April 28, 2026
If you employ your spouse in your business and use a Section 105-HRA to deduct family medical expenses, you may be wondering whether issuing a W-2 is necessary.
The good news is, from a tax law standpoint, a W-2 is not required. IRS guidance and court decisions confirm that medical reimbursements under a properly structured Section 105-HRA can qualify as reasonable compensation, even if they are the only form of pay and are not reported as wages.
So why do some business owners still issue a W-2?
The answer lies in trade-offs:
- Tax impact. Adding W-2 wages generally does not produce meaningful tax savings. In many cases, it slightly increases overall tax liabilities due to interactions between self-employment taxes and income taxes.
- Administrative burden. Issuing a W-2 means running payroll, including quarterly filings, year-end reporting, and ongoing compliance. This creates additional time and cost burdens as well as the potential for penalties.
- Audit perception. A no-wage setup (large benefits, zero wages) is technically valid but may appear unusual. Adding a salary makes the arrangement look more conventional and may reduce IRS scrutiny.
Bottom line. This decision is not about saving taxes; it’s about choosing between simplicity and optics. Skipping the W-2 keeps things lean and compliant, while adding it may provide peace of mind at the cost of added complexity.
If you have any questions, please feel free to reach out to our team!
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