Section 105 HRA for Freelancers: Deduct Family Medical Costs by Employing Your Spouse (2026)

Q: What is a Section 105 HRA and how does it help a freelancer?

A Section 105 Health Reimbursement Arrangement is an employer plan that reimburses employees for medical expenses tax-free, and lets the employer deduct the reimbursements as a business expense. For a sole proprietor, the strategy is to employ your spouse and set up a 105 HRA that reimburses your spouse-employee's family medical costs — which, since you're the spouse, includes your own. The reimbursements become a deductible business expense on Schedule C Line 14, converting ordinary out-of-pocket medical bills and premiums into a write-off that lowers both income tax and self-employment tax.

Q: Why is a 105 HRA better than the self-employed health insurance deduction?

The self-employed health insurance deduction is an above-the-line deduction that reduces income tax but does NOT reduce self-employment tax, and it only covers premiums — not your out-of-pocket costs like copays, dental, and vision. A Section 105 HRA is a business expense on Schedule C, so it reduces net profit before self-employment tax is calculated, saving you roughly 15.3% on top of income tax, and it can reimburse a much broader set of medical costs. For families with meaningful out-of-pocket spending, the HRA can be dramatically more valuable.

Q: Can I set up a Section 105 HRA to cover just myself?

Not directly. A sole proprietor is the owner, not an employee, so you can't reimburse yourself through a 105 HRA. The strategy works because you employ your spouse as a bona fide employee and the plan covers that employee's family — and you're a member of the family. If you have no spouse to legitimately employ, this specific strategy generally isn't available to you, and you'd rely on the self-employed health insurance deduction and an HSA instead.

Q: What are the compliance traps with a one-employee HRA?

The big one is the Affordable Care Act. ACA market-reform rules restrict how an HRA can reimburse individual-market health insurance premiums, and getting it wrong can trigger steep excise penalties. A true one-employee arrangement (only your spouse) has an exception that keeps the classic strategy viable, but the moment you have other employees, or structure it carelessly, the rules change fast. The employment must also be genuinely bona fide — the IRS challenges spouse-employment schemes that are fiction. This is why almost everyone runs a 105 HRA through a third-party administrator rather than a downloaded template.

Q: How much can a Section 105 HRA actually save?

It depends on your family's medical spending, but for many it's the difference between deducting nothing and deducting everything. A family with, say, $12,000 a year in premiums and out-of-pocket medical costs could turn that into a Schedule C deduction worth both income tax (at your marginal rate) and self-employment tax (about 15.3%). At a 22% bracket that's roughly $2,600 in income tax plus around $1,800 in SE tax — well over $4,000 in savings — minus the administrator's annual fee, which is typically a few hundred dollars. The math clearly favors the HRA when out-of-pocket spending is high.

Published: July 11, 2026 · Reading time: 8 min

TL;DR: If you file a Schedule C and have a spouse, a Section 105 Health Reimbursement Arrangement can turn your family's out-of-pocket medical bills and insurance premiums into a business deduction. You employ your spouse as a bona fide employee, adopt a written 105 plan, and reimburse the employee's family medical costs — which includes you. The reimbursements land on Schedule C Line 14, employee benefit programs, so they cut both income tax AND self-employment tax — something the ordinary self-employed health insurance deduction can't do. The catches: the employment must be real, the plan must be written, and ACA rules make this a use-a-third-party-administrator strategy, not a DIY template.

Most freelancers know they can deduct their health insurance premiums. Far fewer know there's a way to also deduct copays, dental, vision, and the family's entire out-of-pocket medical tab — and save self-employment tax on all of it. It's one of the most powerful tax moves available to a married sole proprietor, and it's built on a single idea: employing your spouse. Here's how it works, what it saves, and the traps that make professional setup non-negotiable.

The Strategy in One Sentence

Hire your spouse, reimburse the family's medical costs through a written Section 105 plan, and deduct those reimbursements as a business expense.

Because a sole proprietor is an owner and not an employee, you can't run your own medical costs through a 105 HRA directly. But your spouse can be a genuine employee — and an employee's health plan can cover the employee's family. You're the spouse's family. So the plan reaches your medical costs by covering your spouse-employee's household.

Why It Beats the Self-Employed Health Insurance Deduction

The familiar self-employed health insurance deduction is good, but limited:

	SE health insurance deduction	Section 105 HRA
Where it lives	Above-the-line (Schedule 1)	Business expense (Schedule C Line 14)
Reduces income tax	Yes	Yes
Reduces self-employment tax	No	Yes (cuts net profit first)
Covers premiums	Yes	Yes
Covers copays, dental, vision, out-of-pocket	No	Yes

That "reduces self-employment tax" row is the headline. Because the HRA reimbursement is a business expense, it lowers your Schedule C net profit before self-employment tax is calculated — saving you roughly 15.3% on top of your income-tax rate. The SE health insurance deduction never touches SE tax. And the HRA covers the whole medical tab, not just premiums.

What It Can Save (Real Numbers)

Say your family spends $12,000 a year on premiums plus out-of-pocket medical costs, and you're in the 22% bracket:

Income tax saved: ~$2,640 (22% × $12,000)
Self-employment tax saved: ~$1,700–$1,800 (roughly 15.3% × $12,000, adjusted)
Combined: well over $4,000, minus a few hundred dollars in administrator fees

The larger your family's out-of-pocket medical spending, the more decisively the HRA wins. For a family with high deductibles or ongoing medical costs, this is frequently the single biggest tax move on the table.

How to Set It Up (Five Steps)

Confirm eligibility — you file Schedule C and have a spouse you can legitimately employ.
Make the employment real — job description, reasonable pay, records of hours and duties, actual payment. Family employment gets scrutinized, so it must be genuine. (This is the same bona-fide standard behind hiring your kids.)
Adopt a written 105 plan — covered people, reimbursable expenses, any annual cap. Use a third-party administrator (TPA) to draft and maintain it.
Reimburse substantiated expenses — employee pays, submits documentation, business reimburses; keep every receipt and reimbursement record.
Deduct on Line 14 — total the year's reimbursements as an employee benefit program.

This mirrors the discipline of an accountable plan: a written arrangement, real substantiation, and clean reimbursement paperwork are what make the deduction bulletproof.

The Compliance Traps (Why You Need a Pro)

This strategy is powerful and technical. Three things can sink it:

ACA market-reform rules. The Affordable Care Act restricts how an HRA can reimburse individual-market premiums, with real excise-tax penalties for getting it wrong. A true one-employee arrangement (just your spouse) has an exception that keeps the classic strategy viable — but add another employee or structure it carelessly and the rules shift immediately.
Bona fide employment. The IRS challenges spouse-employment setups that are fiction. Reasonable pay, real duties, and documentation are non-negotiable.
A proper written plan. No plan document, no deduction. Substantiation of each reimbursed expense is required.

Because of the ACA overlay, this is a use-a-third-party-administrator strategy, not a downloaded template. The administrator's few-hundred-dollar annual fee is small against a four-figure tax saving — and it's what keeps the arrangement compliant.

When It Makes Sense — and When It Doesn't

Good fit:

Married sole proprietor whose spouse can genuinely work in the business
Meaningful family out-of-pocket medical spending and/or premiums
Willing to run real payroll-style documentation and a written plan

Poor fit:

No spouse to legitimately employ (you can't cover yourself directly — lean on the SE health insurance deduction and an HSA instead)
Multiple non-family employees (the one-employee ACA exception no longer applies cleanly)
Low medical spending, where the administrator fee eats the benefit
An S-corp owner, where more-than-2% shareholder rules change the analysis entirely

Frequently Asked Questions

What is a Section 105 HRA and how does it help a freelancer?

It's an employer plan that reimburses employees for medical costs tax-free and lets the employer deduct the reimbursements. A sole proprietor employs their spouse and reimburses the spouse-employee's family medical costs — including the owner's — deducting it all on Schedule C Line 14, which lowers both income tax and self-employment tax.

Why is a 105 HRA better than the self-employed health insurance deduction?

The SE health insurance deduction cuts income tax only, and only on premiums. A 105 HRA is a business expense, so it cuts self-employment tax too (about 15.3%) and can reimburse copays, dental, vision, and other out-of-pocket costs — often making it far more valuable for families.

Can I set up a Section 105 HRA to cover just myself?

Not directly — as the owner you aren't an employee. The strategy works by employing your spouse as a bona fide employee whose plan covers their family (including you). With no spouse to legitimately employ, rely on the SE health insurance deduction and an HSA instead.

What are the compliance traps with a one-employee HRA?

Mainly the ACA's limits on reimbursing individual-market premiums, which carry excise penalties if botched; a true one-employee (spouse-only) arrangement has an exception that preserves the classic strategy. The employment must be genuinely bona fide, and a written plan with substantiation is required — hence using a third-party administrator.

How much can a Section 105 HRA actually save?

For a family with ~$12,000 in premiums and out-of-pocket costs in a 22% bracket, roughly $2,600 in income tax plus ~$1,800 in SE tax — over $4,000, minus a few hundred in administrator fees. The higher your out-of-pocket medical spending, the bigger the win.

Authoritative References

Deduct It Only If You Documented It

A Section 105 HRA lives or dies on documentation — every reimbursed medical receipt, every wage record, every plan detail. CentSense scans each receipt with AI, tags it to the right Schedule C line, logs mileage at $0.725/mile for 2026, and exports a CPA-ready CSV — so when your tax pro sets up the HRA, the records behind it are already airtight. Start free with 10 AI scans a month, no credit card required; the Solo plan ($5/month) adds unlimited scanning and mileage tracking.

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This article is educational and not tax or financial advice. Section 105 HRAs involve significant ACA and employment-law compliance requirements — consult a qualified tax professional or benefits administrator before setting one up.

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