Quick Answer
A Section 105 medical reimbursement plan allows business owners to deduct 100% of medical expenses as business expenses rather than itemized deductions. For a freelancer in the 24% tax bracket spending $8,000 annually on healthcare, this saves approximately $1,920 in taxes compared to the standard health insurance deduction.
Best Answer
Priya Sharma, Small Business Tax Analyst
Best for established freelancers with significant medical expenses who want maximum tax savings
What is a Section 105 medical reimbursement plan?
A Section 105 medical reimbursement plan is an IRS-approved employee benefit plan that allows business owners to reimburse themselves and their employees for medical expenses using pre-tax dollars. According to IRS Code Section 105(b), reimbursements for medical care are excludable from gross income, making them fully deductible business expenses.
For freelancers, this represents a significant upgrade from the standard health insurance premium deduction available to self-employed individuals under IRC Section 162(l). While the Section 162(l) deduction reduces your adjusted gross income, a Section 105 plan treats medical reimbursements as legitimate business expenses, reducing both income and self-employment taxes.
Example: $100,000 freelancer with $12,000 in medical expenses
Let's compare the tax impact for a freelancer earning $100,000 annually with $12,000 in medical expenses:
Without Section 105 plan:
With Section 105 plan:
Key requirements for Section 105 plans
What medical expenses qualify?
Section 105 plans can reimburse virtually any expense that qualifies under IRC Section 213(d):
Implementation strategies
For S-Corp owners:
Establish the plan through your corporation and reimburse medical expenses as non-taxable fringe benefits. The corporation deducts the reimbursements, and you pay no taxes on the benefits received.
For sole proprietors:
Hire your spouse as a legitimate employee (even part-time). Establish a Section 105 plan covering all employees. Your spouse's medical coverage extends to you and your family under the plan.
What you should do
If you're spending more than $3,000 annually on medical expenses beyond basic health insurance, a Section 105 plan likely provides substantial tax savings. Start by documenting your current medical expenses for the past year, then consult with a tax professional who specializes in small business benefits to draft appropriate plan documents.
[Use our deduction finder](deduction-finder) to calculate your potential savings from a Section 105 plan based on your specific medical expenses.
Key takeaway: A Section 105 plan converts personal medical expenses into fully deductible business expenses, potentially saving high-earning freelancers $1,500-$4,000+ annually in combined income and self-employment taxes.
Key Takeaway: Section 105 plans convert personal medical expenses into fully deductible business expenses, saving high-earning freelancers $1,500-$4,000+ annually in taxes.
Tax savings comparison for different freelancer income levels with Section 105 plans
| Annual Income | Medical Expenses | Tax Savings (Traditional) | Tax Savings (Section 105) | Additional Benefit |
|---|---|---|---|---|
| $50,000 | $6,000 | $1,800 | $1,845 | $45 |
| $75,000 | $8,000 | $2,400 | $2,580 | $180 |
| $100,000 | $10,000 | $3,000 | $3,690 | $690 |
| $150,000 | $12,000 | $3,600 | $4,428 | $828 |
More Perspectives
Priya Sharma, Small Business Tax Analyst
Good for established freelancers who want to understand the basics before deciding if it's worth the complexity
Section 105 plans: A simpler explanation
A Section 105 medical reimbursement plan is essentially a way to make your personal medical expenses tax-deductible as business expenses. Instead of hoping you can itemize deductions and exceed the 7.5% AGI threshold for medical expenses, you create a formal business benefit plan.
Think of it as creating your own employee benefit package – because as a freelancer, you're both the employer and the employee.
The basic tax math
Currently, you can deduct health insurance premiums as a self-employed person, which reduces your income taxes but not your self-employment taxes. With a Section 105 plan, medical reimbursements become business expenses that reduce both.
For a freelancer earning $60,000 annually:
Is it worth the complexity?
Section 105 plans require formal documentation and careful administration. You need to:
The break-even point is typically around $3,000-$4,000 in annual medical expenses beyond basic health insurance premiums.
Key considerations
Business structure matters: These plans work differently depending on whether you're a sole proprietor, LLC, or S-Corp. S-Corp owners have the easiest implementation.
Employee complications: If you have employees, the plan must cover them too, which can get expensive quickly.
Documentation requirements: Unlike the simple health insurance deduction, Section 105 plans require meticulous record-keeping and formal procedures.
Key takeaway: Section 105 plans can provide significant tax savings for freelancers with substantial medical expenses, but the administrative burden means they're typically worthwhile only for those spending $4,000+ annually on healthcare beyond basic insurance.
Key Takeaway: Section 105 plans provide significant tax savings but require substantial medical expenses ($4,000+) to justify the administrative complexity.
Priya Sharma, Small Business Tax Analyst
Perfect for professional consultants who often work through business entities and want sophisticated tax strategies
Section 105 plans for consulting businesses
As a consultant, you likely understand the value of sophisticated business structures and tax strategies. Section 105 medical reimbursement plans represent one of the most underutilized tax benefits available to consulting businesses.
Under IRC Section 105(b), medical reimbursements made through a qualifying employer plan are excludable from the employee's gross income, while remaining deductible to the employer. For consultants operating through S-Corps or partnerships, this creates a powerful tax arbitrage opportunity.
Strategic implementation for consultants
S-Corp structure advantages:
If you operate through an S-Corp, implementing a Section 105 plan is straightforward. The corporation establishes the plan, reimburses your medical expenses as a fringe benefit, deducts the full amount, and you receive the reimbursements tax-free.
Partnership considerations:
For consultants in partnerships, Section 105 plans work but require careful coordination. Partners cannot exclude reimbursements from their distributive share calculations under IRC Section 707(c).
Solo consultant optimization:
Even as a solo consultant, you can implement a spouse-employee strategy. Hire your spouse for legitimate business activities (bookkeeping, marketing, administration), establish family medical coverage through the Section 105 plan.
Advanced planning opportunities
Health Savings Account coordination:
Section 105 plans complement HSAs perfectly. Use your HSA for routine medical expenses and the Section 105 plan for expenses HSAs cannot cover (insurance premiums, long-term care).
Multi-year planning:
Unlike HSAs, Section 105 plans have no contribution limits. Consultants with variable income can time medical expenses strategically to maximize deductions in high-income years.
Succession planning:
Section 105 plans can cover retiree medical expenses, making them valuable for consultants planning business transitions.
Implementation timeline
Most consultants can implement a Section 105 plan within 30-60 days:
1. Draft plan documents (1-2 weeks)
2. Board resolution (if corporate structure)
3. Employee notification (if applicable)
4. Begin reimbursement procedures
The annual administrative burden is minimal – essentially maintaining receipts and processing reimbursements according to plan terms.
Key takeaway: For consultants with business entities, Section 105 plans offer sophisticated tax optimization with minimal ongoing complexity, typically saving $2,000-$5,000 annually in combined taxes.
Key Takeaway: Consultants with business entities can implement Section 105 plans with minimal complexity, typically saving $2,000-$5,000 annually in combined taxes.
Sources
- IRS Code Section 105 — Amounts received under accident and health plans
- IRS Publication 535 — Business Expenses - Employee Benefit Programs
- IRS Code Section 213 — Medical, dental, etc., expenses
Related Questions
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.