Health Care Tax Strategies for Small Business Owners

Health care and insurance can be expensive, but if you own a small business, those expenses can also create some of the most powerful tax-planning opportunities available to you. Small-business owners have options for deducting health insurance, building tax-free money in an HSA, reimbursing medical expenses through an HRA, and even receiving a tax credit for providing health coverage to employees.

The key is knowing which strategies you qualify for and coordinating your health-care decisions with your tax plan. With a little planning, money you're already spending on health care can potentially work a whole lot harder for you.

1. Claim the Self-Employed Health Insurance Deduction Properly

This is a huge benefit for small-business owners. If you're eligible for the self-employed health insurance deduction, you can generally deduct 100% of qualifying health insurance premiums, subject to the applicable limitations. This can include medical, dental, and certain qualified long-term care insurance premiums for yourself, your spouse, and your dependents.

That's significantly different from trying to deduct medical expenses as an itemized deduction. If you qualify for the self-employed health insurance deduction, you generally claim it as an adjustment to income rather than lumping it in with your itemized medical expenses.

If you operate as a sole proprietor or a single-member LLC taxed as a sole proprietorship, the deduction is generally tied to the earned income from that trade or business. There are additional limitations, including rules that can prevent the deduction for months when you or your spouse were eligible to participate in certain employer-subsidized health plans.

S Corporation Owners Need to Get This Right

If you operate your business as an S Corporation and own more than 2% of the company, the way the health insurance is paid and reported matters.

Generally, the S Corporation needs to pay or reimburse the premiums, and the amount needs to be properly included on the shareholder-employee's Form W-2. When the requirements are met, the shareholder can then claim the self-employed health insurance deduction on their individual return, subject to the applicable limitations.

YEAR-END TIP: If you're an S Corporation shareholder-employee, make sure your health insurance premiums are being handled correctly through the company and reported properly on your W-2. Don't wait until your return is being prepared to discover payroll wasn't set up correctly.

 

This is one of those strategies that's fantastic when it's implemented properly and frustrating when somebody tries to fix it after the fact.

2. Take the Small Business Health Care Tax Credit

If you pay a portion of your employees' health insurance premiums, don't overlook the Small Business Health Care Tax Credit.

If your business meets the requirements, the credit can be worth up to 50% of the premiums you pay on behalf of your employees (up to 35% for eligible tax-exempt employers). And remember, this is a tax credit, not simply another deduction. A credit can directly reduce the tax you owe.

Generally, eligibility depends on requirements that include:

• Having fewer than 25 full-time equivalent employees
• Paying average employee wages below the applicable inflation-adjusted threshold
• Paying at least 50% of the cost of employee-only health coverage
• Generally purchasing qualifying coverage through the Small Business Health Options Program (SHOP) Marketplace

The credit is generally available for two consecutive taxable years, so this isn't something you simply claim forever.

YEAR-END TIP: If you're already paying health insurance premiums for employees, find out whether your business qualifies for the credit. Don't leave a dollar-for-dollar tax benefit sitting on the table because nobody bothered to check. HealthCare.gov has additional information about the Small Business Health Care Tax Credit and SHOP coverage.

3. Use the Health Savings Account (HSA) Tax Strategy

I LOVE the Health Savings Account. If you're enrolled in an HSA-eligible high-deductible health plan and meet the other eligibility requirements, an HSA is one of the most powerful health-care tax strategies available. Why? Because the HSA gives you what I like to call a triple tax benefit:

1. You can receive a tax deduction for eligible contributions.
2. The money can grow tax-free inside the account.
3. Withdrawals are tax-free when used for qualified medical expenses.

And unlike a flexible spending arrangement where you may have restrictions on carrying money forward, the money in your HSA belongs to you and can continue accumulating year after year.

For 2026, the HSA contribution limit is $4,400 for self-only coverage and $8,750 for family coverage. Eligible individuals age 55 or older can contribute an additional $1,000 catch-up contribution.

This is where I want business owners thinking beyond this year's doctor's appointments.

If you're generally healthy and don't need to spend everything in your HSA, you can allow that money to accumulate and invest it for future health-care expenses. You're essentially building another bucket of tax-advantaged wealth specifically designed to help cover medical costs.

That's powerful.

4. Consider a Health Reimbursement Arrangement (HRA)

If your family has significant out-of-pocket medical expenses, the HRA is a strategy you absolutely need to understand.

An HRA is an employer-funded arrangement that can reimburse employees for qualifying medical expenses under the terms of the plan. When your business and employment structure meet the requirements, those qualifying reimbursements can create valuable tax benefits.

Think about what your family may already be spending money on:

• Deductibles and co-pays
• Prescription medications
• Dental expenses
• Vision expenses
• Chiropractic care
• Other qualifying medical expenses

Those expenses can add up fast. The beauty of the HRA is that we're looking for a way to coordinate legitimate employment, the business, and qualifying health-care expenses rather than simply accepting every medical bill as another personal expense.

But Your Business Structure Matters

This is where I need you to slow down. You cannot simply create an HRA, reimburse yourself for every medical expense you've ever had, and call it a business deduction.

The tax rules surrounding business owners are important. For example, greater-than-2% S Corporation shareholders are generally not treated the same as rank-and-file employees for certain fringe-benefit purposes, and family attribution rules can affect a spouse as well. Depending on the circumstances, we may look at a properly structured employment arrangement involving a spouse and a separate legitimate business operation. But the spouse needs to perform bona fide services, the HRA needs to be properly established, and the structure needs to comply with the applicable tax rules.

When the facts line up, the HRA can be an incredible strategy. When they don't, don't force it. If you're spending thousands of dollars every year out of pocket on medical care, this is absolutely worth discussing with an advisor who understands both small-business taxation and HRA planning.

5. Choose the Right Health Insurance Plan

Here's where health-care planning and tax planning really come together. Don't choose your health insurance plan in a vacuum.

If you're eligible for an HSA, for example, the health plan you select determines whether you can make HSA contributions. If you're considering an HRA, your health coverage and business structure need to be considered alongside the plan. And yes, shopping for health insurance can be miserable. We're all in the same boat. But DO NOT WAIT UNTIL THE LAST MINUTE.

When comparing plans, don't look only at the monthly premium. Consider:

• Annual deductible
• Out-of-pocket maximum
• Co-pays and coinsurance
• Prescription drug coverage
• Provider network
• HSA eligibility
• Expected medical needs for your family

Don't Get Distracted by the Metal

Marketplace plans are commonly grouped into Bronze, Silver, Gold, and Platinum categories. Generally, those categories reflect how costs are divided between you and the insurance plan.

A Bronze plan may have lower premiums but leave you responsible for more costs when you receive care. Gold or Platinum plans generally shift a greater portion of covered costs to the insurer but typically come with higher premiums. More expensive doesn't automatically mean better for your situation.

If you're relatively healthy, an HSA-eligible plan could potentially be a fantastic combination with an HSA strategy. If you know your family will have substantial medical expenses, a plan with higher premiums but lower out-of-pocket exposure may make more financial sense.

And look at the network. You can find what looks like a fantastic premium and then discover that the doctors, hospitals, or specialists you actually want aren't in the network. Prescription formularies can matter too.

Look at the entire financial picture, not simply the number at the top of the quote.

What About the Health Insurance Penalty?

At the federal level, there is currently no individual shared responsibility payment for going without qualifying health insurance. The federal penalty has been $0 since 2019. However, some states and jurisdictions have their own individual coverage requirements and penalties, so check the rules where you live.

And let me be clear: the fact that there isn't a federal penalty does not mean I'm telling you to run around uninsured. One major medical event can create a massive financial problem. The point is that your decision should be based on your health, finances, risk, available coverage, and tax strategy, not an outdated belief that you're automatically going to owe a federal penalty if you don't purchase coverage.

The Bottom Line

Your health-care expenses shouldn't sit in one box while your tax planning sits in another. For a business owner, the two can be directly connected. Health insurance premiums, HSAs, HRAs, employee benefits, and even the way your business is structured can create opportunities to keep more of your money instead of unnecessarily sending it to the IRS.

If you're spending thousands of dollars every year on premiums, deductibles, prescriptions, dental care, vision, and other medical expenses, don't automatically assume they're just personal expenses you have to absorb. There may be tax strategies sitting right in front of you that you're not using. Book a Comprehensive Tax and Business Consultation with my team at KKOS Lawyers. They can look at your health-care costs alongside your business, entity structure, and overall tax picture to identify strategies you're missing and build a plan to implement the ones you qualify for. Every year you ignore these opportunities could mean thousands of dollars in legitimate tax savings walking right out the door.