Sometimes, it just makes sense for husband and wife to work together. It can be less complicated and easier for the whole family especially if they are in related industries. A husband-wife flow-through LLC can be a great setup. In one family, the husband runs the LLC, while they are both members. The wife is a real estate professional who pays her through the LLC. This income is reported on 1099 each year. This can be beneficial or detrimental. Some questions that might arise in this situation include:
- Would a husband-wife LLC benefit from Section 105?
- If not, what type of entity would work better?
- Can a 105 plan cover a full year?
- If the couple has an HSA (Health Savings Account), will the 105-HRA provide any tax savings?
A husband-and-wife team may benefit more from forming a sole proprietorship and setting up a 105. It’s not difficult to do, and there may be some nice benefits.
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Making the 105 Plan Work
A section 105 plan will not benefit spouses who are in a husband-wife partnership. You can make it work. In order to do that, one spouse needs to operate as a sole proprietorship and the other spouse as their sole employee. It’s possible that a husband-wife team has this in place but is not aware that they have a proprietorship. A husband-wife partnership is one of the worst options for a business entity since it would not help provide them with tax savings.
How to Turn a Husband-Wife Partnership into a Sole Proprietorship
There is a simple way to change your LLC to a sole proprietorship easily. If you live in a community property state, simpy file your tax return as a sole proprietorship. You can select that on Schedule C of Form 1040. Then you can enroll in the 105-HRA.
One problem you may run into is that the 105-HRA might not reimburse medical expenses that occurred prior to the date the 105-HRA began to exist or the date an employee first enrolled in the 105-HRA. That means the husband and wife need to get the 105-HRA in place as soon as possible to reap the benefits as soon as possible.
Can an HSA be Combined with an HRA?
Be cautious if you are trying to combine an HSA with a 105-HRA. Generally, an HSA isn’t compatible with a Section 105 plan. However, if you have a health plan with high deductibles there are no problems with using a Section 105 plan to pay for medical expenses.
Final Thoughts on a Husband-Wife LLC
If you are looking for tax savings, a husband-wife LLC is not a good option since it is taxed as a partnership. However, the partnership is easily turned into a sole proprietorship by filling out a Schedule C on your next tax return. If your husband-wife business is a sole proprietorship, a Section 105-HRA can provide significant tax savings. For those who already have an HSA, you can use it along with a Section 105-HRA. However, if you want to make sure of both health plan options you will need to carefully follow all the recommended guidelines.
