Can the Self-Employed Have an HSA?
Updated · May 19, 2022
Being your own boss sounds like a dream come true.
But it comes with a lot of responsibility and little help.
Most of all, you're responsible for every aspect of your finances—from taxes to medical expenses.
And, unlike traditional workers, you don't get tons of employer-sponsored benefits.
Still, there are ways to offset the cost of being self-employed—like HSA accounts, for example.
It’s a great way to reduce your taxes and get help with medical expenses.
Read on to learn how to open an HSA account if you're self-employed.
Can the Self-Employed Have HSA?
A Health Savings Account (HSA) is a taxed-advantaged account you can use to save money for medical expenses.
The owner of such an account is the individual, not the employer.
So, if you are self-employed, you can still open an HSA account. The requirements are the same as for traditional workers.
To have an HSA, you need a High Deductible Health Plan (HDHP) first.
Plus, you can’t be named as a dependent on someone else's tax return.
Lastly, you can’t be enrolled in any healthcare plan except a limited-use FSA, dental and vision plans, or disability insurance.
So far, things are exactly the same as for traditional workers.
But there are some differences.
Let’s see what they are.
Traditional Employment vs. Self-Employed HSA
In both cases, contributions are tax-deductible, and withdrawals are tax-free.
And as we mentioned, the requirements to own an HSA are also the same.
The main difference is that employers contribute to their staff's accounts. If you're self-employed, you'll have to make your own deposits.
In addition, your contributions aren’t pre-tax per se.
But don’t worry.
If you follow the procedures, they’re deductible.
When you fill out your Schedule C IRS form (used to report the income of sole proprietors), include your HSA contributions. This will allow you to deduct them from your taxable income.
2022 HSA Contribution Limits
The IRS sets limits for the amount of money you can deposit in your account per year.
For 2022, that is $3,650 for individuals and $7,300 for families.
The 2022 HSA contribution limits for individuals over 55 is $1,000.
This so-called catch-up contribution continues until the age of 65.
The Benefits of HSA for Self-Employed
The biggest benefit of an HSA is the triple tax advantage.
- You don’t pay taxes on the money you deposit in your account.
- Invest part of the funds and let it grow tax-free.
- Withdraw tax-free money for medical expenses.
There’s a list of qualified spending, including doctor's visits, prescription drugs, dental care, and things like acupuncture, birth control pills, and so on.
But you don't need to have tons of medical expenses to benefit from an HSA.
You can use it as a supplementary retirement plan.
Unlike an FSA, an HSA account doesn’t impose time limits. You can leave your money to grow tax-free until you retire.
If you’ve contributed the maximum amount each year, you’ll have a decent amount of money.
The Downsides of HSA for Self-Employed
There are some downsides to having an HSA. Or rather, things you should be aware of.
There’s a limit on how much you can put in an HSA, so the tax deductions won’t be huge.
Plus, if you exceed the allowed contributions, you will have to pay taxes and penalty charges on the excess amount.
Last but not least, withdrawal is tax-free only for qualified medical expenses. If you violate those terms, you will be penalized.
That said, as long as you follow those rules, the pros outweigh the cons by far.
Can an LLC Owner Have HSA?
That depends on the LLC.
If you own a single-member LLC and meet the eligibility requirements, you can open an HSA.
It’s virtually a health savings account for self-employed individuals.
The multi-member LLCs, on the other hand, can offer HSAs to their employees. They can do this using a cafeteria or Section 125 plan.
Unfortunately, the owner of the LLC won’t be able to open an account for themselves.
Still, this will bring many benefits for employees and make for an attractive benefits package.
If you want to provide this option to your staff, read our detailed guide with rules for employer contributions to HSA accounts.
Self-employed individuals can enjoy the same benefits of an HSA as those with traditional employment.
The main difference is that the former have to make their own contributions to the HSA. Plus, doing your taxes will be a tad more difficult.
This may be offset, however, by the tax deductions.
If you are self-employed, an HSA can be a valuable tool for your financial and physical health.
Can I contribute to HSA on my own?
HSAs are owned by the individual, not the employer.
So, whether you’ve set up your HSA through your employer or on your own, you can contribute to it.
Just make sure the total contributions don’t exceed the IRS limit.
Can I open a health savings account on my own?
If your employer offers an HSA as part of a benefits package, contact them to set up an account.
If that isn’t an option, though, you can also open an HSA on your own.
Banks, insurance companies, and credit unions often provide this service. What’s more, there are also plenty of dedicated HSA providers out there.
How much can you contribute to HSA?
The IRS sets the contribution limits and adjusts them every year.
The amounts are different for individuals ($3,650), families ($7,300), and people over 55 ($1,000).
Find out more in the article above.
Can I open an HSA without my employer?
While most HSAs are offered through employers, you can open one on your own.
Just make sure you cover the eligibility criteria—for instance, having an HDHP. Find a more detailed description of the requirements above.
Then, find an HSA provider to see what plans they offer.
Is health insurance tax deductible for the self-employed?
Both employer-sponsored and self-employed HSA contributions are tax-deductible.
In the first case, deposits are made pre-tax. Sole proprietors can deduct contributions from their taxable income.
They just need to fill in the required documents (see “Traditional Employment vs. Self-Employed HSA” above) when filing their tax return.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.