How to Turn Your Medical Bills Into Tax Deductions

A surprise medical bill can wipe out your profits in an instant. 

 But it doesn’t have to.

This article covers powerful legal tax strategies that small business owners can use to turn medical expenses into a deductible asset. By the end, you will know exactly which moves to make, whether you are a solo entrepreneur or running a small team, so your health costs work for you instead of against you.

Here’s how business owners can legally turn health costs into tax savings.

1. Deducting Self-Employed Health Insurance

If you pay for your own health insurance, it’s deductible.
This applies whether you’re a sole proprietor, a single-member LLC, or an S Corp owner… but the process is slightly different for each.

• Sole proprietors and single-member LLCs: You can claim your health insurance premiums directly on your personal tax return (Form 1040, Schedule 1).
  
  
• S Corp owners: Your S Corp must pay or reimburse the premiums and add them to Box 1 of your W-2. They’re not subject to FICA taxes, which means you save on payroll taxes while still claiming the deduction on your personal return.
  
  

For example, if your reasonable salary is $60,000 and your health insurance premiums are $10,000, you can reduce your taxable salary to $50,000. You still report $60,000 for IRS compliance, but you only pay payroll taxes on $50,000.

Always confirm with your payroll provider that your setup is correct. Missing this step can cause you to lose the deduction entirely.

2. Using a Health Savings Account (HSA)

A Health Savings Account (HSA) offers one of the most powerful tax advantages available.
It provides a triple benefit:

• Tax deduction for contributions
  
  
• Tax-free growth on investments
  
  
• Tax-free withdrawals for qualified medical expenses
  
  

That combination doesn’t exist in any other account.

To qualify, you must have a high-deductible health plan. The 2025 contribution limits are $4,300 for individuals and $8,550 for families, with an extra $1,000 catch-up for those 55 or older.

If you can, think of your HSA as a retirement account for medical expenses.
Instead of spending the funds each year, invest them and let the balance grow tax-free. When you reach retirement, you can use that money to cover health expenses without dipping into taxable retirement accounts.

Even better, you can reimburse yourself years later for past medical expenses as long as you keep the receipts.

3. Setting Up a Section 105 Medical Reimbursement Plan

If you’re a business owner with no employees and spend more than $5,000 a year on out-of-pocket medical costs, a Section 105 plan can be a game-changer.

This plan allows you (or your spouse) to be reimbursed through your business for medical expenses, turning personal costs into deductible business expenses.

You’ll need proper documentation and a compliant plan design, but once established, it’s easy to maintain.
This approach works best for sole proprietors and small family-run businesses where the owner’s spouse is involved in the company.

It’s a simple way to reduce taxable income while covering real health costs.

4. Offering Health Benefits to Employees

If you have employees, you can still offer health benefits without breaking your budget.
Small businesses can use Health Reimbursement Arrangements (HRAs) to provide tax-free reimbursements for employee medical costs and insurance premiums.

Two of the most common options are:

• QSEHRA (Qualified Small Employer HRA)  for businesses with fewer than 50 employees.
  
  
• ICHRA (Individual Coverage HRA) for larger or growing teams.
  
  

These plans let you choose an annual allowance that employees can use for their own health coverage.
It’s tax-free to them and deductible to you, making it far more efficient than simply increasing wages to cover health costs.

This approach is an easy first step toward offering competitive employee benefits while keeping compliance simple and affordable.

Putting It All Together

Health costs don’t have to be the silent killer of your cash flow.
By combining these strategies: Self-employed insurance deductions, HSAs, Section 105 plans, and HRAs, you can turn health expenses into a powerful part of your tax strategy.

The key is setting them up correctly and keeping good records.
Your medical bills shouldn’t drain your profits. They should work for you.

👉 Start saving today. Watch this episode here.

Download the free Tax Savings Starter Kit at TaxSavingsPodcast.com/starterkit to learn how small business owners like you save $10,000 or more each year through proactive tax planning.

Transcript

[00:00:00] Introduction: Turning Health Costs into Deductible Assets

[00:00:00] Speaker: Imagine this, you get hit with a surprise medical bill that wipes out your quarterly profit. It's terrifying. But here's the thing, it doesn't have to ruin you. Today, we are uncovering powerful legal tax strategies that small business owners often overlook strategies that can turn your health costs from a burden.

[00:00:17] Into a deductible asset. Stay tuned because by the end you'll know exactly which moves to make, even if you are a solo entrepreneur or have a small team. So let's dive into it. 

[00:00:45] Self-Employed Health Insurance: Maximizing Deductions

[00:00:45] Speaker: The first health related topic that we wanna talk about today is self-employed. Health insurance. And so self-employed health insurance is basically just paying for insurance and you're just a self-employed individual.

[00:00:56] So whether you own a sole proprietorship, whether you pay an S or you own an S [00:01:00] corporation, if you are paying personally out of pocket, not through some other employer, but you're paying for your health insurance and you are a business owner, it is tax deductible no matter what. So that is one thing to think about.

[00:01:13] Now when we talk about self-employed health insurance, there is a special way on how we get the deduction. For that self-employed health insurance. So if you're just a sole proprietorship, a single member LC, you're not, you're gonna take that deduction on your personal tax return form 10 40 on schedule one.

[00:01:29] So sole prop, single member, LC. Super easy. Pay for those premiums outta pocket and then take that deduction on your personal tax return on your form 10 40 Schedule. Now if you are an S corporation, there's a few hoops that we have to jump through to make sure that we're getting a deduction for that health insurance.

[00:01:46] And it's important to follow these hoops because if you don't do this properly, if you just do it, take it on your personal tax return, your 10 40 on schedule one, without going through these first steps, you could lose the deduction. So the hoops with an S corporation and we're gonna talk about [00:02:00] why this is also a really good thing for an S-Corp owner.

[00:02:02] But the first thing is you're gonna want you to have your S-corp. Pay the premiums if you already have paid them personally. Use an accountable plan to reimburse yourself for those premiums so that your S-Corp pre is paying for those health insurance premiums. The second step is you need to add those premiums to box one.

[00:02:20] Of your W2. Now, it's not gonna get hit with FICA taxes or Medicare taxes, box three and five, but it needs to be added into box one as the S Corp owner. So you're gonna pay the premiums through the business, take a deduction for it, add it to W2 income, and then you get the deduction on your 10 40 on schedule one.

[00:02:38] So you're getting the deduction in the same place as you would if you were a sole proper single member lc. You just need to add that. Two, your W2. Now here's the really good thing about that. Everybody knows if you've been listening, if you've been watching us, everyone knows that you need to take a reasonable salary as an S corp owner.

[00:02:54] Now, the bad side about that reasonable salary is it gets hit with FICA taxes, and so that's Social security and Medicare, [00:03:00] roughly 15%. But with the health insurance premiums, they do not get added to box three and five, which is FICA taxes. So you don't get hit with FICA taxes on your health insurance premiums, but it's part of your reasonable salary.

[00:03:13] So let's say that your reasonable salary is $60,000 for your business and you have $10,000 in health insurance premiums. You'd only need to run a reasonable salary of 50,000 because we're gonna add that 10,000 in health insurance premiums to get you to the 60, but we're only paying FICA taxes on $50,000.

[00:03:30] That's the beauty and that's a really good benefit of being able to do this. So sole proprietorship, single member lc, take a deduction, personal tax return form 10 40, schedule one s corp. Pay the premiums inside the business, add it to box one of your W2, and then take the deduction on your personal tax return schedule one.

[00:03:46] If you are working with a payroll provider like Augusto or something like that, talk to them about this to, because you need to make sure that you're doing it correctly within the payroll software. Very important to do that correctly. Now if you're paying for insurance for non-owner [00:04:00] employees, you still obviously get the deduction for that, but you're gonna do it a little bit differently.

[00:04:03] We're gonna be di adding it in different pieces on the W2 for that. For non-owner employees, you're simply adding it to their W2 box 12 with called wd. So just keep that in mind regarding self-employed health insurance. 

[00:04:16] Health Savings Accounts: Triple Tax Benefits

[00:04:16] Speaker: The next thing I wanna talk about is a health savings account. And guys, health savings account is something that I think everybody, as long as you qualify, every single person should be taking advantage of it and maxing it out to its fullest.

[00:04:29] I'm gonna talk about that why in just a second. But first thing about a health a health savings account. In order to qualify, you need to have a high deductible health plan. But a health savings account comes with what I call a triple benefit. You get a tax benefit when you put money into that account.

[00:04:46] You get a tax benefit on any growing inside. That account is tax free and then you get a tax benefit when you withdraw. You don't get taxed on the withdrawals as long as you use it on qualified medical expenses, and that's very important. [00:05:00] You get a deduction going in tax free growth, tax free withdrawals.

[00:05:03] There is no other account that the government gives us like that. Roth has tax-free growth, tax-free withdrawals, but you don't get a deduction going in. A traditional retirement account has a deduction going in and tax-free growth, but you don't get tax-free withdrawals on the backend, a health savings account.

[00:05:19] You get the triple benefit. And so a strategy that I often talk to people about is to say, Hey let's fund and max a whole savings account and think of it. Like a secondary retirement account. Try to not touch those funds, have, invest those funds, get them to work in there, but try not to use them. So let's say medical expenses are coming up.

[00:05:40] You're paying for it out of pocket, you're fully funding your HSA, and you're paying for those medical expenses out of pocket. You're not using that. HSA, you're letting that HSA grow. Why? Because of the triple benefit. Deduction going in tax free growth, tax free withdrawals, and then when you get to retirement, guess what?

[00:05:55] We're all gonna have medical expenses at some time in our life. When we get to retirement, [00:06:00] we can take the tax free money from a health savings account, but to pay for those medical expenses instead of digging into maybe taxable retirement accounts to pay for those medical expenses. So biggest thing. Is I recommend with a health savings account, treat it like a retirement account.

[00:06:14] Try not to touch those funds. But here's the good thing. If you run into a tax crunch, let's say you're funding an HSA, not using it, paying out of pocket for all medical expenses, and then six years down the road you get hit with a money crunch where you need some cash, guess what? You can take those receipts from those six years.

[00:06:29] Submit it to your HSA for a reimbursement and get that money at that time, again, tax free as long as you have those receipts to back that up. Super powerful there. The biggest thing is, if you're doing the strategy, make sure you're investing the amount in that health savings account. So many people skip that step because they're just so used to putting money in, using our expenses, draining it, putting money in, draining it.

[00:06:50] If you're using this method to keep it growing, letting it grow tax free. Make sure you're investing within that health savings account. Key point now for 2025, there's two limits. If [00:07:00] you're single, the max you can put into an H. SA is $4,300. If you're married, it's $8,550. Again, everybody, if you qualify, I believe.

[00:07:08] Should be maxing out an HSA. Now if you're over 55 years old, there's an additional a thousand dollars that you can put in there as well. The other cool thing, and this gets a little bit complicated, we talk about this a lot in Taxo and can help guide people through this, but there is a planning technique with an HSA if you're an S Corp owner, where you can add it to your reasonable salary.

[00:07:27] Similar tool that we talked about with self-employed health insurance, where it only goes in box one, not gets hit with fica, you can do the same thing. With an HSA, a little bit trickier. Payroll companies aren't really used to it, so a couple workarounds on that, but there's definitely a potential there that you can talk to with your payroll provider.

[00:07:43] Also, hey, quick heads up about for business owners who are sick of paying tax roulette, we just dropped our brand new tax saving starter kit, and yep, it is totally free. Inside, you'll get our master list of write-offs. You'll get behind the scenes case studies of business owners saving $5,000, even [00:08:00] $25,000 and more, and you'll also get a bonus discovery call.

[00:08:03] With our team to help you spot missed opportunities, go ahead and grab it [email protected] slash starter kitt. That's tax Savings podcast.com/starter kitt. Alright, back to health strategies. 

[00:08:17] Section 105 Plans: High Medical Costs Strategy

[00:08:17] Speaker: So the next thing we wanna talk about is business owners that have high. Medical costs. So business owners that have high out-of-pocket medical costs, of course insurance premiums, and the HSA, you get a deduction for that.

[00:08:29] So this would be for costs over above your health insurance premiums. If this is you, there is opportunities for planning here. Typically, we're saying once you have $5,000 or more. Out of pocket health costs. So $5,000 over and above your health insurance, out-of-pocket health costs. And if you have a business with no employees, there's planning there.

[00:08:49] It's something called a Section 1 0 5 plan, and with a section 1 0 5 plan, there's the opportunity to turn medical expenses into a valid business deduction, but it's gotta be done correctly. These things [00:09:00] are fairly easy to put together. You just need the right documentation and you need to dot your I's and cross your T's.

[00:09:05] We provide all of that in the tax home platform. So again, this would qualify if you have fi roughly $5,000 or more of out of pocket health costs over and above your health insurance, and you have no employees. You might wanna look at a section 1 0 5 plan where we can turn personal medical expenses into a valid.

[00:09:23] Business deduction. If you do it correctly, the things you need to do is you need to have, ensure you have the correct paperwork and a plan design and that plan design is gonna be key, making sure that we're following that plan design, but then basically you would reimburse the employee, which would be you or your spouse, depending on how we set it up for medical costs incurred.

[00:09:40] Now, depending on the way your business is. If you're single or married, or you're a sole proprietorship, or you're an ass corporation, or you're C corp, depending on the way you're set up, we'll determine the best way to set up a plan like this. So it's not as easy as just putting the plan document in and making that reimbursement.

[00:09:54] There is a couple steps. There might be another entity involved, depending on whether you're single married, how your [00:10:00] current business structure is set up, but it can be a super powerful plan, especially for those that are going through high medical costs at this time. 

[00:10:09] Health Benefits for Employers with Employees

[00:10:09] Speaker: Now the next thing I wanna talk about is health benefits if you have employees.

[00:10:13] So now we looked at options without employees. Now if you have employees, when we talk about health benefits with employees, I really try to bucket or put into a bucket a few different options of what you can do. You can do group health insurance. First of bucket is not offer any health insurance.

[00:10:28] Of course, that's an option. The second option would be group health insurance. You could increase wages. To cover the cost for medical costs. Now the problem is that's gonna be taxable to the employee. So basically you'd say, okay, your typical wage is gonna be 50,000, we're gonna give you 60, and that's just extra money.

[00:10:45] We're gonna pay you extra than we normally would an employee to cover health costs. The problem is, that's taxable to them. The third option would be to self insure or some variation of self-insurance. Or an HRAA health reimbursement arrangement, or a RA or an icra. [00:11:00] And so I'm specifically gonna talk about HRA because a lot of times, especially for those smaller businesses that we're talking to, these are really good options to be able to offer a health benefit as a small business without having to get into this massive group plans or anything crazy like that.

[00:11:14] So if you have less than 50 employees, or even closer to 25 employees, I love the idea of using a qer, that's Q-S-E-H-R-A. So QSE. HRA and then if you have more employees than that, you can also look at an icra, that's I-C-H-R-A, but basically with a qra, you reimburse employees tax free for medical expenses, including health insurance premiums.

[00:11:36] It's a business expense to you and it's tax free income to them. So this is why it's so much better than just saying, Hey, I'm just gonna pay you more, because that's taxable to them. With a property set up, ra, you're saying, Hey, we're gonna set up. An allowance that we choose, that's generally gonna have to be the same for all employees.

[00:11:54] They're need, all employees are gonna need to have similar allowances. It's gonna have to be available to all employees as well. [00:12:00] But we're saying, Hey, we're gonna give you up to X amount of dollars per year, X amount of dollars per month, and you can use that. To cover medical costs that might be go to the marketplace and getting a health insurance plan with that might be funding various different accounts.

[00:12:13] So this is the thing that we need to set it up correctly. They need to have proof of expenses, they need to prove that they're using this for medical expenses, but can be a super easy way to be able to offer our employees. Health insurance benefits within our business without getting into some complex, crazy expensive plan.

[00:12:29] Now, obviously run the options. There's a lot of options when it comes to health, so run the options and see what makes the most sense for your business. But just know that this Sera is a really good way to get your feet wet. I talk to so many business owners that say, Mike, I just don't want to hire employees because I have to do all these benefits and retirement plans and set up health insurance and all these other things.

[00:12:49] There are a lot of plans and it. Retirement goes the same way. There are a lot of options where you can dip your feet into it and offer something that's not going to break your bank. It's not going to break your company, but [00:13:00] can start to get your feet wet into offering some really good benefits. So that's for people that have employees.

[00:13:08] Conclusion: Protect Your Business from Health Costs

[00:13:08] Speaker: Alright, so let's wrap this up. When it comes to health related tax strategies, especially as we come up on your end, we look at self-employed health insurance. We look at a health savings account, we look at a section 1 0 5 plan, and then different various options if you have employees. So with self-employed health insurance, if you are self-employed and you're paying for health insurance out of your pocket, it is a business deduction.

[00:13:30] Now how you get that business deduction is gonna depend on how your business is taxed. Sole proprietorship, single member LC, you're just taking that tax. You're taking that deduction on your personal tax return. If you're an S corporation, a couple hoops we need to jump through. We need to pay for it for their business, add it to our W2, and then take the deduction on our business tax return.

[00:13:48] If you haven't done that, if you are an S-Corp owner and you haven't done that, you need to do that process now. Talk to your payroll provider. Make sure you're planning out, because you need to do it correctly. We don't just add something to our W2. There's a specific [00:14:00] self-employed health insurance that needs to be added.

[00:14:02] To your W2, so talk to your payroll provider about that. The second one was health savings account. Again, I believe that everybody, as long as you qualify, should be maxing out a health savings account, and my favorite way to utilize a health savings account is to not spend it. Let that thing grow and grow and grow.

[00:14:16] Invest those savings, get it into an investment that makes sense, that can grow. And then take the funds out down the road in retirement. Think of it as like a secondary retirement, but. If you run into issues, if you need some cash, guess what? You can take receipts from those medical expenses that you are paying for out of pocket.

[00:14:33] You can get reimbursed from tax free. So it's a really cool re secondary retirement option that you do potentially have access to a little bit earlier if you need it. So really cool planning opportunity. Then we talked about section 1 0 5. This is for business owners with high out-of-pocket costs, out-of-pocket costs, over and above medical insurance, over and above their health insurance premiums.

[00:14:54] If you hadn't fall into that bucket and you have no employees, this is a powerful strategy that to turn those [00:15:00] medical expenses into actual business expenses. Biggest thing with this one, we need to set it up correctly. It has to be do gotta down our i's and cross our T's on this one. Fairly easy to set up once we get it going, and it's pretty easy to manage.

[00:15:12] Just need to make sure we have it set up correctly. And then if you are an employer or if you are a business owner that has employees, a lot of different options out there. But if you're just getting started and wanna start offering a medical option, look into a RA or an icra. These are health reimbursement arrangements and can be super easy to get going and at least.

[00:15:29] Start that process, and then maybe you go into advanced options down the road, or especially as you start to grow, maybe you look to enhance that, but a really good way to get your feet wet. Health costs don't have to be the silent killer of your cash flow. With the right approach from HSAs to properly structuring your insurance to Qera, as in Section 1 0 5, plans, you can keep more money in your pocket.

[00:15:52] And protect your business. If you found this helpful, don't forget to subscribe. Hit that like button and share it with a business owner who's sick [00:16:00] of paying too much in tax. And if you want help from our team of tax professionals implementing these health strategies along with so many other tax strategies, visit tax el.com.

[00:16:09] That's TX elm.com, or click the link into the description. For a free discovery call, we are helping people like you legally lower your tax bill every single day. Let's make sure your health expenses become a tool, not a liability. See you on the next one.