Health insurance a deductable expense?

Discussion in 'Professional Trading' started by Toonces, Nov 7, 2007.

  1. Toonces


    I used to use Robert Green for my accounting, and from what I understood from him, setting up a corporation allows one to deduct health insurance through payroll, thus reducing your net tax liability. But...,,id=157049,00.html

    Reading through this IRS article, it appears that the opposite is can deduct your insurance if you are a sole proprietor, but if you have an S Corporation and the insurance is in your name (not the corporation's), you cannot deduct it.

    My new accountant told me that you can deduct insurance through payroll, but that you had to add that same amount back to your W-2...which would essentially be a wash, so it's pointless.

    I don't get this...I was told I couldn't deduct health insurance as a sole proprietor, but it appears that I could have, and now that I have an S Corp, I'm definitely not allowed.
  2. Fwiw, it has been a couple years but as a sole prop ,what worked best for myself was - I leased myself and employees through an employee leasing co. Basically I leased myself to the co and they in turn leased me to me as a sole prop. I deducted admin, health everything against my taxes and had to claim as income my w-2 was what I paid myself (and tax on profits of course). But it worked out quite well and is quite simple from a bookkeeping perspective.
  3. lindq


    A self-employed person, trader or otherwise, can deduct health insurance.
  4. All sole proprietors (Schedule C) with net income, other than non-exchange member traders, have "earned income" and therefore owe SE tax and can contribute to a retirement plan.

    Business traders report expenses on Schedule C, but capital gains on Schedule D and IRC 475 MTM ordinary trading gains on Form 4797 Part II.

    Business traders don't have earned income, unless they are a member of an options or futures exchange (IRC 1402i).

    Traders can form an S-Corp and pay themselves compensation which is earned income.

    If the S-Corp pays the health insurance premium for a more than 2% owner, the S-Corp adds the insurance amount to the shareholder/owner's compensation payment; thereby giving the S-Corp the insurance deduction.

    On the shareholder's individual return, they have this higher compensation income (in miscellaneous income) and offset it with an AGI deduction for the health insurance; netting out to zero on those two items.

    But the net effect is the health insurance deduction is taken on Schedule E from the S-Corp K-1. So the health insurance deduction is fully taken.

    It's just a little confusing with the IRS rules.
  5. most of that is right except the se tax, if you trade full-time you don't pay se tax
  6. As Green says, that only applies to "non-exchange members."

    Exchange members, on the other hand, are required by the IRS to pay SE tax.

    Fortunately the bulk of the SE tax only applies to the first $94K in earnings.
  7. Yes, my post indicated that business traders (who are not members of options and futures exchanges) do not owe SE tax on trading profits.
  8. I can't believe you are debating Robert Green on taxes for traders. Its like debating Joe Torre on baseball.

    Robert Green has been specializing in traders taxes for years. He's a pro. Its his biz!