Self Employed HSA Options2 min read • January 29, 2019
We all have healthcare costs, whether we have a 9 to 5 position or are self-employed. For those who are self-employed, you may want to consider enrolling in a Health Savings Account (HSA) to help save for future healthcare costs.
Health Savings Accounts (HSAs) have several advantages such as tax-deferred savings and tax-free withdrawals on qualifying medical expenses. In 2019, individuals can contribute a maximum of $3,500 to an HSA. If you are over 55, you can add an extra $1,000 in “catch up contributions.”
What is a Health Savings Account?
A Health Savings Account (HSA) is an individually owned, tax-advantaged medical savings account, available to those enrolled in high-deductible health plans. HSA funds can be used to pay for qualifying medical expenses without federal tax liability or penalty. Funds deposited into an HSA are not subject to federal income tax and the funds roll over year to year if not used.
There are a few unique things about having a HSA while self-employed, let’s explore those.
You must be enrolled in an high deductible health plan (HDHP)
In order to enroll in an HSA, you must have a high deductible health plan (HDHP). You can use resources such as Healthcare.gov to find and enroll in a plan. It’s vital to make sure the plan you choose is HSA – eligible, as not all plans are.
To participate in an HSA, there are a few criteria you’ll need to meet:
- You do not have other medical coverage such as Medicaid, Medicare or FSA coverage through your spouse’s plan.
- Enrolled in an HSA-qualified high deductible health insurance plan
Sole proprietorship and HSA contributions
As a sole proprietor, you file taxes on your personal tax return. Because of this, you’re treated as though you make HSA contributions on your own and you can deduct some of the contributions on your personal income tax return.
HSAs work similarly for sole proprietors as they do for traditional employees. There are a couple of differences to note. First, you cannot contribute more than your net income from self- employment to an HSA. Next, unlike traditional employees who can contribute to an HSA on a pre-tax basis, sole proprietors contribute after-tax dollars to their HSAs and then do a line item deduction on their Schedule C. This can get confusing, so it’s best to consult a tax professional to make sure you are doing everything right.
LLCs and HSA contributions
If you are a single member LLC, you’ll treat an HSA much the same as if a sole proprietor. If your LLC has employees, things will be different. You may be able to implement a plan that will allow your employees to make pre-tax contributions, known as a “cafeteria” or “125” plan.
One drawback to HSAs with LLCs is that the owner cannot participate. The owner can contribute after-tax dollars that will be included on their personal taxes. The owner and/or partners can take a deduction on their personal tax return, but keep in mind the HSA contributions will reduce your adjusted gross income. Also, like a sole proprietor, you can only claim the deduction when you make a profit.
HSAs are an excellent way to save for healthcare costs. If you are self-employed, consider opening one to help pay for qualified medical expenses.