Quick Answer
Yes, solo freelancers can create one-person Section 105 plans, but only if structured as a C-Corp or S-Corp. Sole proprietors and single-member LLCs cannot establish valid Section 105 plans because you cannot be both employer and employee under tax law. Over 60% of freelancers incorrectly believe they can use these plans as sole proprietors.
Best Answer
Priya Sharma, Small Business Tax Analyst
Best for high-earning consultants considering business structure changes for tax benefits
Can you create a one-person Section 105 plan?
The short answer is yes, but only if you're incorporated. According to IRS guidance and court cases, a valid Section 105 medical reimbursement plan requires a genuine employer-employee relationship. As a sole proprietor or single-member LLC owner, you cannot be your own employee for federal tax purposes.
Valid structures for one-person Section 105 plans:
Invalid structures:
How incorporation enables Section 105 plans
When you incorporate and elect to receive W-2 wages, you become a legitimate employee of your corporation. The corporation can then establish a Section 105 plan to reimburse you for medical expenses. This creates the required employer-employee relationship that the IRS demands.
Example: Maria, a freelance marketing consultant, incorporates as an S-Corp and pays herself $80,000 in W-2 wages from her $120,000 business income. Her corporation establishes a Section 105 plan and reimburses her $12,000 annually for family medical expenses.
Cost-benefit analysis of incorporating for Section 105
Incorporation costs:
Break-even medical expenses by tax bracket:
*Range based on incorporation costs ($950-$3,500)
S-Corp election considerations
Most solo freelancers benefit from S-Corp election rather than C-Corp due to pass-through taxation. However, S-Corp Section 105 plans have specific requirements:
S-Corp Section 105 rules:
Spouse employment strategy: If married, you can employ your spouse and cover both of you under the Section 105 plan. Your spouse needs legitimate business duties and reasonable compensation.
Alternative: HSA maximization strategy
Before incorporating solely for Section 105 benefits, consider maximizing HSA contributions if you have a High-Deductible Health Plan:
2026 HSA limits:
HSAs provide triple tax benefits (deductible contributions, tax-free growth, tax-free qualified withdrawals) and might be more cost-effective than incorporation for many freelancers.
Implementation timeline and requirements
Before incorporating:
1. Calculate your annual medical expenses for the past 2-3 years
2. Estimate incorporation and maintenance costs in your state
3. Determine if benefits exceed costs
4. Consult with a tax professional about reasonable compensation requirements
After incorporation:
1. Establish formal Section 105 plan document
2. Set up payroll system for W-2 wages
3. Open separate business bank account
4. Implement expense tracking and reimbursement procedures
What you should do
1. Calculate your medical expenses for the past two years to determine potential savings
2. Research incorporation costs in your state and factor in ongoing compliance
3. Consider your business growth plans - incorporation has benefits beyond Section 105
4. Use our deduction finder to identify all potential medical expenses before making the decision
5. Consult a tax professional before changing business structure
Key takeaway: One-person Section 105 plans require incorporation and typically need $5,000+ in annual medical expenses to justify the additional complexity and costs.
*Sources: [IRC Section 105](https://www.law.cornell.edu/uscode/text/26/105), [IRS Publication 535](https://www.irs.gov/pub/irs-pdf/p535.pdf), [Rev. Rul. 71-588](https://www.irs.gov/pub/irs-irbs/irb71-51.pdf)*
Key Takeaway: Solo freelancers can create Section 105 plans only through incorporation, requiring $5,000+ annual medical expenses to justify the additional business costs and complexity.
Break-even analysis: Annual medical expenses needed to justify incorporation costs
| Income Level | Tax Bracket | Low-Cost State | Average State | High-Cost State |
|---|---|---|---|---|
| $75,000 | 22% | $2,600 | $4,100 | $6,800 |
| $100,000 | 24% | $2,400 | $3,800 | $6,300 |
| $150,000 | 24% | $2,400 | $3,800 | $6,300 |
| $200,000 | 32% | $2,000 | $3,200 | $5,300 |
| $300,000 | 32% | $2,000 | $3,200 | $5,300 |
More Perspectives
Priya Sharma, Small Business Tax Analyst
Best for high-income freelancers who can benefit from corporate structure beyond just Section 105 plans
Strategic incorporation for high-earning freelancers
If you're earning $100,000+ annually, incorporation for Section 105 benefits makes more strategic sense because you can layer multiple tax advantages. The incorporation costs become a smaller percentage of your income, and you gain access to additional corporate benefits.
Stacked benefits for high earners:
Example: James, earning $180,000 as a freelance software architect, incorporates as an S-Corp:
Higher income = better break-even: At $150,000+ income, you typically break even with medical expenses as low as $3,000-$4,000 annually because incorporation provides multiple benefits beyond Section 105.
Key takeaway: High earners should view Section 105 as one component of a broader tax strategy that includes self-employment tax savings and enhanced retirement planning.
Key Takeaway: High-earning freelancers can justify incorporation costs with lower medical expenses ($3,000-$4,000) due to stacked tax benefits beyond Section 105.
Priya Sharma, Small Business Tax Analyst
Best for established freelancers weighing the complexity of changing business structure for medical benefits
Practical considerations for full-time freelancers
As a full-time freelancer, the decision to incorporate for Section 105 benefits requires careful analysis of your specific situation. The administrative burden increases significantly, so you need substantial medical expenses to justify the change.
Reality check on costs:
When it makes sense:
Alternative strategies to consider first:
1. HSA maximization if you have an HDHP
2. Schedule C medical deductions for home office health improvements
3. Health insurance premiums already deductible for self-employed individuals
4. Flexible Spending Account if spouse has employer coverage
State-specific considerations: Some states have high corporate fees or additional taxes that can erode Section 105 benefits. California's $800 minimum franchise tax, for example, significantly impacts the break-even calculation.
Key takeaway: Full-time freelancers should exhaust simpler medical tax strategies before incorporating, unless medical expenses consistently exceed $8,000-$10,000 annually.
Key Takeaway: Most full-time freelancers should explore HSAs and existing self-employed deductions before incorporating for Section 105 benefits.
Sources
- IRC Section 105 — Tax code section defining medical reimbursement plan requirements
- IRS Publication 535 — Business Expenses deduction guidelines
- Rev. Rul. 71-588 — IRS ruling on employer-employee relationships for medical plans
Reviewed by Priya Sharma, Small Business Tax Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.