. And, you may still be able to claim the child as a dependent.
REIMBURSE THE SPOUSE FOR AUTO EXPENSES.
A sole proprietor can reimburse an employee/spouse or
employee/child for mileage driven on company business at the rate of $.345 per
mile. The sole proprietor can deduct the payment as a business expense and the
spouse/employee does not have to report any income.
TRAVEL EXPENSES OF SPOUSE.
A sole proprietor can deduct the travel expenses of a
spouse or dependent child if the spouse or child is an employee of the sole
proprietor, travel is for a bona fide business purpose.
PARTNERSHIPS AND LLCs.
If a partnership or LLC employs the spouse of a partner
or manager, such as is done by a sole proprietorship, then the entity can
utilize the tax deductible benefits for Medical Insurance Plan, Medical Expense
Reimbursement Plans, Dependent Care Assistance Expense Reimbursement Plan,
Retirement Plans, and Life Insurance Policy of up to $50,000.
The above plans and programs are frequently subject to IRS scrutiny.
Extra care needs to be taken in the initial implementation of any of the plans
as well as the ongoing documentation of any of the plans. Proper implementation
and documentation can reap substantial tax savings, so the efforts are well