Medical costs are rising fast, and many business owners are wondering if there is a smarter, more tax-efficient way to handle them. You might be able to deduct certain medical expenses for yourself, your employees, or both. The important thing to know is that the rules vary based on how your business is set up.
This article covers what counts, who qualifies, and how to take advantage of these deductions without making mistakes that lead to penalties.
Medical Deductions: Personal vs Business
When it comes to taxes, medical deductions fall into two categories. Personal deductions apply to your individual tax return and only cover expenses that exceed 7.5 percent of your adjusted gross income if you itemize deductions.
In contrast, business deductions are more flexible and can include employee benefits, reimbursement plans, and in some cases, the business owner’s own expenses. Self-employed individuals may also qualify for special personal deductions, such as health insurance premiums that are deductible without itemizing.
Which medical expenses count as business deductions?
Your business may be able to deduct medical expenses such as:
- Health insurance premiums paid directly by the business
- Reimbursements through IRS-approved plans like HRAs or QSEHRAs
- Contributions to FSAs or HSAs on behalf of employees
- Out-of-pocket payments for qualifying care, including:
- Doctor visits
- Diagnostic tests
- Non-cosmetic surgeries
- Prescriptions
- Medical devices and supplies
You can also use resources like our Medical Expense Summary Worksheet to help track these expenses.
Which medical expenses are not deductible?
Certain costs do not qualify for business deductions. Cosmetic procedures that are not medically necessary and over-the-counter medications, aside from insulin, are excluded. Expenses already reimbursed by insurance also do not qualify, and any undocumented or purely personal expenses are not deductible either.
Does my business structure matter?
Your business entity determines what you can deduct through the business and what must be deducted personally.
- Sole proprietors or single-member LLC owners can deduct health insurance premiums on their personal tax return if they are not eligible for an employer-sponsored plan. Employer-paid premiums for employees are fully deductible.
- Partners in partnerships or multi-member LLCs can usually deduct their premiums personally, while the business can deduct premiums and reimbursements for employees
- S-Corporations must include premiums paid for 2 percent or greater shareholders as taxable wages, but these owners can usually deduct the premiums personally. Benefits provided to employees are deductible by the business.
- C-Corporations can deduct all qualifying health expenses provided to owner-employees and employees, offering the most flexibility
Setting Up a Deductible Medical Reimbursement Plan
There are several ways to offer deductible reimbursement plans. Health Reimbursement Arrangements, or HRAs, allow businesses to reimburse specific medical expenses and are fully deductible. Qualified Small Employer HRAs, or QSEHRAs, are available to businesses with fewer than 50 employees and come with annual reimbursement caps.
Employers can also offer FSAs, which are use-it-or-lose-it accounts that are deductible, and HSAs, which allow both employer and employee contributions and require a high-deductible health plan.
What documentation do I need?
Recordkeeping is essential to protect your deductions. Make sure you retain:
- Proof of premium payments and reimbursement amounts
- Plan documents for all benefit plans offered
- Receipts and invoices for medical services and supplies
- Forms like W-2s for S-corporations or 1099s where applicable
Using a secure digital system can make it easier to track everything year-round.
The Bottom Line
If you want to start deducting medical expenses, your next step depends on your business structure. Sole proprietors and partners should review their eligibility to deduct premiums personally, while S-Corporation and C-Corporation owners should consider setting up reimbursement plans.
No matter your setup, working with a tax professional can help you maximize deductions and stay compliant. With the right approach, you can turn rising medical costs into a real tax advantage for your business.
