If you're running your own business and have healthcare through the Affordable Care Act (Obamacare), you're in a unique position. With your business structured correctly (LLC/S-corp), you can decide on what your salary should be and then examine how that salary will affect your healthcare costs. Keep reading for a dreadfully boring or financially exhilarating journey (depending on how you look at it!)
So, What is an S-Corp anyway?
An S-Corp is a type of corporation that you create for holding the money your business makes. It's like a piggy bank that doesn't get taxes taken out UNTIL you withdraw your salary from it. The money in your S-Corp IS NOT personal income, but the money you take out for your salary is. For the purposes of calculating your personal income, you only need report what you take out of the S-Corp, not what goes in.
Example: You make $5500 from a branding job. This money goes into the S-Corp's bank account and stays there untaxed. When you pay yourself $1500 for your salary that month, then taxes are taken out. The $1500 is what counts toward your healthcare-reportable income.
The beauty of this is that you can make money on the business level (and save it in case you don't work for a while/need medical leave/hit hard times/ etc.), and only take out what you actually need every month for personal costs. Then you can report only that personal amount as Obamacare income. This helps you immensely when it comes to getting help with healthcare costs.
**If you make a lot of money in your business, you'll need to make sure you're not left with a lot of profit at the end of the year that would count towards your personal income. I'm assuming that the readership of my blog might have a little leftover each month, enough to cover the following month or regular business expenses, etc. If you do really well, though, this is a subject for an accountant to cover in depth with you!**
Obamacare subsidies (financial help) are based on several brackets which vary by state. However, for the most part if you make (these numbers are for a family of three, you can enter your household info in the calculator here) :
Below $20,000 - You may qualify for Medicaid
$20,000 - $50,000 - You'll qualify for a health plan with lower monthly premiums PLUS extra savings.
$50,000 - $80,000 - You'll qualify for a health plan with lower monthly premiums
Above $80,000 - You won't qualify to save on a health insurance plan. But do you really need help if you're making this much $$?
The sweet spot for a family like us is between $20,000 - $50,000, where you can get a lower cost plan with extra discounts on copays (amount you pay for a doctor visit) and sometimes lower deductibles (amount you have to spend before your plan covers the rest)
So here's the big question: Can your family's life fit between $20,000 and $50,000 for three people? Next step: discover your budget.
A few years ago we had a bad year and we didn't make much money. I had to scramble to afford our basic lifestyle and making a budget really helped me. Once we started doing better again I realized that we didn't need to spend ALL our money (genius, huh?) and in fact we could live below our means. This is very empowering. It removes a lot of stress about money and leaves plenty for a rainy day.
Do you know how much you need to live each month? Lots of people don't, so let's get to the how-to on budgeting.
List out what each category costs you (and add categories if you need to!)
I've filled in some sample amounts:
Bare Minimum Personal Budget
- Mortgage payment (including taxes and insurance): $1300
- Utilities: $400
- Car insurance: $125
- Gas: $100
- Groceries: $400 (Try Aldi!)
- Dining out: $400
- Health insurance: $300
- Miscellaneous costs: $250-500
add in 15% for taxes, and you've got: $3766 per month
THEN, since what you pay for healthcare is deductible, remove that $300 (or whatever your cost will be) and your final amount is:
FINAL TOTAL: $3466 per month or $41,595 per year
Be brave and start with the bare minimum budget you can, then you can always adjust month-to-month. Need a repair on your house one month? No problem, take an extra $1000 in income that month. How about a special occasion or a vacation? Again, take it if you want to or need to! The beauty of this is that at the end of the year, those relatively small amounts won't increase your overall income by very much. And even if they do, worst case scenario you pay back a bit of the tax-credit subsidy you got for your healthcare.
A side note: You might be wondering where things like cell phone costs are in this budget. I like to charge my cell bill to my business pre-tax along with other things like donations to charity and some meals, etc. You can even do a SEP IRA for part of your retirement plan and take it right out of your business account. Oh, the perks of having a business account. But that's a topic for another time :)
The Big Save
Can you live on less? We've decided against paying for a new car, child care, and most entertainment partly because we want to live below our means and also get to pay less for healthcare. Extreme? Maybe so, but it REALLY pays off because at a certain threshold for SILVER PLANS ONLY there's a cost break AND a thing called "cost sharing" which greatly reduces your deductible and your copays. Take a look at these samples:
If your family of 3 makes $80,000, here's what the Blue Cross plan that we chose looks like:
If that same family makes $45,000, look at the vast improvement in the same plan:
And if you manage to squeeze in at $40,000, look at how the numbers ROCK!: Check out that $0 deductible!
So, to recap, if you're a small business owner, you can use the S-Corp set up to decide what your minimum salary can be, pay yourself that, and reap the rewards of a low-cost health plan.
What if I make too much for a Subsidy?
If you make too much for a subsidy, you probably have to look at your costs and decide if anything can be cut so you can "make less." Remember that "making less" on the personal level leaves more in your business account, and you can always adjust your budget and take more out if you need it. If you can't cut anything, then here's some factors to consider when picking a plan full-cost or otherwise:
Picking a Plan
This is my philosophy, so take it or leave it, but here's how I pick a plan:
If you have savings
Go for a plan with a higher out-of-pocket maximum and deductible which usually has a lower monthly payment. You can hedge your bets, hope that you don't get expensively sick/injured, and come out ahead with less spent per month.
If you don't have savings
The point of insurance of any sort is to limit risk. If you're sitting out there with no savings, then it makes sense to get a plan with lower out-of-pocket maximum and deductible, but you'll have to cover that risk with a higher monthly payment.
If you know you'll be using a lot of healthcare (sickness/pregnancy/etc.)
Get a plan with the best coverage you can afford! That means a low out-of-pocket maximum, a low deductible, and a higher monthly payment.
If you are young and healthy
Don't assume that you're invincible. This scenario often pairs well with "very little savings" and "risky activity" so while you'd be likely not to get sick, you're just as likely as anyone else to get injured. The thing you want to guard against at this point in your youth is medical debt. So, you can get a bronze plan or a "catastrophic" plan which has a low monthly payment but a high out-of-pocket maximum and deductible.
Wow! You made it this far into the article? Pretty exciting stuff, right? You can now inch back from the edge of your seat and return to using the whole thing.