Health insurance can be an important part of how you pay yourself as a business owner. When your premiums are set up correctly through payroll, you can generally deduct them on your personal tax return. This article covers how to get covered, why premiums run through payroll, and what to do if something's missing.
This article is for S Corp tier members. If you're on the LLC tier, you don't run payroll for yourself, so this setup doesn't apply to you.
Get covered through Solo Health
If you don't already have a plan, Collective's partnership with Solo Health is the fastest way to get covered and have it set up correctly from day one. Solo Health offers nationwide PPO coverage built for solopreneurs, with pricing that's typically lower than what you'd find on your state marketplace. Plans include:
- Deductible options of $2,500, $5,000, or $10,000
- Coverage on the Multiplan PHCS network
- A $100 annual credit from Collective toward your premium once you've been enrolled for four months
When you sign up through Collective, we set up your premium on your payroll automatically, so you don't need to send us anything separately. To get a quote:
- In your Collective dashboard, go to the Insurance tab.
- Select Health Insurance.
- Sign up through the link there. You need to use this link to be eligible for the $100 credit.
For more on coverage, tax treatment, and claims, see Collective's Partnership with Solo Health for Affordable Healthcare.
Why health insurance runs through payroll
If you own more than 2% of your S Corp, as most sole owners do, the IRS has specific rules for how your health insurance premiums are handled:
- Your S Corp pays or reimburses your premiums and can deduct them as a business expense.
- The premiums are added to your W-2 as wages, so they're subject to income tax withholding.
- They generally aren't subject to Social Security, Medicare, or federal unemployment tax, as long as the plan covers all employees, or a class of employees, and their dependents.
On your W-2, this means the premiums appear in Box 1 (wages) but not in Boxes 3 and 5 (Social Security and Medicare wages). Reporting them this way is what generally lets you take the self-employed health insurance deduction on your personal return.
Your plan should be purchased through a government health insurance marketplace, through an insurance broker in your name, or through a provider like Solo Health. COBRA premiums follow slightly different rules, covered below.
Set up your health insurance in Gusto
If you signed up through Solo Health via Collective, this is handled for you. For any other plan, including COBRA coverage that meets the requirements below:
- Mark that you have health insurance during payroll setup.
- Within 2 business days, our team will ask for your monthly premium, the date coverage started, the plan type (medical, dental, or vision), and the carrier.
- We'll add your premiums to your payroll as a benefit your S Corp offers.
If you've already finished payroll setup, reach out to your Collective team with those details.
Pay your premiums
Pay your insurance provider directly from your business checking account or business credit card. Gusto doesn't send payments to insurance providers, so these payments are up to you. In your books, categorize each payment as Payroll Liabilities.
How premiums show up in your books
Your Gusto payroll data syncs to your Collective books automatically. Each premium is recorded in two places:
- As an expense on your Profit and Loss statement
- As an amount owed under Payroll Liabilities on your Balance Sheet
When you pay the premium from your business account and it's categorized as Payroll Liabilities, that payment clears the balance owed.
COBRA premiums
COBRA premiums can qualify for the self-employed health insurance deduction, but only if they're set up correctly through your S Corp's payroll. If your S Corp pays your COBRA premiums directly, or reimburses you promptly, and reports them on your W-2 the same way as other premiums, you can generally deduct that amount on your personal return.
A few things can limit the deduction:
- You, or your spouse, can't be eligible for coverage through another employer's plan.
- Your deduction can't be more than your W-2 wages from your S Corp.
- You can't also claim the ACA Premium Tax Credit for the same coverage.
Let your Collective team know as soon as you start paying or being reimbursed for COBRA premiums, so they're reported correctly on your W-2.
Healthcare sharing ministries
Payments to a healthcare sharing ministry aren't eligible for the self-employed health insurance deduction, and they shouldn't be run through payroll in Gusto. The IRS doesn't treat these plans as health insurance. Regulations proposed in 2020 would have changed that, but they were never finalized.
Premiums missing from Gusto
If you've paid premiums that aren't in Gusto, reach out to your Collective team with the months you've paid and the amounts, and we'll make any updates or corrections. Add premiums for earlier months before year-end so they're included on your W-2.
If you have questions about your coverage or how it's set up, reach out to your Collective team through your dashboard. They're here to help.
Disclaimer: The information contained in this article is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.