Hire Your Spouse? The 'Section 105 HRA' Strategy That Turns Medical Bills into 100% Tax Deductions
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| Hire Your Spouse? |
As a business owner, you know the pain of paying for healthcare. Health insurance premiums are skyrocketing, and out-of-pocket costs for things like dental work, braces for the kids, or LASIK surgery can drain your bank account.
Normally, these expenses are personal. You might try to deduct them on your personal tax return (Schedule A), but in 2026, you usually fail because of the high Standard Deduction and the "7.5% AGI Floor" rule.
But there is a secret weapon hidden in the tax code called the Section 105 Medical Reimbursement Plan (HRA).
By hiring your spouse, you can legally transform these "personal" medical bills into "100% deductible business expenses." Here is the blueprint.
1. The Problem: The "7.5% Floor" Trap
Let's say your Adjusted Gross Income (AGI) is $100,000, and you spent $5,000 on medical bills this year.
- The IRS says you can only deduct medical expenses that exceed 7.5% of your income ($7,500).
- Since $5,000 is less than $7,500, your tax deduction is $0. You paid those bills with expensive, after-tax dollars.
2. The Solution: Hiring Your Spouse
Instead of paying the bills yourself, you hire your spouse as a legitimate employee of your business.
The Strategy:
- Hire Correctly: You hire your spouse to do real work (bookkeeping, scheduling, admin). Crucially, they must be a W-2 Employee, not a 1099 contractor.
- Compensate: Instead of paying a high taxable salary, you offer a "Medical Reimbursement Plan" as their primary employee benefit.
- Reimburse: Your business agrees to reimburse the employee (your spouse) for all out-of-pocket medical expenses for them and their family (which includes YOU and your kids!).
3. The Magic Math (Why It Wins)
This structure creates a "Triple Win" tax situation:
💰 The Tax Savings Breakdown
- For the Business: The reimbursements are a 100% deductible business expense. (Reduces your taxable profit).
- For the Spouse (Employee): The reimbursements are 100% tax-free income. (They don't pay income tax or FICA tax on this benefit).
- For the Family: You effectively pay for braces, glasses, and co-pays with pre-tax money, bypassing the 7.5% floor entirely.
Example: If you are in the 24% tax bracket and have $10,000 in medical bills, this strategy puts $2,400+ back in your pocket compared to paying personally.
4. Crucial Rules: Stay Out of Jail
This is a legitimate IRS strategy, but you must follow the rules strictly to avoid an audit.
A. Real Employee, Real Work
Your spouse cannot just be a "ghost employee." They must perform actual duties appropriate for the business, and their total compensation (medical benefits + cash salary) must be "reasonable" for the work done.
B. Written Plan Document
You cannot just write a check and call it an HRA. You must have a formal, written Section 105 Plan Document signed and kept on file. (You can buy compliant templates online).
C. The "Other Employees" Trap (Anti-Discrimination)
This strategy works best if you have NO other employees (except your spouse). Section 105 plans cannot discriminate. If you have other full-time staff, you must generally offer them the same reimbursement benefits, which can become very expensive.
D. Entity Type Warning (S-Corps)
This works perfectly for Sole Proprietorships and C-Corps.
Warning: If you are an S-Corp owner (>2% shareholder), you are legally restricted from receiving these benefits tax-free. Do not attempt this without a specific workaround from a CPA.
The Ultimate Family Tax Hack
If you operate a Sole Proprietorship and have high medical bills, not using a Section 105 plan is literally throwing money away.
Stop treating healthcare as a personal burden. Make it a business expense. Hire your partner, document the work via W-2, and let the tax code subsidize your family's health.
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