Another Misinformed Tax Pro about Husband & Wife Business

June --

My husband has been self employed architect since 1991.

Since its inception, we have had a small business health insurance plan NOT INDIV with me as one employee.

Each year I issue a small paycheck to myself for my bookkeeping services and pay payroll taxes on it. The cost of the premiums has always been deducted as a business expense a NOT PERSONAL DEDUCTION.

For reasons unknown to me, our accountant of 3-4 years abruptly declined to list our health insurance as a business expense this year although nothing has changed. He just said that unless my W2 equals the annual premium, then forget it. I do not wish to change the way I file my health insurance after 15 years? What gives?

Rosemary & Michael
Culpeper, VA


Rosemary --

"What gives" is that your accountant was doing it wrong for 3 or 4 years and didn't want to tell you.

Often health insurance plans will call a spousal assistant an employee. However, just because you have a group health insurance policy that treats you as an employee does not make you an employee.

You cannot deduct health insurance premiums from business income unless that health insurance is provided by the business for a legitimate employee.

Here's how it works:
Husband [or wife, doesn't matter] has a sole proprietorship. Wife is made an employee via the registration and filing of all federal and state employment forms. Wife is paid by check or direct deposit from the husband's business.

Husband sets up health plan benefits for his employee. It's called a Plan 105. This must be formally done. You can get more info on Section 105 from BizPLan at http://www.tasconline.com/products/bizplan/ or I can give you the person to contact. [I have no quid pro quo on this arrangement.] There is also a lot of information on my blog in the category payroll -- spouse as employee .

Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.

If your accountant hasn't told you all this -- in greater detail than I can do here -- or does not say he will research and get back to you -- then fire him and get a new accountant!

1/2/11: A new regulation is in effect regarding the deductibility of health insurance premiums by all self-employed. This deduction is not for spousal employees only. So be sure to talk with your tax pro about this.

Best,
June

JW Revised 1/2/11