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.
Related: how married couples are treated for tax filing purposes when operating a business together (see our guide on married couple LLC partnership return rules).
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.
Do You Need a W-2 for a Spouse Using a 105-HRA?
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.
Why Some Business Owners Still Issue a W-2
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.
How We Can Help
Sterling Tax and Accounting is here to help your business with tax planning! Our comprehensive approach to tax planning helps reduce your overall tax liability and keep more money in your pocket. If all your accountant does is file your taxes, chances are they are making you pay more than your fair share of taxes.
Learn how to proactively save on taxes by scheduling a call with our tax planning specialists.
Our tax planning, accounting & business services help you stay on track. Sterling Tax & Accounting will work with you to optimize your business and minimize your taxes. We will work to provide you and your business with the tools and resources you need to build a solid tax and business foundation. We’re a trusted CPA Firm in Sarasota, Florida. We serve clients all over the US, and proactively work to minimize their taxes.
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