Employee Benefit Plans
Traders need an S-Corp to deduct health insurance and retirement plan contributions.
Employee benefit plan deductions including health insurance and retirement contributions require self-employment income (SEI), but trading income is not SEI. Exception: If a trader uses a full membership to a futures or options exchange for trading Section 1256 contracts on that exchange, it is SEI (Section 1402i).
A sole proprietor trader cannot pay him or herself compensation, so they cannot arrange health insurance and retirement plan deductions.
Traders qualifying for trader tax status (TTS) may form an S-Corp trading company, or an S-Corp or C-Corp management company in association with a trading LLC or partnership, to pay officer compensation to unlock employee-benefit plan deductions including health insurance premiums and a high-deductible retirement plan contribution.
Investment companies without TTS may not pay compensation to owners to unlock employee benefit plan deductions.
For more in-depth information about employee-benefits for traders, including entities, compensation, retirement plans and health insurance premium deductions, read Green’s 2018 Trader Tax Guide.