Tax

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 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:

1. 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.
2. 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.
3. 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.

If you want to discuss the 105-HRA, please call me directly at 408-778-9651

• By Leon Clinton
• April 7, 2026

Many business owners overlook a powerful strategy that allows them to pay family members, reduce taxes, and avoid payroll taxes altogether.

You likely know the traditional approach: hire your child and put them on payroll. That strategy works well for younger children in a sole proprietorship. But once your child turns 18—or if you operate as a corporation—payroll taxes usually apply.

In the right situation, a lesser-known alternative offers a better outcome.

You can hire a family member for a “one-time project” instead of ongoing work. This structure allows you to deduct the payment at your higher tax rate while your family member reports the income at a much lower rate—often with little or no tax liability.

For example, you might pay your college-age child to design a website, create marketing materials, or complete a facility upgrade. If you structure the work as a true one-time project—not a continuous or recurring one—the income avoids employee status and thus payroll taxes for both you and the child. It also avoids 1099 independent contractor status and thus self-employment taxes for the child.

This approach can generate meaningful savings. In one scenario, a $23,225 payment produced over $7,800 in net family tax savings.

To make this strategy work, you must follow several key rules:

• Define a clear, one-time project with a specific scope.
• Pay a reasonable, fixed amount upon completion of the project.
• Avoid hourly wages or ongoing tasks.
• Maintain simple documentation and proof of completion.
• Ensure the arrangement supports proper worker classification.

This strategy depends heavily on proper structure and execution. If you treat the work as ongoing employment, you risk having your child or other family member classified as an employee or a 1099 independent contractor.

When done correctly, this approach efficiently shifts income, minimizes taxes, and keeps compliance simple.

If you want to discuss the one-time project strategy, please call me on my direct line at 408-778-9651

• By Leon Clinton
• April 3, 2026

If you purchase health insurance through the Affordable Care Act (ACA) marketplace and receive premium tax credits, a major rule change begins in 2026—and it could create a painful surprise.

Under prior rules, if your income came in higher than expected, the amount of excess subsidy you had to repay was capped (as long as your modified adjusted gross income (MAGI) stayed under 400 percent of the federal poverty level). That safety net is now gone. Beginning in 2026, if you receive more advance premium tax credit than you qualify for, you must repay every dollar of the excess.

Even more significant: the “subsidy cliff” returns. If your household MAGI exceeds 400 percent of the federal poverty level—even slightly—you lose eligibility entirely and must repay 100 percent of the advance credit you received during the year. For many couples, that could mean writing a check for $15,000 or more at tax time.

Business owners and early retirees are especially exposed. Variable profits, year-end bonuses, Roth conversions, or capital gains can unexpectedly push income over the threshold. What once felt like a manageable reconciliation can now become a five-figure tax bill.

The key takeaway: ACA income planning must now be precise. If you rely on marketplace subsidies, you need to coordinate business income, retirement distributions, and investment decisions carefully throughout the year.

If you want to discuss ACA subsidies, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• March 24, 2026