When a sole proprietor hires a spouse and uses a medical reimbursement plan, a familiar question comes up: “Should I also put my spouse on payroll and issue a W‑2?”

This W-2 issue surfaces in the context of a Section 105-HRA plan in which the employee‑spouse is reimbursed for both the family’s health insurance and all other medical expenses.

Does the Section 105-HRA medical reimbursement count as compensation for purposes of “reasonable compensation”?

Can the medical reimbursement be the sole source of compensation?

What do you gain or lose with a W-2 wage?

Situation

Jennifer operates a sole proprietorship with $100,000 of taxable business income. She hires her husband, Jake, as a bona fide employee; adopts a Section 105 medical reimbursement arrangement; and pays Jake only through a family medical plan that reimburses $20,000 of health insurance premiums and other medical expenses.

The question is whether she should ... Log in to view full article.