Health Reimbursement Arrangements (HRA) for Spouses

Medical expenses are hard to deduct. You need to itemize and exceed 7.5% of AGI. But for Business Owners, there is a backdoor: The Section 105 HRA. By hiring your spouse, you can deduct their (and your family’s) medical costs as a business expense. This is one of the most powerful self-employed tax strategies available.

Key Takeaways

• Legitimacy: Your spouse must be a bona fide employee detailed w/ job description, timesheets, and reasonable pay.
• The Benefit: The business reimburses the employee (spouse) for medical expenses tax-free.
• The Deduction: The business deducts 100% of the reimbursement.
• Coverage: Includes Insurance Premiums, Co-pays, Dental, Vision, and Orthodontics.

How It Works: A Step-by-Step Example

1. You: Own a Sole Proprietorship (Schedule C) — could be consulting, freelancing, or a side business.
2. You: Hire your spouse as a legitimate employee. Job title: “Office Manager,” “Bookkeeper,” or “Marketing Coordinator.” Pay them a reasonable W-2 salary (even $10,000/year qualifies).
3. Plan: Create a formalized HRA Plan Document. This is not optional — the IRS requires written documentation. Templates are available from services like Remodel Health or Sterling HSA, or your CPA can draft one.
4. Action: Your spouse (as the employee) incurs medical expenses:
   • $10,000 in orthodontics for the kids
   • $12,000 in health insurance premiums
   • $3,000 in dental and vision expenses
   • Total: $25,000
5. Reimbursement: Your business reimburses your spouse $25,000 for these expenses.
   • Business Deduction: $25,000 (Schedule C expense)
   • Spouse’s Income: $0 (tax-free under Section 105)
   • Your Taxes Saved: ~$7,000 - $9,000 (depending on your marginal rate + self-employment tax)

The Math:

• Without HRA: You pay $25,000 of medical expenses with after-tax dollars. If you are in the 24% bracket + 15.3% SE tax = 39.3% combined rate, you needed to earn $41,000 to have $25,000 left after taxes.
• With HRA: Business deducts $25,000. Net cost after tax savings: $15,000.
• Savings: $10,000.

Note: This works best for Sole Proprietorships. If you are an S-Corp with > 2% ownership, this strategy is blocked (different rules apply).

HRA vs. HSA vs. Self-Employed Health Insurance Deduction

The HRA is not the only way to deduct medical costs. Here is how the alternatives compare:

Strategy	Deduction Type	2025 Limit	Requirements	Who It’s Best For
Spousal HRA	Business expense (Schedule C)	No limit	Sole prop + spouse as employee + written plan	High medical costs, sole prop
HSA	Above-the-line deduction	$4,300 self / $8,750 family	High-deductible health plan (HDHP)	Healthy individuals, long-term savers
Self-Employed Health Insurance Deduction	Above-the-line deduction	Cost of premiums	Self-employed, not eligible for employer plan	Simple situations, no spouse employee

When to Use Each:

• Use the HRA if: You have high out-of-pocket medical costs (braces, surgery, prescriptions) and run a sole proprietorship. The HRA covers expenses beyond premiums.
• Use an HSA if: You are healthy, have an HDHP, and want to invest the money long-term. HSAs offer a triple tax advantage (deductible contributions, tax-free growth, tax-free withdrawals for medical). Read our HSA vs. FSA strategy guide for more.
• Use the Self-Employed Deduction if: You don’t want the administrative burden of hiring your spouse or maintaining an HRA plan document.

S-Corp Trap: If you are considering switching to an S-Corp for payroll tax savings, know that you lose this HRA strategy. S-Corp owners with > 2% ownership cannot receive tax-free health benefits through an HRA. Weigh the tradeoff using our best business structure guide and our S-Corp tax strategies overview.

How sharper.tax Helps

sharper.tax analyzes your uploaded return and identifies whether you are deducting medical expenses optimally. We compare the Section 105 HRA approach against the self-employed health insurance deduction and HSA contributions to show which path saves the most. Sophisticated tax planning used to require a high-end CPA --- we make it available for free.

Common Pitfalls to Avoid

1. Forgetting the Written Plan Document: The IRS requires a formal HRA plan document. An email or handshake agreement does not count. The plan must specify which expenses are covered, how reimbursements work, and who is eligible.

2. Not Paying Your Spouse a W-2 Wage: Your spouse must be a legitimate employee receiving W-2 wages. You cannot reimburse a non-employee under Section 105. Even a small salary ($10,000/year) is sufficient if the work is bona fide.

3. Mixing Business and Personal: Only reimburse expenses that are legitimate medical expenses under IRC Section 213(d). This includes insurance premiums, co-pays, prescriptions, dental, vision, and many over-the-counter items — but not cosmetic procedures or gym memberships (unless medically prescribed).

4. Ignoring State Payroll Taxes: While the reimbursement is federally tax-free, your spouse’s W-2 wages are still subject to FICA (Social Security and Medicare taxes). However, the medical reimbursements themselves are NOT subject to payroll taxes.

Related Strategies

If you run a sole proprietorship, the spousal HRA is just one piece of the puzzle. Consider stacking it with these:

• Home office deduction — deduct your workspace as a business expense
• Solo 401(k) contributions — shelter up to $70,000 (2025) or $72,000 (2026) in retirement savings
• SEP IRA vs. SIMPLE IRA — compare retirement plan options for the self-employed
• Hiring your kids — another family employment strategy that shifts income to lower brackets
• QBI deduction — claim up to 20% off your qualified business income
• Tax strategy stacking — how to combine multiple strategies for maximum savings

Sources

• IRC Section 105 - Amounts Received Under Accident and Health Plans
• IRC Section 213(d) - Qualified Medical Expenses
• IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits
• IRS: Self-Employed Health Insurance Deduction

The information above is educational and not tax advice.