When you’re a self-employed therapist, setting up and using a health savings account (HSA) has the potential to save you money while creating a financial cushion in case of an unanticipated medical expense. 

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Here’s everything you need to set up an HSA as a therapist.

What are HSAs for therapists?

An HSA operates similarly to a retirement savings account like an IRA or a 401(k). Cash you put in an HSA is tax deductible. Meaning, if you put $1,000 of your income in an HSA, that’s $1,000 for which you do not have to pay income tax.

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Assets in your HSA vest, or roll over. Any money you contribute in the current year carries forward into the following rear.

HSA tax savings for therapists

So long as you use the money in your HSA on qualified health expenses, it isn’t taxed. 

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Contrast that with, say, a traditional IRA, where income tax is applied when you withdraw funds.

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You can invest the money in your HSA similarly to how you would invest money in a retirement savings account. Anything you earn from your investment—any interest that accrues—is, like the principal, not taxed.

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That’s why accountants and other financial professionals will sometimes refer to HSAs as the only “triple tax deductible” account. So long as you use the money you contribute to your HSA for qualified expenses, you pay no income tax on:

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1. The initial deposit
2. The “withdrawal” (in this case, withdrawing the funds to spend them on qualified expenses)
3. Earnings (interest earned on investments)

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In the case of an individual making contributions to their personal HSA, this triple deduction applies only to income tax. You are still required to pay your share of FICA (7.65%) if you’re someone’s employee, or self-employment tax (15.3%) if you are self-employed, on your earnings.

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HSA contribution limits for therapists

Like all good things, HSA contributions are finite. The IRS puts limits on how much you can contribute to your HSA each year.

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These limits apply whether you’re making 100% of the contributions yourself, whether your employer is making 100% of the contributions, or whether you are each making a portion of them.

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For the 2024 tax year, the HSA contribution limit for therapists is $4,150 for individual coverage and $8,300 for family coverage.

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For the 2025 tax year, the HSA contribution limit for therapists is $4,300 for individual coverage and $8,550 for family coverage.

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If you are 55 or older, you can contribute an additional $1,000 per year to either individual or family coverage. 

Qualifying medical expenses for HSAs

HSAs differ one from another. For a precise list of eligible medical expenses, contact your provider. 

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That being said, here are some examples of expenses HSAs typically cover:

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• Doctor appointments: Payments to your primary care provider or specialists.
• Prescription medications: Both ongoing and short-term prescribed medication.
• Medical procedures: Surgeries, diagnostic tests, and hospital stays.
• Dental and orthodontic care: Cleanings, fillings, dentures, and braces.
• Vision care: Eye exams, glasses, contacts, and surgery.
• Physical therapy: Chiropractic care and physiotherapy.
• Psychotherapy: Note: for self-employed therapists, the cost of therapy may already be a deductible expense.
• Medical equipment: Wheelchairs, crutches, hearing aids, orthopedics.
• Long-term expenses: Nursing home care, at-home nurses and care aides
• Over-the-counter medication: Pain drugs, allergy medication, and other non-prescription medicines
• Health insurance premiums: Eligible in specific circumstances (unemployment)

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For an exhaustive rundown of medical expenses your HSA may cover, check out HSAlist.

Are self-employed therapists eligible for HSAs?

Regardless whether you’re taxed as a self-employed individual (sole proprietor of your therapy practice) or an employee (on the payroll of your practice, a separate business entity), you are typically able to open an HSA as long as you meet the following conditions:

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• You’re not enrolled in Medicare
• You’re not registered as someone’s dependent
• You’re not covered by a spouse or family member’s non-HSA-qualifying health insurance
• You are enrolled in an HSA-eligible health plan

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To be HSA-eligible, your health plan must qualify as a high deductible health plan (HDHP).

HDHP requirements

To qualify as an HDHP, your health plan must have a deductible of at least $1,400 (individual) or $2,800 (family). 

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Also, your HDHP’s total in-network, out-of-pocket expenses (which, depending on the plan, may include deductibles, co-insurance, and co-payments) must not exceed $7,050 (individual) or $14,100 (family). This limit does not apply to out-of-network services.

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If you already have a health plan, but it doesn’t meet these criteria, you may be able to switch to an HDHP plan. Consult with your health plan administrator, or your insurance provider. In many cases, providers offer HDHP plans that include HSAs.

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HSAs vs. FSAs for therapists

A flexible spending account (FSA) is similar to an HSA. Money you contribute is tax-deductible, provided it’s spent on qualified expenses. You do not need an HDHP in order to open an FSA.

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There are two types of FSAs:

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• Health care FSAs. In order to qualify for a tax deduction, funds must be spent on qualifying medical expenses.
• Dependent care FSAs. In order to qualify for a tax deduction, funds must be spent on care for your dependents (eg. day care, preschool, after-school programs, at-home care).

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As with an HSA, both you and your employer may contribute funds to your FSA. 

The big difference between HSAs and FSAs

Funds you contribute to an FSA may only be used on qualifying expenses during the year in which you contribute them.

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That is, your FSA funds won’t “roll over.”

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For instance, if you contributed $1,000 to your FSA in February; spent $700 on a qualifying medical expense in June; and still had $300 left in your account at midnight, December 31st, that $300 would be forfeit.

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(You can withdraw the $300 before the end-of-year deadline, but you will have to pay income tax on it.)

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Contrast this with an HSA, in which funds roll over each year.

FSA contribution limits for therapists

Each year, the contribution limits for health care FSAs and dependent care FSAs differ.

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Health care FSA limits

For the 2024 tax year, the individual contribution limit for a healthcare FSA is $3,200, and the family contribution limit is $6,400.

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For the 2025 tax year, the individual contribution limit for a healthcare FSA is $3,300, and the family contribution limit is $6,600.

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Dependent care FSA limits

For both the 2024 and 2025 tax years, the contribution limit for a dependent care FSA is $5,000. This limit applies to both individuals and couples filing jointly.

Employer contributions to FSAs

There is no limit to employer contributions to employees’ FSAs. But keep in mind that any money contributed to the account must be spent on qualifying expenses during the current tax year. Otherwise, it’s subject to income tax.

Is an HSA or an FSA better for therapists?

If you’re wondering whether you’re better off, as a therapist, opening an HSA or an FSA, good news—you don’t have to choose. You can open and contribute to both an HSA and an FSA. 

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In that case, you may consider using your FSA to cover medical expenses you expect to pay before the end of the year. Routine doctors’ visits, dental cleaning, vision check-ups, and ongoing prescriptions are all good candidates.

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Then you could reserve funds in your HSA for unexpected minor medical expenses, or to cover the deductible for large expenses.

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Consult with a CPA or financial planner to learn how you can maximize your HSA and FSA contributions.

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How to set up an HSA as a self-employed therapist

Opening an HSA is fairly straightforward. 

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• If you already have health coverage: Contact your insurance provider and find out whether your current plan is HSA-compatible. If it isn’t, you may be able to switch to an HDHP paired with an HSA while staying with the same provider.
• If you don’t already have health coverage: Shop around for providers that offer HDHP, ideally paired with HSAs. The exact plan to choose will depend on specifics of the coverage it offers.
• If you have an HSA-eligible plan, but your insurance provider does not offer HSAs: Contact your bank or a local insurance broker. Either may be able to open an HSA for you, provided your existing plan is HSA-compatible.

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Beyond those basic considerations, the steps you need to take to open an HSA—and how exactly contributions to that HSA will be taxed—depends on whether your therapy practice is a sole proprietorship or an S corporation.

Sole props vs. S corps and your HSA

If you’re a sole proprietor—or a state-level business entity, like an LLC, that’s taxed as a sole proprietor—you and your business are identical for tax purposes. All income your practice earns is self-employment income, and subject to self-employment tax.

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If your practice is an S corporation—a state-level business entity that has elected S corp status—then your business is a separate entity from you as an individual. You work for your own practice as an employee and receive a wage. Only the money you pay yourself as a wage is subject to the equivalent of self-employment tax (in this case, FICA).

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For a detailed explanation of how sole proprietors and S corporations differ, check out our complete guide to s corps for therapists.

How an HSA works for a sole proprietor

If you’re a sole proprietor, you can set up an HSA by registering for an HSA-eligible private health plan, then opening an HSA and making contributions.

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Each year, you file Form 8883 with the IRS, reporting funds you contributed and spent. On Form 1040, Schedule 1, Line 13, you report the amount as a health savings account deduction.

How an HSA works for an S corp

When your practice is an S corporation, the S corp (rather than you, as an individual) signs up for an HSA-compatible group insurance plan. Group insurance plans may include just one employee.

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You, as employee, are enrolled in the plan, and you designate in advance how much of your income you’d like to have withheld pre-tax and contributed to your HSA.

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In addition, you can opt to have the S corp make contributions. These contributions qualify as a deductible business expense for the S corp. 

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Also, for the sake of calculating a reasonable salary, the contributions count as part of your salary. For instance, if your aim was to be paid a reasonable salary of $60,000 by your S corp, you could accept $57,000 as salary and $3,000 in the form of HSA contributions, for a total compensation of $60,000. 

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Your combined personal and employer contributions cannot exceed the total limit for your annual contributions. It doesn’t matter whether you make 100% of your contributions for the year, or your employer makes 100% of the year, or you split the contributions; the total amount must fall within the annual limit. 

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How your S corp could save money with an HSA

Making smart use of an HSA may let you take advantage of a double deduction: 

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• First, you deduct the total cost of your compensation as an employee from your S corp’s tax return, as a business expense;
• Then, on Form 1040, Schedule E, you list your personal HSA contribution as reduction in income, so you end up paying less income tax

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On top of that, you can make adjustments each year in terms of how much you as an employee contribute to your HSA versus how much your S corp contributes to it, giving you more flexibility overall in terms of how much income each entity reports year to year.

Should you elect S corp status before opening an HSA?

Because of the advantages an employee HSA offers an S corp, you may be wondering if now isn’t the perfect time to elect S corp status.

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Generally speaking, S corp status only offers tax advantages if your practice has a net income of $100,000 or more. 

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It has to do with how S corps are taxed on their income, the need to pay yourself a reasonable salary, and extra costs associated with running an S corp versus a sole prop. For a detailed breakdown, check out How Much Do Therapists Really Save by Switching to an S Corp?

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How much money should you have in your HSA?

Your first year or two with an HSA, you may be content simply to watch your savings grow. But at some point you’ll need to determine how much cash you really need available to cover medical expenses.

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The reasons are twofold: First, once you cover a substantial medical expense and your account is depleted, you’ll have to decide how much to contribute to top up funds. That has a direct impact on your contribution amount for the year.

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Second, any funds you don’t plan to use in the short term ought to be invested. The annual percentage yield (APY) of your savings in an HSA is unlikely to be higher than 1%. If you have thousands of dollars sitting in your account that you know you won’t be spending any time soon, you could put your money to work investing in bonds, mutual funds, or exchange traded funds (ETFs). 

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Before topping up or investing your HSA, though, you need to set a cash goal.

How to set a cash goal for your HSA

Your HSA cash goal is the amount you need to have on hand immediately to cover a year’s worth of medical expenses not covered by medical insurance.

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That includes:

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• Any expenses falling below your insurance plan’s deductible and within your out-of-pocket limit for the year. Example: Your deductible is $1,400 and your out-of-pocket limit is $8,000. Your SSRI prescription will cost you $500 over the course of the year. So, you should make sure that $500 will be covered by the cash you have in your HSA.
• The deductible itself, in case of emergencies. Example: You know your deductible is $1,400, so you always keep at least $1,400 cash in your HSA. One winter you break your arm snowboarding, and the hospital expenses come to $7,000. Because you have enough cash in your HSA, you pay the $1,400, and enjoy tax savings at the same time.

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Your HSA cash goal should be the average amount you spend each year on routine medical expenses, plus the amount needed to cover your deductible in case of an accident or sudden illness.

How to calculate average medical expenses

To calculate your average medical expenses for the year, add up all the medical expenses you paid the previous year, excluding any unusual expenses.

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An unusual expense, in this case, is one you would not ordinarily expect to pay. For instance, if you had to have a mole removed last year, the cost of the procedure would drive up your outlay for medical expenses that year. Unless you have a mole removed every year, you can exclude that expense from your calculations.

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Take into account:

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• Doctor visits
• Prescription drugs and devices
• Vision care
• Dental care
• Physiotherapy
• Psychotherapy
• Any recurring visits to specialists

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If your records are detailed enough, you may be able to add up medical expenses from multiple years, divide them by the number of years included, and arrive at a more accurate average expense. The more data, the more accurate your projected expenses.

Investing your HSA as a therapist

To take full advantage of your HSA’s “triple tax deductible” features, you need to invest some of the funds. Interest you earn on investments is not taxed. 

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By investing some of your HSA, you can grow a steady nest egg for retirement. Many individuals, after maxing out their retirement contributions, put funds in their HSAs and invest them long term in order to cover medical costs after they retire.

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Your aim should be to guarantee your HSA always meets its cash goal—discussed above—so you’re able to cover medical expenses as they arise. Any funds above and beyond that goal you may invest.

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Before making any investments, consult with a financial advisor. There are a variety of strategies for investing HSA funds—some geared towards longer-term savings, others meant to be more rewarding in the short term—and a professional can help determine the right strategy for you.

The benefits of HSAs for therapists

As always, it’s a good idea to consult with a CPA or a financial advisor; your particular situation will have an impact on the benefits you get from opening an HSA.

Tax savings

The “triple tax deduction”—on contributing, spending, and earning funds—makes HSAs an attractive option. Plus, contributions by your S corp are a deductible business expense. Used wisely, an HSA can lower your tax bill while making sure you’re prepared to cover all your medical expenses.

Lower insurance premiums

An HDHP has lower premiums than a comparable health plan with a higher deductible. So you pay less each month for insurance coverage, while keeping savings on-hand in your HSA to cover expenses that fall below the deductible. Lower monthly premium payments are especially beneficial if your income tends to vary month to month.

Retirement savings

Money saved and invested in an HSA may be spent on qualified medical expenses in your retirement. Plus, after age 65, if you withdraw funds for non-qualified medical expenses, you won’t be penalized. You’ll still pay income tax on the withdrawal, but if you’re in a lower tax bracket after age 65 than you were when you made the contribution, you’ll end up saving in the long run. In this way, your HSA acts similarly to a traditional IRA.

The drawbacks of HSAs for therapists

As with any other financial instrument, HSAs have their potential drawbacks. Keep these in mind as you decide whether to open an account.

Tied-up funds

Once money is in your HSA, you’d better plan to spend it on qualified medical expenses. Withdrawing the funds for other purposes could cost you a chunk of change: Before age 65, there’s a 20% penalty on money withdrawn for non-qualified medical expenses, and you’ll also need to pay income tax on the withdrawal.

High insurance deductibles

With a good savings strategy, you should be able to cover the high deductible of an HDHP with money in your HSA. But if you have trouble meeting your savings goals, or expenses unexpectedly deplete your account, you may find yourself stuck with high deductibles you can’t afford to pay out of pocket.

Extra paperwork

Regardless of whether you have an HSA as a self-employed therapist or as an employee of your own therapy practice, you’ll have extra paperwork to tackle each year in order to report contributions and spending and take advantage of tax savings. If you pay an accountant to file your taxes for you, that could even mean slightly higher accounting fees.

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Opening an HSA is just one way to reduce your tax burden and increase your bottom line. For more, check out these five investment strategies for therapists.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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Bryce Warnes is a West Coast writer specializing in small business finances.‍

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