Health Savings Accounts for Small Businesses and Self-Employed Individuals: A Guide to Unlocking Savings and Tax Benefits
When you’re a small business owner or self-employed, managing your finances can feel like juggling many tasks at once. From business expenses to personal income, it can be tough to navigate it all. But one area that’s often overlooked in financial planning is healthcare—and more specifically, Health Savings Accounts (HSAs). These accounts are not only an essential tool for managing your medical costs but can also be a powerful tool for building wealth over time. In this article, we’ll dive into everything you need to know about Health Savings Accounts (HSAs) for small businesses and self-employed individuals, breaking down the tax benefits, savings opportunities, and how to maximize this tool for your future.
What is an HSA?
A Health Savings Account (HSA) is a tax-advantaged savings account that lets you set aside money for healthcare expenses. It’s designed to help people with high-deductible health plans (HDHPs) manage their medical costs. Contributions to an HSA are made on a pre-tax basis, meaning they reduce your taxable income for the year. Plus, when you withdraw funds for qualified medical expenses, those withdrawals are also tax-free.
For self-employed individuals and small business owners, an HSA can be a powerful financial tool. It offers triple tax advantages:
Pre-tax contributions that reduce your taxable income.
Tax-free growth on any investments within the account.
Tax-free withdrawals for eligible medical expenses.
This makes an HSA an excellent way to save for both immediate medical costs and long-term healthcare needs.
How Do HSAs Work?
To open an HSA, you need to be enrolled in a High-Deductible Health Plan (HDHP). An HDHP is a type of health insurance plan with a higher deductible and lower monthly premiums compared to traditional plans. The minimum deductible for an HDHP is $1,600 for individuals and $3,200 for families in 2025, and the maximum out-of-pocket expense is $8,050 for individuals and $16,100 for families.
Once you have an HDHP in place, you can open an HSA through a bank, credit union, or other financial institution. Here’s how the HSA works in a typical year:
Contribute: You can contribute up to the annual limit. For 2025, individuals can contribute up to $4,300, and families can contribute up to $8,550. If you’re 55 or older, you can contribute an additional $1,000 as a catch-up contribution.
Withdraw: When you incur qualified medical expenses, you can withdraw funds from your HSA to pay for them, tax-free.
Invest: Any money in your HSA that’s not immediately used for medical expenses can be invested, helping the account grow over time.
Roll over: The money in your HSA rolls over year after year, unlike Flexible Spending Accounts (FSAs), which have a “use it or lose it” rule.
The flexibility and tax advantages make HSAs an essential part of any small business owner’s or self-employed individual’s financial plan.
Why Should Small Business Owners and the Self-Employed Care About HSAs?
As a small business owner or self-employed individual, managing your health expenses can be a huge challenge. Without employer-sponsored health plans, you may find yourself paying for healthcare entirely out of pocket or purchasing a plan on the open market. The good news is that HSAs provide a way to manage these costs in a way that benefits your bottom line—especially when you combine them with your business expenses and personal financial goals.
Here’s why an HSA should be on your radar:
Tax Deductions: Contributions to an HSA are tax-deductible, which can lower your overall taxable income. Whether you're paying for business-related health expenses or your personal medical costs, this tax benefit helps reduce the amount of taxes you owe.
Lower Healthcare Costs: As a self-employed individual, you likely pay for your own health insurance premiums. With an HSA, you can use the account to cover these premiums if you qualify under certain circumstances. This can ease the financial strain of paying for health insurance while still allowing you to save and invest for the future.
Wealth Building: An often overlooked aspect of HSAs is their potential as long-term investment vehicles. Many HSA custodians allow you to invest the funds in stocks, bonds, or mutual funds, which can grow your balance over time. This makes an HSA an ideal option for building wealth for future healthcare expenses, especially in retirement.
No “Use It or Lose It” Rule: Unlike Flexible Spending Accounts (FSAs), the money you contribute to an HSA can be rolled over year after year. If you don’t need to use all your funds in a given year, you can leave them in the account, where they will continue to grow tax-free.
Retirement Benefits: While HSAs are primarily designed for medical expenses, once you reach age 65, you can withdraw funds for any purpose without penalty—though non-medical withdrawals will be subject to ordinary income tax. This makes an HSA a great way to supplement your retirement savings.
How to Use Your HSA as a Self-Employed Person
Once you’ve opened your HSA, it’s time to start using it wisely. Here are some tips for making the most of your HSA as a self-employed individual:
1. Maximize Contributions
The first step is to contribute as much as you can to take full advantage of the tax benefits. For 2025, individuals can contribute up to $4,300, and families can contribute up to $8,550. If you’re over 55, you can add $1,000 more as a catch-up contribution.
If you're just starting your business or have variable income, remember that you can contribute in lump sums or on a regular basis. As long as you stay within the annual contribution limits, you can contribute however works best for your budget.
2. Invest for the Long-Term
Many HSA providers allow you to invest your contributions in mutual funds, stocks, and bonds once your balance exceeds a certain threshold. If you’re planning for future healthcare needs, especially as you approach retirement, consider using your HSA to invest in a diversified portfolio that can grow over time.
The beauty of investing within an HSA is that it allows you to take advantage of the tax-free growth. Plus, unlike other retirement accounts, you can use these funds for medical expenses without incurring any penalties, making them a unique tool for long-term wealth building.
3. Use It for Qualified Medical Expenses
One of the most valuable aspects of an HSA is that you can use it to cover a wide range of qualified medical expenses. These include doctor visits, prescriptions, dental care, vision care, and even certain over-the-counter medications. If you have a high-deductible health plan, you’ll likely use your HSA frequently to cover the costs of meeting your deductible and copayments.
But did you know that you can also use your HSA to pay for long-term care, mental health services, and some alternative medicine treatments, like acupuncture? Be sure to keep receipts and records of any medical expenses, as you’ll need them when withdrawing funds from your HSA.
4. Plan for Retirement
Once you reach age 65, you can use your HSA funds for non-medical expenses without paying a penalty. While the withdrawals will be subject to ordinary income tax, this gives you another option for funding your retirement.
If you don’t need the funds for medical expenses, consider leaving your HSA balance to grow as an additional retirement savings vehicle. Since there’s no “use it or lose it” rule, the money can continue to grow, and the tax-free nature of the account makes it a highly effective tool for long-term financial planning.
Conclusion: Why Every Small Business Owner and Self-Employed Person Should Consider an HSA
For self-employed individuals and small business owners, an HSA offers a triple tax advantage that can help you save for medical expenses now and for retirement later. With the flexibility to contribute, withdraw, and invest, HSAs are not just for healthcare—they can also become a key component of your broader financial strategy. By using the HSA wisely, you can maximize its benefits and secure a better financial future for both your health and your retirement.
So, whether you're just starting your business or are a seasoned entrepreneur, make sure to consider the power of an HSA. It’s an opportunity to lower your taxable income, save for future medical needs, and even invest for your retirement—giving you more control over your finances, both now and in the years to come.
Disclaimer:
The information provided on this website is for general informational purposes only and does not constitute legal, accounting, or tax advice. I am not an accountant, tax planner, or financial advisor. For advice tailored to your specific financial situation, please consult a qualified accountant, tax professional, or financial planner.
