Sunstone Blog

Tax law headlines can feel like driving in fog—big promises, low visibility. Let’s look at practical markers that help you navigate what the IRS rules actually provide for tips and overtime, how employers report it, and what employees should look for each year.

First, the key clarification: this is not a full “exclusion” from income

For federal purposes, H.R. 1, the landmark tax bill passed 4 July 2025 created new deductions for qualified tips and qualified overtime compensation, generally available for tax years 2025 through 2028.

That means:

• The income is generally still earned and reported, but you may get an above-the-line deduction if you qualify.
• Payroll taxes (Social Security/Medicare) are a separate topic; “no tax” headlines can be misleading. The IRS explicitly frames “no tax on overtime” as a deduction overtime and tip income is still subject to income and payroll taxes in general.

Part 1 — Rules for 2025 tax returns (filed in 2026)

1. Tips (2025)

What qualifies

For 2025, the deduction is for “qualified tips” as defined in new IRC §224 and related guidance:

• Cash tips, including tips paid in cash or charged, and (for employees) tips received under tip-sharing arrangements.
• Tips must be voluntary (not negotiated; no consequence for nonpayment).
• Tips must be earned in an occupation that customarily and regularly received tips on or before December 31, 2024—Treasury/IRS published proposed guidance listing eligible occupations.

Limits and phaseouts

• Max deduction: $25,000/year
• Phaseout begins once MAGI exceeds $150,000 ($300,000 joint)
• Not allowed if married filing separately (MFS).
• The taxpayer must include their SSN on the return to claim it.

1. Overtime (2025)

What qualifies

For 2025, the “qualified overtime compensation” deduction is narrowly aimed at the overtime premium portion required under the Fair Labor Standards Act (FLSA)—the amount over the regular rate (think: the “half” in “time-and-a-half”).

Limits and phaseouts

• Max deduction: $12,500 per return ($25,000 if MFJ)
• Phaseout begins once MAGI exceeds $150,000 ($300,000 joint)

1. How employers can report (and what changes in 2025)

2025 is explicitly treated as a transition year for reporting

The IRS recognized that Forms W-2 and 1099 for 2025 would not be updated for the new OBBBA tip/overtime reporting. The IRS therefore treats tax year 2025 as a transition period and provided penalty relief for certain “missing/incorrect” new data items.

What that means in practice for 2025 employers/payors:

• You generally keep issuing W-2s and 1099s under existing systems.
• You are encouraged (but not required for the 2025 penalty relief) to provide employees/payees with:
  • separate accounting of cash tips and occupation codes for tipped occupations, and
  • (to the extent possible) better detail on overtime premium amounts, so workers can claim deductions accurately.

2025 penalty relief (why it matters)

For tax year 2025, Notice 2025-62 provides relief from certain penalties for not separately reporting the new required details (including separate accounting and occupation information for tips, and separate breakout of qualified overtime items), so long as the payer otherwise files and furnishes complete/correct returns under the pre-update framework.

1. What employees should look for in 2025 reporting

Because 2025 W-2/1099 forms generally won’t have new dedicated boxes/fields yet, the most important “sunstone” is your records:

• Pay stubs showing tips and/or overtime premium calculations
• Tip reports submitted to employer (if applicable)
• Year-end summaries from employer payroll portal (if provided)
• Any separate statement from employer showing:
  • total cash tips and your tipped occupation code, and/or
  • qualified overtime premium totals

Separately, IRS guidance for individuals (Notice 2025-69) lays out how taxpayers can determine/claim the amounts for 2025 and explains the statutory limits and definitions used for the deductions.

Part 2 — Rules for 2026 and forward (under current law)

1. The deductions still apply—through 2028 (unless extended)

As of now, the IRS describes these as deductions available for 2025 through 2028. So when we say “2026 and forward,” read that as:

• 2026–2028: deductions continue under the enacted statute and guidance framework.
• 2029 and later: currently not covered unless Congress extends or revises the law.

1. The big change in 2026+: reporting becomes structured (forms updated)

The statutory design is that employers and other payors will provide separate reporting of:

• qualified overtime compensation totals on employee statements (via new information reporting requirements tied to IRC §6051).
• For tips, the law adds requirements across multiple reporting regimes to separately account for cash tips and include the worker’s tipped occupation (for different payer types).

The IRS has also explicitly signaled that TY 2026 will include changes to how tips and overtime pay are reported as forms/guidance are updated.

1. What employers should expect to do in 2026+

In plain English, employers/payors should be prepared for:

• payroll system updates that can compute and track “qualified overtime compensation” (the premium portion required under FLSA), and
• mechanisms to separately account for cash tips and retain the worker’s eligible tipped occupation classification, consistent with Treasury’s list and IRS guidance.

1. What employees should look for starting in 2026

Starting with 2026 reporting, employees should expect clearer year-end documentation that:

• explicitly shows qualified overtime compensation totals, and
• provides better separation of cash tips and the relevant tipped-occupation classification (depending on how the final forms/boxes are implemented).

In other words: the fog should lift. The system is meant to move from “track it yourself” (2025) to “it’s shown on your year-end tax documents” (2026+).

Practical takeaways

If you’re an employer (2025)

• Treat 2025 as a transition year, but begin capturing the data you’ll need for 2026 reporting.
• Consider providing employees a year-end supplemental statement (portal download or letter) listing:
  • cash tips totals and occupation code
  • qualified overtime premium totals

If you’re an employee (2025)

• Don’t wait for a “magic box” on your W-2—keep paystubs and tip/overtime records.
• If your employer offers an end-of-year breakdown, save it with your tax file.

For 2026–2028

• Expect more standardized reporting and fewer “manual math” moments, because the statutory framework is aimed at separate reporting on payer statements.

Let’s talk about a tax reporting form people tend to forget about, the 1099-G.

“G” in this case stands for “Government” (the full name is Certain Government Payments) and the form is used to report to the IRS payments made by a government entity to a taxpayer. You as the taxpayer get copied on it.

The key takeaway here is the IRS will know about these payments to you, so you really should report them on your tax return as needed – don’t ignore them.

Many states nowadays make these available online rather than mailing them to you. So, go onto your favorite search engine and do a search using the state you reside in and “online individual tax account” and set up your account now if you haven’t already.

In Connecticut, you can find that account here: https://portal.ct.gov/drs/myconnect/myconnect

These online accounts (including the federal one here https://www.irs.gov/payments/online-account-for-individuals) are useful for seeing balances owed, making payments, and checking correspondence from the authorities.

As tax filing time grows ever nearer, you should go ahead and register for your online account and be ready to retrieve any 1099-Gs issued to you (the deadline for government entities to furnish you a copy is January 31). In many cases, a state’s online account is the only way to get your 1099-G in a timely manner.

Here’s a list of the payments that may trigger a 1099-G filing:

• Payment of unemployment benefits (By the way, these are taxable at the federal level and often also the state level).
• State or local tax refunds (could be taxable at the federal level)
• Government grants and assistance payments (like disaster relief, taxable business or individual assistance and other state/local grants)
• Agricultural program payments
• Market gain from certain specialized investment programs
• Reemployment Trade Adjustment Assistance (RTAA)

We’re here to help at Sunstone Bookkeeping and Tax Solutions, so give a shout if you need us: info@sunstonebookkeping.com.

 

We know the holiday season is not the time when you want to think about taxes, but the filing season is coming and some of your last chances to make a difference expire on New Year’s Eve.

There were some big changes in federal taxes for 2025. Our guides to HR 1 can help you out. 

With a little preparation, you can avoid last-minute stress and even discover opportunities to save money. Here’s a guide to help you get organized and understand what to expect in the months ahead.

Key Steps to Take Before Year-End

1. Review Your Income and Deductions

Make sure you have accounted for all your business expenses in the past year! Review those bank and credit card statements and pull those receipts out of your bag, wallet, or desk drawer.

If you think you can itemize for your personal return, pull together all your medical expenses, charitable deductions, and local and state tax bills.

If you spent money on child care so that you could work, get a statement from the provider.

2. Maximize Contributions to Tax-Advantaged Accounts

Contribute to your 401(k), IRA, or Health Savings Account (HSA). For 2024, the 401(k) contribution limit is \$23,500 (plus \$7,500 if you’re over 50), and the IRA limit is \$7,000 (plus \$1,000 catch-up for those 50+). HSAs allow contributions up to \$4,300 for individuals and \$8,850 for families. You have until 15 April 2025 to make these contributions and allocate them to 2024.

3. Review Your Withholdings and Estimated Payments

If you’ve had significant changes in income, double-check that your withholdings and/or quarterly estimated payments are on track to avoid penalties. The IRS Tax Withholding Estimator is a great tool.

4. Organize Your Records

Gather in one place all receipts and documents related to deductions, such as charitable donations, medical expenses, or business expenses if you’re self-employed. Pay attention to informational notices that’ll be coming to you soon in the mail or email (see the list at the end of this article). Keep digital or physical copies in one place for easy access; we recommend finding a secure, cloud-based option for storing those records to avoid accidental loss.

Certain credits that involve dependents (like the Head of Household status, the Earned Income Credit, and Child Tax Credit) or education require due diligence by your preparer. Get ahead of the game by gathering the required documents like school and medical records.

5. Pull Those Letters Out of the Drawer

If you received letters from the IRS or your state tax authority, stuck them in a drawer, and “forgot”; now’s a good time to find them. Those problems do not cure themselves.

6. Schedule Time With a Tax Professional

An early in the tax season meeting with a tax pro can help you identify last-minute strategies to reduce your tax liability and plan for the upcoming year. Get an early estimate calculated if you can, it might save you a painful realization when you file.

Tax Documents You’ll Receive in the New Year

The IRS requires many organizations to provide tax forms by specific deadlines. You can expect these in your physical or virtual mailbox soon, so be vigilant. There is a growing trend for these records to be provided electronically in a portal and you’ll get an email notifying, so be careful to read incoming emails and check your spam filter for the next month or so. You’ll need these records to prepare your tax return and the tax authorities get a copy; failure to report such income is a quick way to get an underreporting penalty.

Here’s a list of common documents you might expect:

– Form W-2: Provided by employers to report wages, tips, and other compensation. Deadline: January 31.

– Form 1099-DA: The NEW ONE! This is for reporting digital asset transactions. Note it may not include your cost basis for the assets not other important information. Pay attention to this one early.

– Form 1099-NEC: For non-employee compensation (e.g., freelancers, contractors). Deadline: January 31.

– Form 1099-MISC: For other types of income like rent or prizes. Deadline: January 31.

– Form 1099-INT: Reports interest income from banks or financial institutions. Deadline: January 31.

– Form 1099-DIV: Reports dividends and distributions. Deadline: January 31.

– Form 1099-B: Details stock sales and other investment transactions. Deadline: February 15.

– Form 1098: Provided by lenders to report mortgage interest paid. Deadline: January 31.

– Form 1095-A/B/C: Related to health insurance coverage through the Marketplace or employer. Deadline: January 31. Important for the Premium Tax Credit and Self-Employed Health Insurance Deduction.

– Schedule K-1: For income from partnerships, S-corporations, or trusts. Deadline: March 15, though it may arrive later.

Final Thoughts

Taking proactive steps now can save you time and reduce stress as tax season approaches. By organizing your records, maximizing deductions, and understanding the documents you’ll need, you’ll be well-prepared to file your taxes accurately and efficiently.

If you’re unsure where to start or have questions about your unique tax situation, reach out to a tax professional. A little effort now can make a big difference when it’s time to hit “submit” on your return!

The IRS has introduced Form 1099-DA to improve reporting of digital asset transactions, starting with the 2026 tax filing season (for the 2025 tax year). If you’ve bought, sold, or exchanged cryptocurrency or other digital assets, this new form may soon show up in your mailbox—or inbox.

What Will Be Included
Form 1099-DA is designed to capture gross proceeds from the sale or exchange of digital assets. Brokers and trading platforms will be required to issue it, similar to how stock sales are reported on Form 1099-B. Expect to see:

-Basic identifying information about you and the broker.
-Details of the digital asset sold (e.g., type of coin or token).
-Dates of acquisition and sale (if available).
-The gross proceeds of the sale.

What May Not Be Included
It’s important to note that Form 1099-DA may not provide your cost basis (what you originally paid for the asset). Without this, the form alone may not show your taxable gain or loss—just the proceeds. Additionally:

-Transfers between your own wallets may not be reported.
-Income from mining, staking, or airdrops will still be reported elsewhere (e.g., Form 1099-MISC).

When to Expect It
Brokers will need to provide a statement reflecting the information reported to the IRS on Form 1099-DA to taxpayers by Feb. 17.

Decentralized Finance (DeFi) brokers and some foreign brokers are not required to file a Form 1099-DA with the IRS or furnish a statement to taxpayers showing their digital asset transaction(s). Taxpayers should understand their tax obligations whether or not they received a statement showing all taxable digital asset activities.

What You Should Do

-Keep good records of digital asset purchases, transfers, and sales. – including cost basis, dates, and transaction fees.
-Compare your own records with the 1099-DA once you receive it, since missing information can affect your reported gains or losses.
-Use crypto tax software or a professional if you trade frequently or across multiple platforms.

If you need help getting ready, give us a call! We do suggest sooner-rather-than-later if you have a complex digital asset trading history.

We’ve received a lot of questions about how tax legislation might evolve under the incoming administration. While we expect a lot of Congressional noise about tax policy this coming year, we have no real confidence about what, if anything, will get passed.

What we do know is that there are major provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire after tax year 2025 unless Congress takes action.

Below is a list of specific provisions affecting individual taxpayers and small businesses that will go away if not renewed. We can’t think of a single client of ours who won’t be impacted if that happens, so we’ll be monitoring Congressional activity throughout the year and updating our clients on the outlook.

The exact impacts of each of these will vary according to your specific situation, please contact us if you’d like detailed calculations or specific examples for these provisions.

Individual Taxpayer Provisions

1. Lower Individual Income Tax Rates
   • The reduced rates for individual tax brackets will revert to pre-TCJA levels.
2. Increased Standard Deduction
   • The nearly doubled standard deduction will return to lower amounts (e.g., approximately $6,500 for individuals and $13,000 for married couples filing jointly from the current $15,000 and $30,000 respectively).
3. Child Tax Credit Expansion
   • The credit amount will decrease from $2,000 to $1,000 per qualifying child.
   • The refundable portion of the credit will also be reduced.
4. State and Local Tax (SALT) Deduction Cap
   • The $10,000 cap on SALT deductions will expire, potentially reinstating the ability to fully deduct these taxes.
5. Elimination of Personal Exemptions
   • The suspension of personal exemptions will end, restoring the deduction.
6. Limitation on Mortgage Interest Deduction
   • The deduction limit will revert to $1,000,000 of mortgage debt versus $750,000 under the TCJA.
7. Medical Expense Deduction Threshold
   • The threshold for deducting medical expenses will return to 10% of adjusted gross income (AGI), up from the current 7.5%.
8. Lower Alternative Minimum Tax (AMT) Exemptions
   • The increased AMT exemption amounts for individuals will expire.
9. Qualified Business Income (QBI) Deduction (Section 199A)
   • The 20% deduction for pass-through business income will no longer be available.
10. Expanded Estate and Gift Tax Exemption

• The estate and gift tax exemption will drop from approximately $13 million per individual to around $5.5 million (adjusted for inflation).

Small Business Provisions

1. Bonus Depreciation (100%)
   • The ability to deduct 100% of the cost of qualified property in the first year will phase out after 2022, with complete expiration after 2026.
2. Simplified Accounting Methods for Small Businesses
   • Businesses with gross receipts under $25 million will lose eligibility for simplified methods, such as cash accounting and inventory accounting exceptions.
3. Increased Section 179 Expensing Limits
   • The higher limits for immediate expensing of qualified assets (up to $1.16 million in 2023) will revert to pre-TCJA levels.
4. Net Operating Loss (NOL) Limitations
   • The favorable rules for carrying forward NOLs without a 20-year limit and deducting up to 80% of taxable income will change.
5. Deduction for Entertainment Expenses
   • The disallowance of deductions for entertainment expenses may revert, potentially restoring prior rules.

We note that pre-TCJA amounts are before potential inflation adjustments.

As a new year begins, it’s a great time to get ahead of your taxes and set yourself up for a smoother filing season. With a little preparation, you can avoid last-minute stress and even uncover opportunities to save money. Here’s a guide to help you get organized and understand what to expect in the months ahead.

Key Steps to Take Before Year-End

1. Review Your Income and Deductions

Make sure you have accounted for all your business expenses in the past year! Review those bank and credit card statements and pull those receipts out of your bag, wallet, or desk drawer.

If you think you can itemize for your personal return, pull together all your medical expenses, charitable deductions, and local and state tax bills.

If you spent money on child care so that you could work, get a statement from the provider.

2. Maximize Contributions to Tax-Advantaged Accounts

Contribute to your 401(k), IRA, or Health Savings Account (HSA). For 2024, the 401(k) contribution limit is \$23,000 (plus \$7,500 if you’re over 50), and the IRA limit is \$7,000 (plus \$1,000 catch-up for those 50+). HSAs allow contributions up to \$3,850 for individuals and \$7,750 for families. You have until 15 April 2025 to make these contributions and allocate them to 2024.

3. Review Your Withholdings and Estimated Payments

If you’ve had significant changes in income, double-check that your withholdings and/or quarterly estimated payments are on track to avoid penalties. The IRS Tax Withholding Estimator is a great tool.

4. Organize Your Records

Gather in one place all receipts and documents related to deductions, such as charitable donations, medical expenses, or business expenses if you’re self-employed. Pay attention to informational notices that’ll be coming to you soon in the mail or email (see the list at the end of this article). Keep digital or physical copies in one place for easy access; we recommend finding a secure, cloud-based option for storing those records to avoid accidental loss.

Certain credits that involve dependents (like the Head of Household status, the Earned Income Credit, and Child Tax Credit) or education require due diligence by your preparer. Get ahead of the game by gathering the required documents like school and medical records.

5. Pull Those Letters Out of the Drawer

If you received letters from the IRS or your state tax authority, stuck them in a drawer, and “forgot”; now’s a good time to find them. Those problems do not cure themselves.

6. Schedule Time With a Tax Professional

An early in the tax season meeting with a tax pro can help you identify last-minute strategies to reduce your tax liability and plan for the upcoming year. Get an early estimate calculated if you can, it might save you a painful realization when you file.

Tax Documents You’ll Receive in the New Year

The IRS requires many organizations to provide tax forms by specific deadlines. You can expect these in your physical or virtual mailbox soon, so be vigilant. There is a growing trend for these records to be provided electronically in a portal and you’ll get an email notifying, so be careful to read incoming emails and check your spam filter for the next month or so. You’ll need these records to prepare your tax return and the tax authorities get a copy; failure to report such income is a quick way to get an underreporting penalty.

Here’s a list of common documents you might expect:

– Form W-2: Provided by employers to report wages, tips, and other compensation. Deadline: January 31.

– Form 1099-NEC: For non-employee compensation (e.g., freelancers, contractors). Deadline: January 31.

– Form 1099-MISC: For other types of income like rent or prizes. Deadline: January 31.

– Form 1099-INT: Reports interest income from banks or financial institutions. Deadline: January 31.

– Form 1099-DIV: Reports dividends and distributions. Deadline: January 31.

– Form 1099-B: Details stock sales and other investment transactions. Deadline: February 15.

– Form 1098: Provided by lenders to report mortgage interest paid. Deadline: January 31.

– Form 1095-A/B/C: Related to health insurance coverage through the Marketplace or employer. Deadline: January 31. Important for the Premium Tax Credit and Self-Employed Health Insurance Deduction.

– Schedule K-1: For income from partnerships, S-corporations, or trusts. Deadline: March 15, though it may arrive later.

Final Thoughts

Taking proactive steps now can save you time and reduce stress as tax season approaches. By organizing your records, maximizing deductions, and understanding the documents you’ll need, you’ll be well-prepared to file your taxes accurately and efficiently.

If you’re unsure where to start or have questions about your unique tax situation, reach out to a tax professional. A little effort now can make a big difference when it’s time to hit “submit” on your return!

For S-corporation owner-employees, health insurance premiums offer potential tax advantages, though the rules differ from other business structures. If you’re an S-corp shareholder who owns more than 2% of the company, here’s what you should know to make the most of your health insurance expenses.

As a reminder, the open enrollment period for health insurance launched November 1, 2024, and concludes January 15, 2025. You can enroll in, renew, or change your health insurance plans through the Affordable Care Act (ACA) marketplace or your state’s exchange after comparing plans for one that fits your needs best.

This is the third of a series of articles we are publishing regarding tax implications related to health insurance for individuals and small businesses.

1. Deducting Health Insurance Premiums

S-corporation owner-employees can deduct health insurance premiums, but the process involves several steps. The S-corp must pay the premiums directly or reimburse the owner-employee, recording these payments as wages on the owner’s W-2. These wages are then subject to income tax but not to Social Security and Medicare taxes.

Once the health insurance premiums are reported as income, the owner-employee can take an “above-the-line” deduction on their personal tax return, which reduces adjusted gross income (AGI). This deduction is only available if the S-corp had a net profit, meaning the deduction can’t exceed business income.

2. Health Insurance and Eligibility for Other Benefits

If you qualify for other tax-advantaged health benefits, such as Health Savings Account (HSA) contributions, keep in mind that health coverage from the S-corp must align with IRS requirements. For example, to contribute to an HSA, the S-corp owner-employee must have a high-deductible health plan (HDHP), as required for HSA eligibility.

3. ACA Premium Tax Credit

Owner-employees may not qualify for the Premium Tax Credit (PTC) on health plans purchased through the Health Insurance Marketplace, as the S-corp health insurance deduction reduces the PTC. It’s essential to consider this when choosing a health insurance plan, especially if other family members are included on the policy.

4. Spousal and Family Coverage

If an owner-employee’s spouse or family members work for the S-corp, their health insurance premiums may also be eligible for this deduction. The same rules apply: premiums must be paid by the S-corp and reported as wages to the employee-family member, and they must meet the AGI and net profit limitations.

Important Considerations

For S-corp owner-employees, balancing health insurance expenses with tax efficiency requires careful planning. Open enrollment is an ideal time to ensure your coverage aligns with these tax rules. Consulting a tax professional can provide personalized insights, especially for those balancing multiple tax considerations within the S-corp structure.

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a valuable option for small businesses looking to provide healthcare benefits to employees in a cost-effective, flexible way. Designed specifically for companies with fewer than 50 full-time employees, a QSEHRA allows employers to reimburse employees tax-free for health insurance premiums and other qualifying medical expenses. Here’s a closer look at the benefits, requirements, and extensive list of covered expenses that make QSEHRA a strong choice for small businesses.

This is the second in a series of articles we are publishing regarding tax implications related to health insurance for individuals and small businesses.

As a reminder, the open enrollment period for health insurance launched November 1, 2024, and concludes January 15, 2025.

Benefits of Offering a QSEHRA

1. Cost Control: Unlike traditional group health insurance, where premium costs can fluctuate and increase, a QSEHRA gives employers the ability to set a defined budget, providing full control over healthcare spending.
2. Tax Advantages: QSEHRA reimbursements are tax-free for both employers and employees, provided employees have minimum essential coverage (MEC). Employers also benefit from a tax deduction on these contributions, making it a win-win for both sides.
3. Employee Flexibility: With a QSEHRA, employees can select the health insurance plan that best meets their needs and budget. This personalization enhances employee satisfaction, as they can tailor their health benefits to fit their unique healthcare circumstances and family requirements.

Requirements for Establishing a QSEHRA

To offer a QSEHRA, businesses must meet certain requirements as outlined by the IRS:

– Size Limitation: Only employers with fewer than 50 full-time employees can offer a QSEHRA.

– No Group Health Plan: Employers offering a QSEHRA cannot provide a separate group health plan to any employees. The QSEHRA is intended as an alternative for small businesses that do not offer group health insurance.

– Employee Coverage Requirement: Employees must have minimum essential coverage (MEC) to receive QSEHRA reimbursements tax-free. If an employee lacks MEC, any reimbursements are treated as taxable income and must be reported on their tax return.

How the QSEHRA Works

1. Set a Budget and Define Reimbursement Limits: Employers decide how much they wish to offer in reimbursements, with annual IRS-set limits. For 2024, the maximum reimbursement amounts are around $5,850 for individual employees and $11,800 for families (2025 limits are $6,350 and $12,800 respectively). Employers have the flexibility to set limits below these maximums based on their budget.
2. Employee Submission of Expenses: Employees pay for eligible health expenses out-of-pocket, then submit documentation to the employer for reimbursement. Eligible expenses encompass a broad spectrum of healthcare costs, providing extensive coverage and flexibility.
3. Tax-Free Reimbursement: As long as employees have MEC, QSEHRA reimbursements are tax-free for them, with no need to report the reimbursement as income. Employers benefit from a tax deduction on these reimbursements, enhancing the overall tax efficiency of the arrangement.

Extensive List of Eligible Expenses

One of the standout features of a QSEHRA is the broad range of health expenses it covers, providing employees with a flexible benefit that can be tailored to their healthcare needs. This extensive list includes more than just insurance premiums and helps employees manage various out-of-pocket costs. Some of the main categories of eligible expenses include:

– Health Insurance Premiums: Premiums for individual health policies, COBRA, and even Medicare are covered, making QSEHRA funds versatile across different coverage needs.

– Out-of-Pocket Medical Costs: Reimbursements can be applied toward co-pays, deductibles, and other costs for doctor visits, hospital stays, surgeries, and lab tests.

– Prescription Medications and Insulin: Both prescription drugs and insulin are eligible, which can be a significant relief for employees managing ongoing medication costs.

– Dental and Vision Care: Dental expenses, including exams, cleanings, braces, and dentures, as well as vision costs like eye exams, glasses, and contact lenses, are covered. This is especially valuable as these areas are often excluded from standard health insurance.

– Mental Health Services: QSEHRA reimbursements can cover therapy sessions, psychiatric services, and other mental health treatments, aligning with the growing focus on mental wellness in the workplace.

– Medical Equipment and Supplies: Eligible expenses include items such as crutches, hearing aids, bandages, and durable medical equipment like wheelchairs, offering support for various health needs.

– Over-the-Counter (OTC) Health Products: Following recent updates, many OTC products are also covered. Eligible items include common medications (e.g., pain relievers, allergy medications), health aids (e.g., first-aid kits, thermometers, blood pressure monitors), and feminine hygiene products (e.g., tampons, pads). This feature makes QSEHRA funds useful for day-to-day healthcare needs, not just major medical expenses.

Additional Rules and Considerations

– Impact on Premium Tax Credit: Employees who are eligible for a Premium Tax Credit (PTC) through the Health Insurance Marketplace may see an adjustment if they receive QSEHRA reimbursements. The amount of QSEHRA reimbursement reduces the PTC since employees cannot receive full benefits from both.

– Annual Reporting: Employers are required to report the QSEHRA amount on employees’ W-2 forms each year, ensuring compliance with IRS rules and transparency for both parties.

– Communication Requirements: Employers must provide employees with a written notice about the QSEHRA each year, including the annual reimbursement limit and a reminder that MEC is required to receive tax-free reimbursements.

QSEHRA vs. Group Health Insurance

For small businesses, a QSEHRA can be an ideal solution, offering healthcare benefits without the administrative and financial burdens of traditional group health insurance. With a QSEHRA, employers set a defined benefit amount, giving them control over costs while providing employees with greater choice and flexibility in their healthcare decisions.

Is a QSEHRA Right for Your Business?

A QSEHRA can be a smart choice if you’re a small business owner who wants to offer healthcare support to employees without committing to the cost and complexity of a group health plan. It’s especially appealing for companies that value flexibility, budget control, and a customizable approach to healthcare benefits. Consulting a benefits advisor or tax professional can help ensure you’re setting up and managing a QSEHRA in a compliant, strategic way tailored to your business needs.

With the health insurance open enrollment period underway, it’s time to review your health insurance options and understand the potential tax benefits associated with your healthcare coverage. Health insurance expenses can impact your taxes in several ways, and taking advantage of available deductions, credits, and employer arrangements can help you save.

As a reminder, the open enrollment period launched November 1, 2024, and concludes January 15, 2025. You can enroll in, renew, or change your health insurance plans through the Affordable Care Act (ACA) marketplace or your state’s exchange after comparing plans for one that fits your needs best.

This is the first of a series of articles we are publishing regarding tax implications related to health insurance for individuals and small businesses. Below are the top six things you should consider regarding taxes and health insurance.

1. Self-Employed Health Insurance Deduction

If you’re self-employed, open enrollment is an ideal time to explore health insurance plans, as you may be eligible for a 100% deduction of health insurance premiums paid for yourself, your spouse, and dependents. This deduction reduces your adjusted gross income, which lowers your taxable income and applies regardless of whether you itemize deductions. One key factor is that the deduction cannot exceed your net profit from the business. This deduction can be a valuable way to lessen the tax impact of health insurance costs if you’re self-employed.

2. Health Savings Account (HSA) Contributions

Enrolling in a high-deductible health plan (HDHP) during open enrollment can give you access to a Health Savings Account (HSA), which offers triple tax benefits. Contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free when used for qualified medical expenses. In 2024, the contribution limits are $3,850 for individuals and $7,750 for families (2025 limits are $4,300 and $8,550 respectively), with an additional $1,000 catch-up contribution for those aged 55 or older. HSAs can be a powerful tax-saving tool, especially if you’re preparing for healthcare expenses in retirement or aiming to reduce your current taxable income.

3. Premium Tax Credit for Marketplace Plans

If you’re purchasing health insurance through the Health Insurance Marketplace, you may qualify for the Premium Tax Credit (PTC) based on household income and family size. The PTC can help lower the cost of premiums, and you can receive it in advance or claim it on your tax return. The open enrollment period is the time to update your income and household information with the Marketplace, as this affects your PTC eligibility. Properly adjusting these details can help you make the most of this credit and avoid potential surprises during tax season. Be sure to obtain and retain your 1095-A from your provider; you’ll need it to claim the credit on your taxes!

4. Long-Term Care Insurance Premiums

If you’re considering long-term care insurance, premiums paid for a qualified policy may be deductible as medical expenses, subject to age-based limits. These premiums contribute to the medical expenses deduction threshold mentioned above (7.5% of AGI). Although this deduction is not exclusively tied to open enrollment, this is a good time to review any long-term care needs and their potential tax impact as you assess overall health coverage.

5. Employer-Sponsored Plans and QSEHRA Reimbursements

If you’re an employee with health insurance premiums paid through an employer-sponsored plan, those premiums are generally paid with pre-tax dollars, meaning they’re not deductible since you’re already benefiting from a tax break.

For employees of small businesses, a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers a unique benefit. Under QSEHRAs, small employers (those with fewer than 50 full-time employees) can reimburse employees for health insurance premiums and other medical expenses on a tax-free basis, as long as the employee has minimum essential coverage. Employers can deduct these reimbursements as a business expense, while employees receive the funds tax-free, making it a win-win for both parties.

For 2024, QSEHRA reimbursement limits are set at around $5,850 for individuals and $11,800 for family coverage families (2025 limits are $6,350 and $12,800 respectively). Note that if you qualify for the Premium Tax Credit through the Health Insurance Marketplace, the amount reimbursed through QSEHRA can affect the credit, as you can’t receive full benefits from both. Additionally, QSEHRAs may impact Health Savings Account (HSA) eligibility, as an employee with QSEHRA reimbursement for all medical expenses may not be able to contribute to an HSA.

6. Itemized Deduction for Medical Expenses

If you plan to itemize deductions this tax year, you can potentially deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI), including health insurance premiums. For instance, if your AGI is $50,000, medical expenses over $3,750 are eligible for deduction. Deductible expenses go beyond premiums and can include out-of-pocket costs for doctor visits, surgeries, dental and vision care, mental health services, and more.

It’s important to remember that only expenses that exceed the 7.5% threshold count toward the deduction, so if your total medical costs are below this, you may benefit more from taking the standard deduction rather than itemizing.

Make the Most of Open Enrollment

As you navigate the open enrollment period, take a moment to review how health insurance decisions impact your taxes. Whether you’re eligible for specific deductions, contributions to an HSA, or potential tax credits, understanding these options allows you to tailor your health coverage to both meet your needs and maximize tax savings. Open enrollment is more than just selecting a plan; it’s an opportunity to optimize your financial health alongside your physical well-being. For personalized guidance, consult a tax professional or use reputable tax software to ensure you’re making the most tax-savvy decisions for the year ahead.

Self-employed individuals face unique challenges when qualifying for Social Security Disability Insurance (SSDI). However, by leveraging optional methods for figuring self-employment tax, you can enhance your eligibility for SSDI benefits and unlock potential tax benefits like the Earned Income Tax Credit (EIC). Here’s how you can make the most of these optional methods.

Key Requirements for SSDI Eligibility for Self-Employed Individuals

1. Work Credits:

• SSDI eligibility hinges on accumulating enough work credits, which self-employed individuals earn based on net earnings.
• In 2024, one work credit is earned for every $1,730 in net earnings, up to a maximum of four credits per year.

2. Recent Work Test:

• This test checks your work history prior to becoming disabled, with varying requirements based on age:
• Under 24 of age: 6 credits in the 3 years before disability.
• Ages 24-31: Credits for half the time worked between age 21 and the onset of disability.
• 31 and older: Typically, 20 credits in the 10 years before disability.

3. Duration of Work Test:

Ensures sufficient work history under Social Security, with requirements depending on your age at disability onset.

Example: At age 50, you need 28 credits (7 years of work).

4. Medical Requirements:

You must have a condition meeting the SSA’s definition of disability, preventing substantial gainful activity (SGA) and expected to last at least one year or result in death.

(For further reading How You Earn Credits & If You Are Self-Employed at SSA.gov)

Leveraging Optional Methods for Self-Employment Tax

If your Schedule C net income is negative, you may be able to effectively “purchase” those credits by using optional methods to calculate your net earnings from self-employment! These can significantly impact your SSDI eligibility and other tax benefits.

1. Farm Optional Method:

• Ideal for farmers with gross farm income of $8,640 or less, or net farm profits under $6,960.
• Allows you to report two-thirds of your gross farm income (up to $6,960) as net earnings, even if your actual earnings are lower. This can help you meet the income threshold for work credits.

2. Nonfarm Optional Method:

• Suitable for nonfarm businesses with net nonfarm profits under $6,960 and less than 72.189% of gross nonfarm income.
• Lets you report your actual net earnings or a minimum of $5,640 (whichever is lower), aiding in meeting work credit requirements.

Benefits of Using Optional Methods

Enhanced SSDI Eligibility:

Optional methods can ensure you earn sufficient income to qualify for work credits, crucial for maintaining SSDI eligibility during low-earning years.

Consistent Work Credits

• By consistently meeting work credit requirements, you avoid gaps in your work history that could jeopardize your SSDI eligibility.

Increased SSDI Benefits:

• Reporting higher net earnings can result in higher SSDI benefits, as the benefit amount is based on your average lifetime earnings.

Tax Benefits:

• Utilizing optional methods can also qualify you for the Earned Income Tax Credit (EIC), a refundable tax credit that can reduce your tax liability and potentially result in a

Conclusion

Self-employed individuals can significantly benefit from understanding and utilizing optional methods for calculating self-employment tax. These methods not only help in qualifying for SSDI benefits by ensuring consistent work credits and potentially higher benefit amounts, but they also unlock valuable tax benefits such as the EIC.

You might end up having to pay something in SE taxes, essentially “buying” your credits, but just think of this as a cheap way of buying disability insurance. You can even amend past returns (up to the last 3 years) to make this happen.

Important note: If the Schedule C business is in the name of only one spouse, then the credits only accrue to that spouse, even if you file your return jointly. Think carefully about this!

Things to do:

1. Create your Social Security Account if you don’t have one. You can monitor your credits toward Social Security Benefits.
2. CHECK YOU ELIGIBILITY!
3. If you aren’t eligible, review your past three years of tax returns to see if your Self Employment Income was reported as negative and then re-figure the SE income using the appropriate method.
4. If eligible, file that amendment!

For tailored advice, consider consulting with a tax professional or a Social Security expert to navigate these strategies effectively and maximize your financial support in case of disability.