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.
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.
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.
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.
