Tax

If you are self-employed and buy your own health insurance, you may have noticed fine print on the application stating that the policy is not employer-sponsored and that you will not deduct the premiums on your tax return. 

That language can be alarming, but it does not take away your tax deduction.

The statement exists because Affordable Care Act rules penalize employers that improperly pay employees’ individual insurance premiums. It is an insurance rule about who sponsors the coverage, not a tax rule, and an insurance application cannot override the tax code.

Here is how the deduction actually works:

• If you’re a sole proprietor or a partner, you are not an employee of the business. You buy the policy as an individual and deduct the premiums on your Form 1040.
• If you are an S corporation owner (more than 2 percent), have the corporation pay or reimburse the premium and report it as W-2 wages. You then deduct it on your Form 1040. For health insurance purposes, the tax code treats you as a partner.

The following rules really can limit your self-employed health insurance deduction:

• The deduction cannot exceed your net earnings from the business. A loss year, or a zero S corporation salary, means no deduction.
• No deduction is allowed for any month you, your spouse, a dependent, or your child under age 27 is eligible for a subsidized employer plan, even if you or they decline that employer coverage.
• The deduction reduces income tax, not self-employment tax.

If you want to discuss the self-employed health insurance deduction, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 13, 2026

If you own an S corporation and work in the business, the IRS expects you to pay yourself a reasonable salary before taking the rest of your profits as distributions. 

With wages subject to a combined 15.3 percent payroll tax up to the $184,500 Social Security wage base in 2026, it is tempting to keep that salary low or skip it entirely. That strategy carries real risk.

When the IRS finds a salary too low, it can recharacterize your distributions as wages and collect the payroll taxes your S corporation should have paid, plus interest and penalties. 

The IRS takes this issue seriously enough to pursue return preparers too. In one case reported by tax attorney Eric L. Green, the IRS assessed a CPA $130,000 in preparer penalties because 13 of his S corporation clients took little or no salary, even though he had urged the clients for years to pay themselves properly.

In that audit, the IRS agent repeatedly asked for a written report justifying the salary. That report is your best protection too. We recommend that you do the following:

• Set your salary before year-end, based on the work you actually perform.
• Obtain a written reasonable compensation report that documents how you arrived at the figure.
• Keep the report with your corporate records.

This report does not guarantee a win, but it answers the first question an auditor will ask: Where’s the evidence?

If you want to discuss reasonable compensation, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 9, 2026

If your business has employees, or soon will, now is a good time to review your retirement plan options for 2026.

Check If Your State Requires a Plan

Fifteen states now require employers to either sponsor a qualifying plan or enroll workers in a state-run program. California and Oregon apply the rule to employers with just one W-2 employee. Penalties commonly run $100 to $250 per employee per year. 

The rules follow where your employees work, so a single remote hire can trigger the obligation. Even if you already have a plan, you may need to register your exemption on the state portal to avoid penalty notices.

A Good Plan Does Not Require a Big Company

Options range from a basic SEP-IRA or SIMPLE IRA to a safe-harbor 401(k) with profit sharing, which allows up to $72,000 per participant in 2026. Standard features such as Social Security integration and cross-testing can direct more of the employer contribution to owners. 

A cash balance (defined benefit) plan can produce much larger deductions for owners who are older than their staff.

Federal Tax Credits Can Cover Much of the Cost of a New Plan

Small employers that begin new plans may claim credits for startup and administration costs as well as employer contributions. There’s also a tax credit for all plans that add automatic enrollment.

If you operate as an S corporation, remember that you base your contributions on your W-2 wages, not distributions. A low salary saves payroll tax but also caps what you can save for retirement.

If you want to discuss retirement plans, please call me directly at 408-778-9651.

• By Leon Clinton
• October 7, 2026