How to Claim Personal Medical Expenses as a Business Deduction

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The only way a self-employed family child care provider can deduct personal medical expenses as a business deduction is to set up a Health Reimbursement Account (HRA).

These plans are also known as a medical reimbursement plan or Section 105 Plan.

Here’s how it works: You hire your spouse or your own child to help you do work for your business (cleaning, record keeping, help caring for the children, etc.).

Once you set up an HRA you can claim a business deduction for all uninsured medical expenses such as medical insurance premiums paid by your husband at work, drugs, co-payments, diagnostic fees, examination fees, hospital bills,
orthodontia, braces, hearing aids, wheelchairs, eyeglasses, contact lenses, etc.

For every $1,000 of uninsured medical expenses, you can expect to save between $300-$400 in taxes because as business expenses they will reduce both your Social Security and federal and state income taxes.

Here’s an example: Let’s say your family spent $6,000 on health insurance premiums and another $4,000 on out-of-pocket medical expenses. If you were not eligible to purchase health insurance through your husband’s employer you could deduct half of the the $6,000 on your Form 1040.*

If you were in the 15% federal income tax bracket you would save $900 in federal taxes ($6,000 x 15%). The $4,000 in other medical expenses could only be deducted as an itemized expense on Schedule A to the extent they exceeded 10% of your adjusted gross income. For most providers this means they wouldn’t be able to claim any medical expenses on Schedule A.

However, if you establish an HRA you could deduct the entire $10,000 as a business expense. This would save you 15% in federal income taxes and 15.3% in Social Security/Medicare taxes, or $3,030 ($10,000 x 15% x 15.3%). If your state income tax was 5% you would save another $500.

Here’s a helpful brochure that includes a worksheet so you can estimate how much you would save.

The largest company that offers HRA plans is Total Administrative Services (TASC). Their HRA plan is called BizPlan. They have posted several informational videos here and here that explain BizPlan.

10% Discount!

You can receive a 10% discount on the first year’s cost of BizPlan (about $400 – 100% tax deductible) if you use this application form or mention my name and code TOMA when you enroll. Call 888-595-2261 (ext. 17732) for more information.

I will receive some compensation from BizPlan if you take advantage of this discount. I decided to endorse BizPlan because they are the leader in providing HRA services to family child care providers and I have been in contact with them for many years.

Pay Wages?

BizPlan includes an audit protection guarantee and an employee payroll service. Although you are not required by law to pay your spouse wages to take advantage of the tax benefits of an HRA, BizPlan strongly recommends that you pay your spouse at least a minimal amount. If you choose not to pay wages, you will not be covered under their audit protection plan.

I won a US Tax Court case for a family child care provider who did not pay wages. There has also been an appeals court case (Shellito v. Commissioner) that says the same thing.

If your family has medical expenses of at least $1,000 a year that are not covered by medical insurance, you should seriously consider setting up an HRA.

I previously wrote an article “How Can You Deduct Family Medical Expenses.”

* If you are eligible to be covered you can’t deduct any of the insurance premiums.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.tasconline.com/



Categories: Employees, Record Keeping & Taxes

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10 replies

  1. Tom, i have been meaning to set up an hra but my tax person wasnt excited or seemingly willing to wirk with me ( seeking new tax person for next year). Anyway, is it too late in the year to do so? Are there penalties for waiting til september? Would i be able to claim the stuff from the year to date as well? Lastly, does this includecthe insurance premiums my husband pays at work? Thank you

  2. Does this work still if my husband has health insurance benefits through his work place and has a flex medical spending account as well. Not that you can double dip but we always spend more than he can flex in a year. 3 kids with braces, one with speech that cost 300 a month after insurance..it doesn’t take long. Can I still do this for my family.

  3. You can’t include within an HRA money used with the flex medical spending account. You can use the HRA for health expenses outside of the flex spending account.

  4. Lori – You can only start deducting medical expenses after the HRA is set up. You can start it during any month – no penalties for when you start. Yes, you can include medical insurance premiums paid by your husband at his work.

  5. Hello Tom,
    My question has to do with rates during the school year. I have been taking care of a 3 year old for about a year and she started preschool this past week. She goes twice a week, 3 hours each day. The parents asked a couple of months ago if I’d lower their fee but I told them no b/c they’re using a fulltime position and they replied that we could discuss it more as we get closer. Well, here we are and they want to know again. Is it fair of me not to reduce their rate?

  6. You are always entitled to set your own rates. It’s still logical to argue that the child still takes up a full time space. You can say you are not willing to fill one full time space with two part time children. You can also decide to charge her less, based on a part-time rate, but your part-time rate is higher on an hourly basis than your full time rate. It’s up to you. There is no right or wrong way to handle this.

  7. Hello Tom,
    I just wanted to verify which expenses can be deducted if this plan is set up at this point in the year. When I called TASC to discuss the options for my husband’s and my businesses, I was told that we would be able to deduct premiums paid back to the beginning of the year; but that we would only be able to deduct out of pocket costs starting at the first of the month that we set up the HRA. I see you stated that we could only deduct what was paid out after the HRA is set up. Before I get this all set up I just wanted to clarify what is the correct answer just so I can get a good feel for what we would save in taxes.
    Thanks!

  8. We have family health insurance thru my family child care business so we pay the full premium. The plan has a 4000 deductible. I have an HSA account. What’s the best way for me handle this on our taxes?

  9. Rachell – I assume TASC is correct. They are the experts in this.

  10. Hi, if I pay my spouse to “clean” in order to set up this med acct, and I pay him, how should that be reflected on our joint tax return?

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