Yes, your LLC can offer health benefits to family members who are legitimate employees, but the tax treatment depends on your business structure and how you set up the benefits plan.
Offering health insurance is a smart way to attract and retain employees-including relatives-but if you’re hiring a spouse or child, it’s important to understand the legal, tax, and administrative implications. Done correctly, your LLC can deduct the cost of premiums and even lower your family’s overall tax burden. Done incorrectly, it can trigger audits, penalties, or disallowed deductions.
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1. Your LLC Must Hire the Family Member as a Real Employee
Before offering any benefits, the family member must be a legitimate employee of your LLC. That means:
- They perform real, age-appropriate work
- You pay them a reasonable wage for that work
- You issue a W-2 and withhold payroll taxes
- You follow employment laws just as you would for any other employee
Casual help or symbolic roles do not qualify for employer-sponsored health benefits. The family member must be on the books, on payroll, and actively contributing to the business.
2. Structuring Benefits Depends on Your LLC’s Tax Classification
The tax treatment of health benefits varies based on whether your LLC is taxed as a sole proprietorship, partnership, or S corporation:
If You’re a Single-Member LLC (Sole Proprietor):
You can’t offer group health benefits to yourself as an “employee,” but if you hire your spouse and provide a family health plan as part of their compensation, you may be able to deduct 100% of the premiums.
This is often called the “spouse-as-employee” strategy. Requirements include:
- Your spouse is a legitimate employee with actual duties
- The health plan is in your spouse’s name (not yours)
- The plan covers your spouse and dependents (which includes you)
This setup lets you claim the premiums as a business expense, not just a personal self-employed health insurance deduction.
If You’re a Multi-Member LLC or Partnership:
If your spouse is a co-owner (not an employee), the above strategy does not apply. Instead, each partner may deduct their share of the health insurance cost on their individual return, but it won’t count as a business expense on the LLC’s return.
If a child is hired as an employee, you can offer them benefits and deduct the cost-assuming they are old enough to work, and the coverage is part of a bona fide employee benefits program.
If Your LLC Elects to Be Taxed as an S Corporation:
S corps are subject to different rules. If you own more than 2% of the S corp and offer health insurance to yourself or your family members, the cost must be included in your W-2 wages as additional income. You can then deduct the premium on your personal return, but the business can’t deduct it directly as a fringe benefit.
If you hire your spouse or child as an employee and they own no part of the business, you may offer them regular employee benefits as you would for any other worker. The business can deduct those premiums if the plan meets IRS guidelines.
3. Using a Qualified Small Employer HRA (QSEHRA)
LLCs with fewer than 50 full-time employees may be eligible to offer a QSEHRA-a type of reimbursement arrangement that allows the business to reimburse employees for qualified medical expenses, including insurance premiums.
With a QSEHRA, you don’t provide insurance directly. Instead, you reimburse the employee tax-free up to an annual limit. This can work well if your family member is a W-2 employee and buys their own coverage.
4. Compliance and Documentation Are Critical
To protect your LLC and ensure tax compliance:
- Have a written benefits policy that applies to all employees, including family
- Keep records of employment duties, wages, and hours worked
- Work with a licensed health insurance provider or benefits administrator
- Consult a tax professional to ensure proper reporting on W-2s and tax returns
Offering benefits to family members is legal-but it must be done professionally and with full documentation to withstand IRS scrutiny.
5. Benefits Beyond Health Insurance
In addition to medical coverage, you may also offer family employees other benefits such as:
- Dental and vision insurance
- Retirement plan contributions (e.g., SEP IRA, SIMPLE IRA)
- Paid time off or vacation
- Life or disability insurance
Each benefit comes with its own rules and tax implications, especially when family is involved. Always apply benefits equally to all eligible employees to avoid discrimination issues.
Your LLC can legally offer health benefits to family members if they are legitimate employees-and doing so can offer both tax savings and peace of mind. The key is to treat family employees just like any other worker, comply with employment and tax laws, and keep clean records. If structured properly, health benefits can be a smart part of your compensation strategy and a valuable support to your family.
