Learn what a sole proprietorship is, and how to get health insurance if you’re a sole proprietor.
You need health insurance and you run a business, so does that mean your sole proprietorship qualifies for a group health plan? The Affordable Care Act introduced new rules into the health insurance market and they can be confusing. For instance, what is a sole proprietorship and does it have the same rights and responsibilities when it comes to health insurance? It’s a common question because a sole proprietorship is seen differently and that changes the company’s health insurance options. So how does health insurance for a sole proprietor work?
What is a sole proprietor?
The IRS defines a sole proprietor as a person who owns an unincorporated business alone and usually without the benefit of any employees. Some single business owners work as sole proprietors but file as limited liability companies (LLCs) and that changes their status. The IRS points out you are not a sole proprietor if you operate as a corporation.
Put simply, a sole proprietorship is run by one person who has direct control of the business. The sole proprietor receives the profits from the business and pays all the bills.
A sole proprietorship can have employees but it must obtain an Employment Identification Number (EIN) if it uses anyone other than independent contractors. When working solo, however, the Social Security number of the sole proprietor serves to identify the company.
Do sole proprietorships get group health insurance?
Being a sole proprietor can make things easy when it comes to taxes, but it can get tricky when health insurance shopping. Group health insurance plans do not always apply to sole proprietorships. In order for the business to qualify for a small business plan, it would have to have one common-law employee — by definition, that excludes the owner and spouse. Without that one qualified employee, the business owner can only get individual health insurance from a licensed insurance broker or the health insurance marketplace. eHealth has a variety of great options for individual and family health insurance, which you can explore here.
What is a common-law employee?
According to the Small Business Administration, a person is an employee if she or he meets the standards of the common-law test. This guideline defines the relationship between the employee and employer, including when the business is a sole proprietorship.
The common-law test is based on two key factors related to the company’s control over the worker. A worker is considered an employee (as opposed to a contract worker) if the employer controls both of these:
- How something is done
- What must be done
It’s a bit subjective, but the test determines if the company requires the worker to comply with set rules and directions. Key questions the IRS may consider include:
- Does the company provide full training to ensure compliance with those rules and directions?
- Does the employer oversee and manage all work?
- Does the sole proprietorship rely heavily on the work of this one individual, or is it something anyone could do?
- Does the sole proprietorship have full control over hiring, wages, and schedule?
- Is the work done in a space owned by the sole proprietorship?
- Does working for the sole proprietor keep this person from getting other employment?
- Does the sole proprietor pay for all the worker’s job-related supplies, travel, and expenses?
- Does the worker make an investment in his or her work product and realize profit and loss from it?
These are all elements that help determine if someone is actually an employee, or a sole proprietor who is working as an independent contractor.
If you own a sole proprietorship, you must have at least one qualified employee beyond yourself, your spouse, and your independent contractors to qualify for group health insurance.
Every business, whether sole proprietorship or not, wants to get the best deal on its health insurance plan, so it may be worth talking to a licensed insurance broker before buying. They are trained to understand the nuances of a sole proprietorship and help find insurance that may meet the needs of the small business owner.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.