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Section 105 Medical Reimbursement

This plan has been around for some time but it is not well known.  It can be very exciting though. Below is listed some rules that must be adhered to.  What it does is the business, (your business) can pay for all medical expenses that are not covered by insurance, including some over the counter medicines, and be fully deductible on the Schedule C.  For more information go to TASC.  I am working on finding more plan administrators for this.

Here is a scenario to show you how it works:

Betty is a consultant for Tupperware.  She has a net profit of $50,000 a year.  Because she did not have the Section 105 Medical Reimbursement plan, she deducts the cost of doctors and prescription an Schedule A of $7,000.  But because of her income and her Spouse's income she can not use any of it.

Net income $50,000
Self Employment tax = $7,650

Now if Betty had this plan in place and hired her spouse to help her with her  business and shows the scenario changes.  She pays him for 20 hours a week each week.  She does not have to pay Unemployment taxes for her spouse, but she does pay Social Security and Medicare.  She pays him a total for the year of $20,000.  She paid a bookkeeper $45 a month to help her with employment taxes.  She paid the Plan Administrator $195 a year for the plan.

Net income = $50,000  
Payroll = $20,000
Bookkeeping = $540
Plan Administrator = $195
Covered Medical Expenses = $7,000
Deductible Employment Taxes = $153
New Net Income = $22,112
New Self Employment Taxes = $3383

So Betty saved $4267 in Self Employment tax, plus she was able to deduct the $7,000 medical expense that she could not deduct on her 1040.  Also she will be able to deduct more medical because it cover over the counter medical also.

There are strict rules however so please be aware of them.